abc7 February 2024Global Research and Evidence LabChina Equity StrategyDecoding recent major volatility of A-share marketA-share market too concerned about liquidity risksThis year kicked off with the A-share market sharply undershooting our and investor expectations. The Wind All-China A Index retreated a rapid >18% at the lowest, small-caps had larger declines and the CSI 2000 fell >37%, seemingly pointing to liquidity risks. That said, we believe investors have been too concerned about risk factors including stock pledging/margin trading & securities lending (MTSL)/snowball knock-ins. 1) As per the CSDC, the pledged share market cap is Rmb2.2trn, only 7.7% of the A-share free-float market cap, well below the 2015-18 levels. 2) The UBS-S non-bank financial team estimates the market’s average margin maintenance was 222%, well above the warning line of 150%; only 2% of the MT balance had a margin maintenance ratio below 130%; and MT is running smoothly overall. 3) As for snowball products, issuers typically start to sell stock index futures before a knock-in is reached in order to hedge. Since most snowball products on the CSI 500 and CSI 1000 already knocked in as the market moved lower, the pressure on stock index futures appears to be ending, and stock index futures’ impact on the A-share spot market is relatively indirect.Stronger policies to prop up stock market; explicit medium/LT troughNotably, the CSRC in recent days has frequently called for fully shoring up market stability. Besides the regulator's efforts to clarify and prevent risks arising from stock pledging and MTSL, positive statements from the "national team" about the A-share market are most noteworthy. We observed a surge in CSI 300 ETF trading volume since mid-Jan, along with a sharp increase in CSI 500 ETF/CSI 1000 ETF turnover on 5 Feb. Central Huijin announced on 6 Feb its plan to expand the scope of ETF holdings soon, and to step up holdings. In our All you need to know about the 'national team' note, we argued the group is more likely to increase A-share holdings through channels including ETFs. We see potential for a sharp increase in the group's total position in extreme scenarios. In our view, the "national team" signalling its intentions to step in suggests the current A-share investor sentiment is too bearish, with the market trading close to its medium-/long-term (LT) trough. Medium/LT positioning opportunity emerging but bumpy in near termAs the A-share market entered a LT trough after the "national team" stepped in in mid-2015, we see decent medium/LT positioning opportunities for investors. In any case, the A-share market met its challenges in early 2016 and the two-year “slow bull” market did not come until supply-side reform drove PPI to bottom out and shanty-town renovation boosted the overall demand recovery. For now, after short-te...
