This week, China’s macroeconomic data was released, revealing that consumption, industrial production, and investment excluding real estate exceeded expectations. In response, the China A-share market launched another defense of the 3000-point mark. Despite the People’s Bank of China actively injecting liquidity in the latter part of the week, asset prices received little support in the short term. The bond market continued its bull run, with the one-year government bond yield holding around 1.6%. The Ministry of Finance issued a large volume of ultra-long-term government bonds, highlighting a significant shift of deposits to bonds. Additionally, statements from the State Administration of Foreign Exchange indicated that foreign holdings of Chinese bonds have reached four trillion yuan. Considering recent macroeconomic issues, maintaining market stability likely hinges on further liquidity injections.
This week, both the Medium-term Lending Facility (MLF) and Loan Prime Rate (LPR) remained unchanged. The market anticipates some monetary policy actions in the near future. In the long term, building a robust Chinese stock market involves regulatory measures to stabilize investor confidence, as discussed at the Lujiazui Forum. The State Council’s policies to promote venture capital primarily focus on encouraging state capital to support entrepreneurial investments. While these measures contribute to long-term systemic improvements, their immediate impact on the capital market is limited. Liquidity appears to be the crucial factor for the capital market. The release of June PMI data next week could be pivotal in the battle to defend the 3000-point level.
Currently, expectations of government support for the 3000-point level provide some market stability. Sector-wise, the continued sharp decline in the liquor industry suggests an impending collapse. Traditionally a cornerstone of China’s capital market and a focal point for heavy institutional investment, a further decline in liquor stocks next week could trigger market turmoil. The fundamental sales bottom for liquor has yet to be seen, indicating potential for continued stock price declines. In the medium to long term, the Chinese stock market is also influenced by AI advancements, with related software, hardware, and energy sectors seeing successive gains, possibly marking the dawn of a new era. Other factors include the performance of the real estate market, where prices are trending downwards. Although data from the four major first-tier cities show a narrowing decline, it’s challenging to predict a turnaround for the real estate sector.
The recent decline of the China A-share market from 3170 points has led to another significant adjustment, leaving future prospects uncertain. The primary liquidity flow towards the bond market fundamentally suppresses the stock market. Looking ahead to the second half of the year, fiscal policy is expected to be the main direction for monetary injection, casting a pessimistic outlook on corporate financing.
We all understand that the stock market is leveraged. If overall liquidity does not increase, defending key levels like the 3000-point mark will remain an elusive goal.