Was the market adjustment on October 9th a necessary path for A-shares to move towards a healthy bull market? Despite this round of a gamma squeeze-like surge in RMB assets being driven by policy and market sentiment.
A good news that arrived as expected is that during the National Day Golden Week, domestic tourism, consumption, and real estate sales all showed a positive momentum. The Chief Investment Director of Jing Shun Mainland China and Hong Kong, Ma Lei, stated that the stance of the National Development and Reform Commission, combined with the supportive monetary and fiscal policies recently introduced, will provide strong support for the economy. Therefore, he is optimistic about the long-term prospects of the Chinese stock market.
A potential "bad news" comes from the changes in global liquidity. The US employment data (September non-farm payrolls added 254,000 people, and the unemployment rate dropped to 4.1%) suggest that the market's expectation for a significant interest rate cut by the Federal Reserve in November has been significantly reduced. This could lead to an expansion of the China-US interest rate spread, putting pressure on the RMB, thereby affecting the space for further easing of monetary policy in China in the future.
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The core issue facing the economy now is how to convert the time gained from "reversing stock market expectations" into actual economic growth space? From the perspective of the time window and spatial logic, why did RMB assets experience a surge? How will its sustainability and future trends evolve?
The "explosion" of RMB assets
On October 9th, after a continuous surge and "ten consecutive days of sunshine," A-shares experienced a deep adjustment, but the FTSE China A50 futures rose by 2.87%. This shows that in the offshore market, some institutional investors may have already started to buy low, showing a certain short-term repair expectation.
In terms of news, the State Council Information Office will hold a press conference at 10 am on October 12th (Saturday), where the Minister of Finance, Lan Fo'an, will introduce the situation related to "increasing the counter-cyclical adjustment strength of fiscal policy and promoting high-quality economic development," and answer questions from reporters.
On that day, 5,043 stocks fell, and only 295 stocks rose. The Shanghai Composite Index, Shenzhen Component Index, and ChiNext Index fell by 6.62%, 8.15%, and 10.59%, respectively; the total transaction volume of the Shanghai and Shenzhen markets reached 2.94 trillion yuan (the previous day's A-share single-day trading volume reached 3.4 trillion yuan, the highest level in history).
The yield on the US 10-year Treasury bond rose to 4.075%, an increase of 0.98%, indicating that the US bond market's sensitivity to interest rate hike expectations remains strong. This phenomenon may indicate that US monetary policy will continue to maintain a relatively tight path, putting pressure on global risk assets.
The yield on China's 10-year Treasury bond also rose slightly to 2.188%, suggesting that after the A-share adjustment, the bond market did not fully attract inflows of risk-averse funds. This may be due to investors' concerns about whether the future synergy of fiscal and monetary policies will be stable enough to stabilize market expectations.On October 9th, the official website of the People's Bank of China (PBOC) reported that the PBOC and the Ministry of Finance have established a joint working group and held the first official meeting recently. The meeting fully affirmed the close cooperation between the two parties in the central bank's government bond trading in the early stage and established the working group's operational mechanism. The meeting stated that in the next step, it is necessary to coordinate development and security, continue to strengthen policy synergy, and continuously optimize relevant institutional arrangements. This will maintain the stable development of the bond market in a standardized manner and provide a suitable market environment for the central bank's government bond trading operations.
The convening of this meeting may imply that future policy focus may tilt towards more forceful counter-cyclical adjustments. In the next few months, the market may see a clearer policy combination. This will provide medium and long-term support for the Chinese yuan's assets.
The day before, the National Development and Reform Commission (NDRC) introduced the systematic implementation of a package of incremental policies, but did not explicitly propose the "major stimulus policy" expected by some market participants and suggested by some economists.
At a press conference held by the State Council Information Office, the NDRC confirmed that China will continue to issue ultra-long-term special government bonds next year and optimize their allocation to strengthen support for the "two heavy" construction. At the same time, the NDRC will issue a "two heavy" construction project list of 100 billion yuan in advance within the year to support localities in accelerating the preliminary work and starting construction first.
Invesco China believes that implementing policies to support enterprises, the labor market, the capital market, and the real estate market will provide strong support for China's long-term growth.
In the past week, global markets have been generally shrouded in the shadow of uncertainty: expectations of the Federal Reserve's interest rate hike have intensified, and the yield on 10-year U.S. Treasury bonds has quickly risen to more than 4%. Stock markets in Europe and the United States have generally回调ed, and the VIX panic index has soared to nearly 18% in just a few days. In contrast, Chinese yuan assets have shown strong resilience. During the National Day holiday, although the A-share market was closed, the Hong Kong market performed strongly in the global fluctuations. This trend is not accidental but a manifestation of the "independence" of Chinese yuan assets in the global market turmoil, supported by policy logic and global capital flow trends.
For example, Chinese policies have been introduced densely, sending a signal of stable growth. Since late September, the PBOC has implemented reserve requirement ratio cuts and interest rate cuts, and for the first time, established structural monetary policy tools to support the capital market. These positive policy statements not only boosted the A-share market before the National Day holiday but also supported the strong rebound of Hong Kong stocks during the holiday.
Secondly, the change in the global capital flow pattern has become an important support factor for the "independence" of Chinese yuan assets. After the Federal Reserve unexpectedly cut interest rates by 50 basis points on September 19, funds began to re-evaluate the risk-return ratio of global assets. Against this backdrop, Chinese yuan assets with relatively low valuations and more friendly policies have gradually become favored by global funds.
Next, the market's expectations for future policy intensity and economic recovery continue to heat up. In the future, whether this short-term "explosion" can continue depends on whether Chinese yuan assets can find more solid fundamental support after the sentiment heats up.
According to Lipper data, as of the end of September this year, both active and passive funds overseas are significantly underweight Chinese stocks. Currently, the allocation of active funds to Chinese stocks is only 5%, while the historical high is close to 15%. This data indicates that for a long time, the allocation level of hedge funds and institutional investors in the Chinese market has always been low. The recent economic stimulus policies issued by multiple departments have boosted market sentiment, putting huge pressure on short sellers.Fidelity International believes that the appeal of China's A-shares will continue. Firstly, the current market valuation in China is still within a historically low range, lower than the valuation levels of most major global markets. In the future, a large amount of capital from international investors from Asia, the Americas, Europe, and other regions may need to be rebalanced, which is expected to further boost the performance of the A-share market. Secondly, the resilience of China's economy should not be underestimated. While maintaining a sound economic foundation and adjusting its structure, China has already taken a leading position globally in multiple fields such as green technology, digital economy, and high-end manufacturing. Lastly, the Chinese government's determination to stabilize growth and stimulate the economy is very clear, with a clear "three-step" strategic path.
Ni Yixiang, the head of investment and fund manager at Fidelity Fund Management (China) Co., Ltd., said that recently, China has introduced monetary and fiscal policies that exceeded expectations, boosting market confidence, especially with a significant increase in support for the real estate sector. Although some funds with higher risk preferences may shift to other sectors that are more sensitive to policy adjustments, high-dividend stocks still have investment value supported by the new liquidity tools created by the central bank.
To a certain extent, the "eruption" of the renminbi assets is not a simple fluctuation of market sentiment, but a result under specific policy time windows. In terms of time dimension, the current market performance can be divided into two main stages: the "short-term policy stimulus phase" and the "medium-term structural reform phase".
Short-term time window: Policy密集出台 and emotional resonance
"The pace is too fast, time and space are highly compressed. What is recovered in three to five days is not just the losses of three to five months, but it has reached a three-year high," said Zhao Jian, the dean of Xi' Jing Research Institute.
Since mid-to-late September, the People's Bank of China and related regulatory departments have introduced a series of policy combinations in a dense manner, quickly igniting market sentiment. The A-share market rose by 565 points in just five trading days at the end of September, with the CSI 300 index increasing by more than 20% in a single week.
Zhang Yu, the deputy director and chief macro analyst at Hua Chuang Securities Research Institute, pointed out in the research report "Eight Observational Indicators of the Bull Market Process" that a surge in trading volume, a decline in risk premiums, and a warming of policy expectations are often signs that the bull market has entered the second phase - a phase that, while accompanied by a sharp rise in the stock market, is also accumulating risks. Once there is a subtle change in policy signals (such as policy strength not meeting expectations), market sentiment will quickly reverse, leading to a "mutual killing" situation.
On October 9th, the three major A-share indexes experienced a sharp adjustment, indicating that the current market's short-term sentiment is highly sensitive and easily disturbed by policy signals, leading to extremely high volatility risks.
The significant market pullback on that day may be a direct reflection of this high resonance between sentiment and policy. In other words, within the short-term time window, the resonance effect between policy and market sentiment has amplified market volatility.
During this special time window, the market has shown characteristics of alternating "positive feedback" and "negative feedback":Positive Feedback Effect: Policy stimulus, combined with the warming of market sentiment, has propelled the stock market to rise rapidly. Trading volume increased swiftly from 481.7 billion yuan on September 18th to 2.6 trillion yuan on September 30th. During this period, the single-day trading volume of the Shanghai and Shenzhen stock markets even broke through 3 trillion yuan, forming a typical "gamma squeeze" effect.
Negative Feedback Effect: After the press conference on October 8th, perhaps due to the absence of signals for more significant stimulus policies, market sentiment underwent a sudden change, leading to a sharp adjustment in the A-share market. This indicates that in the current market environment, minor changes in policy signals can trigger intense market fluctuations.
In terms of the fragility of market sentiment and global environmental pressures, the "gamma squeeze" effect of A-shares before the National Day holiday mainly relied on policy support and the resonance of market sentiment. Once policy signals fall short of expectations, the high dependence of investors on market sentiment becomes a vulnerability. Strategists from Morgan Stanley and UBS have pointed out that the current valuation of A-shares is at a relatively high level, and sharp fluctuations in market sentiment may trigger greater adjustment risks.
At the same time, the pressure of the global market environment is also increasing the risk of fluctuations in the A-share market. The rapid rise in the yield of 10-year U.S. Treasury bonds, breaking through 4%, has led to a warming of global risk aversion; the renewed strength of the U.S. dollar may reduce expectations for foreign capital inflows into A-shares. Under this background, the future volatility of RMB assets may continue to be influenced by the global market environment.
However, "When the market is frantic, the decision-making layer steps in to cool things down, giving everyone a chance to exchange chips. This will not only not kill the bull market but will also be beneficial for the transition from a mad bull to a slow bull, a healthy bull," wrote Zhao Jian.
Zhao Jian is concerned that this round of mad bull market has traversed the time of several months in just a few days, overdrawing the space of several years.
Mid-term Time Effect: Structural Reform and Policy Coordination Relay
Whether RMB assets can truly move towards a medium and long-term stable rise depends on the effectiveness of structural reforms and the coordination of fiscal and monetary policies. As market sentiment gradually calms down, the key to the mid-term time effect lies in the implementation of policies and the rebalancing of market confidence.
A senior market figure believes that in the next few months, the evolution of the mid-term time effect will focus on the following two stages:
First Stage (October - December): The rebalancing period of policy signals and sentiment. The current market's violent fluctuations reflect the mismatch between policy signals and market sentiment. The State Council's press conference on October 12th will be an important observation point. If the Ministry of Finance can propose more explicit special treasury bond issuance scales, local government debt resolution measures, and other specific policy plans, then market sentiment is expected to gradually recover. If the policy intensity falls short of expectations, the market will continue to be in a state of fluctuation.The market's primary focus is on the scale and use of special government bonds. These will serve as a crucial indicator for gauging the strength of fiscal policy. If the special government bonds are used for large-scale infrastructure investment or social welfare spending, they may bolster market confidence in the future economic recovery.
Secondly, the resolution of local government debt is a matter of high market interest. The market is closely watching the path to resolving local debt risks. If local governments can resolve local debt issues through the restructuring of urban investment platforms, deficit bonds, and other means, market sentiment will be stabilized, and this will also help rebuild investors' confidence in the economic fundamentals in the future.
Furthermore, whether the policy combination of "fiscal expansion + monetary easing" can be formed as expected is at the core of market expectations. Against the backdrop of increasing global economic uncertainty, if the People's Bank of China and the Ministry of Finance can establish a more explicit "coordination mechanism," it can prevent an over-reliance on the stimulus effect of a single policy tool on the economy.
In the coming months, the market may see fiscal expansion measures and liquidity management measures introduced simultaneously. If this policy synergy can be effectively implemented, it will not only help stabilize current market expectations but also provide medium to long-term support for RMB assets.
However, the successful implementation of this policy combination also faces challenges. First, local government debt is high, and fiscal policy needs to strike a balance between supporting economic growth and preventing systemic risks. Second, the global interest rate environment is tightening (especially with the continuous rise in US Treasury yields), and the external liquidity environment may constrain domestic monetary policy.
If the People's Bank of China and the Ministry of Finance can further clarify the specific implementation path of the "fiscal + monetary" dual-wheel drive and strengthen guidance on market expectations, then the "explosive" space for RMB assets will not be limited to the short-term policy window but is expected to continue into the medium to long-term reform dividend phase.
At this stage, investors need to pay close attention to whether policy signals can be realized, especially the degree of coordination between fiscal and monetary policies.
Second phase (first quarter of 2025): The relay period between policy and fundamentals. As structural reforms gradually advance, whether policy can effectively be transformed into economic growth momentum will become a key factor in the medium to long-term trend. In the first quarter of 2025, the main indicators that investors need to focus on include consumer recovery, improvement in industrial profits, and investment rebound, among other actual economic data. If these data show substantial improvement, the market will enter the "fundamental relay" phase, forming long-term support for RMB assets.
In addition, the external environment (such as the Federal Reserve's monetary policy path and the global economic growth outlook) will also have a significant impact on RMB assets during this phase. Therefore, the performance of the medium-term time window will depend on the combined effect of internal and external factors.
Strategic Outlook: Matching Time Windows with Investment OpportunitiesIn the analysis of the "time dimension," it is necessary to distinguish between the different manifestations of short-term and medium-term time effects, as well as their different impacts on the market:
Short-term strategy—Focus on the marginal changes in policy signals and market sentiment. Around the press conference on October 12th, the market may continue to exhibit high volatility. Investors might consider closely monitoring the strength of policy signals and the market's emotional response. If the policy signals exceed expectations, the market may experience a short-term rebound; however, if the signals fall short of expectations, market volatility will intensify.
Medium to long-term strategy—Position for structural opportunities and await policy follow-through. In the medium to long term, opportunities for RMB assets are primarily concentrated in the structural reform of the economy and changes in the global capital flow pattern. Particularly, whether the coordination of fiscal and monetary policies can drive economic growth is an important basis for judging the medium to long-term value of RMB assets. Therefore, investors should adopt a "staggered positioning" strategy, gradually allocating to high-quality assets with long-term growth potential, and avoiding the impact of short-term market sentiment fluctuations on medium to long-term investment decisions.
Zhou Wenqun, Deputy Director of the Equity Department at Fidelity Fund Management (China) Co., Ltd., believes that with the coordinated efforts of monetary and fiscal policies, policies will gradually take effect. As the fundamentals of China's economy continue to improve and valuations remain attractive, it is a good time for global investors to refocus on the Chinese market. Sectors sensitive to macroeconomics, such as consumption and domestic cyclical industries, may outperform the broader market.
Zhang Xiaomu, Equity Fund Manager at Fidelity Fund Management (China) Co., Ltd., stated that since late August of this year, the market has generally expected that leading internet and consumer industries in Hong Kong stocks are likely to benefit from the Federal Reserve's interest rate cuts and adjustments in Chinese policies. Despite strong performance, the stock prices of these industries have not fully reflected their improved performance, creating highly attractive investment opportunities. Recent policies and market reactions have confirmed the view that China's policy cycle has turned, and the measures to be taken will boost economic growth and stock market performance. "Looking ahead, while we remain relatively optimistic, we will also closely monitor the relevant statements from the December Central Political Bureau meeting and data related to the economic fundamentals."
Regardless, behind the short-term market sentiment fluctuations lies the game of policy expectations, and the medium-term market performance will depend on whether policies can effectively translate into actual economic growth space.