China A-Shares: Overseas Inflection Point May Precede Domestic Turnaround

China A-Shares: Overseas Inflection Point May Precede Domestic Turnaround

TREE NEWS reports: China’s A-share market is teetering on the edge of a liquidity-driven negative feedback loop, with investor sentiment at extremely pessimistic levels. While a major domestic liquidity inflection point has yet to arrive, the market is primed for a rebound if overseas conditions improve first. The report highlights that selling pressure has broadened from earlier high-level positions to funds that entered even earlier, with margin financing balances dropping 45.9 billion yuan over four trading days and tech-focused ETFs seeing sustained outflows.

Liquidity Negative Feedback Spreads

The report notes that last week’s selling pressure extended beyond previously high-level positions. As indices like ChiNext continued to decline, stop-loss pressure spread from funds that entered in the first and second quarters to those allocated to tech in 2025. Different absolute-return funds face varying constraints: some corporate annuities have high requirements for net value drawdown and stop-loss lines, triggering passive reductions when indices fall below safe ranges; some publicly managed absolute-return accounts face redemption pressure; and other absolute-return and leveraged accounts are approaching risk thresholds again. Retail sentiment has entered an extremely pessimistic zone.

Zhongtai believes the market now has conditions for a sentiment reversal but remains at a critical juncture where the liquidation negative feedback could continue to spread.

Tech Outflows, Blue Chips Absorb Limited

From a fund flow perspective, support for the tech sector is clearly receding. Last week, ETFs overall saw a small net outflow of about 7.5 billion yuan, with electronics/semiconductors, communications, computer software, and tech composite ETFs collectively expanding outflows from the previous week, while funds flowed more into blue chips. Zhongtai warns that if long-term funds mainly allocate to blue chips, tech and small-cap directions like STAR Market and CSI 1000 will continue to bleed, leading to a decline in overall market profitability.

However, long-term funds have already built positions in tech: from July to September, ETFs related to STAR Market, ChiNext, CSI 1000, and CSI 500 saw continuous inflows. This indicates the market does not lack the chips for a rebound.

Overseas Inflection Point May Come First

The core judgment is that the domestic market is ready to rebound alongside overseas improvements, but it is difficult to reverse the trend solely with domestic forces. Conventional long-term funds tend to follow the trend; when overseas tech and global risk appetite continue to decline, it is hard for them to push the market up against the tide. Once US Treasury yields fall and global tech strengthens, the accumulated chips could fuel a strong rebound.

To reverse the market trend solely with domestic forces would require higher-level, more forceful, and sustained unconventional policy support. Historically, after liquidity negative feedback deepens, policies escalate from CSRC statements to the Financial Stability Committee, State Council, and central level. Currently, the CSRC, National Financial Regulatory Administration, and PBOC have intervened with tools, but Zhongtai believes there is still room for improvement in policy level and buying intensity in tech directions.

Policy Level Rise Takes Time

Zhongtai analyzes two reasons why policy escalation may take time: first, policy support may follow a gradual approach, requiring time for transmission and feedback; second, from the Shanghai Composite perspective, the decline has been relatively limited and slower than historical systemic liquidity risk phases, and absolute levels are not low. Management may focus more on the Shanghai Composite, financial institution stability, and overall market conditions, differing from institutional investors’ perception of tech losses.

Therefore, a major inflection point for domestic liquidity support still requires observation of higher-level policy statements and actions, as well as the intensity and sustainability of buying in tech indices like STAR Market and CSI 1000.

Key Takeaways for Investors

• Watch overseas cues: A decline in US Treasury yields and a rebound in global tech could trigger a strong A-share rebound, especially in tech sectors where long-term funds have accumulated positions.
• Policy escalation is key: A sustained reversal requires higher-level policy support; monitor for statements from the State Council or central level.
• Sector divergence: Blue chips may see inflows, but tech and small caps could continue to suffer until overseas conditions improve.
• Sentiment is extreme: Extremely pessimistic retail sentiment often precedes a contrarian opportunity, but timing depends on external catalysts.