Can we expect a "liquidity bull market" in 25 years?

1. The impact of macro liquidity on A-shares is mainly indirect

Looking ahead to next year, China's macro liquidity is expected to further loosen. From the tone of monetary policy, the Central Economic Work Conference in 2024 clearly stated that in 2025 "a moderately loose monetary policy should be implemented," and "timely cuts in the reserve requirement ratio and interest rates should be made to maintain ample liquidity," indicating that the tone of monetary policy is likely to further shift towards easing. Currently, there is still some room for maneuver in China's monetary policy. For example, on December 2024, Wang Xin, director of the Research Bureau of the People's Bank of China, stated, "In terms of liquidity, the current average reserve requirement ratio in China is 6.6%, and there is still room for further cuts." In addition, although nominal interest rates in China have fallen significantly in the past two years, as of November 2024, the 10-year government bond yield has decreased by about 90 basis points from early 2023 to 2.0%. However, the real interest rate (the difference between the 10-year government bond yield and CPI) has risen by about 100 basis points to 1.8%. Compared to the United States (with a real interest rate of 1.5% in November 2024), Japan (-1.8%), and Germany (-0.1%), China's current real interest rate still has some room to decline. Furthermore, the growth rate of China's money supply has continued to decline in recent years, with M2 year-on-year and the growth rate of remaining liquidity (the difference between M2 year-on-year and social financing growth) both significantly retreating from the high levels at the beginning of 2023. Additionally, in conjunction with China's expansionary fiscal policy in 2025, the pace of monetary policy is expected to correspondingly align. The recent Central Economic Work Conference also emphasized "the need to implement a more proactive fiscal policy," clearly focusing on "increasing the fiscal deficit ratio" and "issuing more long-term special government bonds," indicating that the tone of fiscal policy is significantly more positive than in the past. On October 9, 2024, according to the People's Bank of China, the People's Bank of China and the Ministry of Finance have established a joint working group, indicating that the coordination between monetary policy and fiscal policy in China is becoming increasingly close. Looking ahead to 2025, as the pressure of government bond supply increases, the central bank may adjust market liquidity through monetary policy tools. Therefore, overall, macro liquidity in China is expected to further expand in 2025.

Historically, improvements in macro liquidity and turning points in the stock market are relatively close, but the impact is mostly indirect. In the context of A-shares, does a more accommodative macro liquidity environment necessarily correspond to a more positive market trend? Looking back at the history of A-shares, improvements in liquidity and turning points in market valuation often occur simultaneously. This is mainly because, generally speaking, liquidity is a leading indicator of economic fundamentals, while stock market valuation reflects investors' economic expectations, which are also a leading indicator of economic fundamentals. Therefore, the turning points of the two are often close. However, there have also been instances in A-share history where macro liquidity and valuation trends diverged. From the perspective of price indicators of macro liquidity, historically, during periods of declining nominal interest rates in China, A-share valuations have often retreated, such as in 2011-12, 2018, and 2022-24; at the same time, during periods of declining real interest rates in 2010-11, 2018, and 2021-22, A-share valuations continued to decline. Similarly, from the perspective of quantity indicators, historically, during periods of rising money supply growth, A-share valuations have also shown a decline, such as in 2012, 2015, and 2022 when measured by the year-on-year growth rate of M2, and in 2011-12, 2015, 2017-18, and 2021-22 when measured by the residual liquidity indicator (the difference between the year-on-year growth rate of M2 and the growth rate of social financing). This indicates that the relationship between macro liquidity and A-shares is not absolute. The divergence between macro liquidity and stock market trends may stem from the market's risk appetite not being significantly restored. As mentioned earlier, there have been multiple instances in China's history where A-share valuations declined during periods of improving macro liquidity. We believe this is mainly due to a certain lag between the turning points of macro liquidity and economic fundamentals. If the time for fundamental recovery after liquidity improvement is long, and the overall market risk appetite during that period remains low, it is easier for macro liquidity and stock market valuations to diverge. Combining the previous analysis, we believe that macro liquidity measures the abundance of liquidity in the entire macro system, and how much of that can flow into the equity market ultimately depends on the level of risk appetite. If we further consider risk appetite, we use risk premium (1/total A-share PE - 10-year government bond yield) to measure the risk appetite of the financial market, and the ratio of total A-share market capitalization to the scale of household RMB deposits in China to measure the overall risk appetite of Chinese residents. When macro liquidity is abundant but the risk appetite of the financial market or Chinese residents is low, a divergence between macro liquidity and A-share valuations can occur, as seen in the second half of 2012, early 2016, 2018, and 2022-23. !

2. Micro liquidity directly affects the A-share market

Compared to macro liquidity, micro liquidity is a more significant factor affecting the A-share market. As mentioned earlier, we believe that macro liquidity easing cannot be the sole condition driving a bull market in A-shares. In fact, micro liquidity at the stock market level directly measures the abundance of funds entering the stock market, and is therefore more relevant to market trends. Specifically, we conduct a bottom-up summary calculation of various micro funds from both inflow and outflow directions. Further analysis shows: ① The funds flowing into the stock market mainly come from five sources: retail investor funds (measured by the balance of customer trading settlement funds), leveraged funds (only counting the financing balance within the market), domestic institutional funds (including funds, insurance, social security, etc., where public fund funds are estimated using fund shares, net value, and A-share positions, while private equity funds, asset management, and insurance funds are represented by estimated changes in stock market value), overseas funds (where the data for the Shanghai-Hong Kong Stock Connect since August 24, 2016, uses our estimated inflow amount), and dividends and buybacks (only measuring excluding major shareholders' secondary investors). ② The funds flowing out of the stock market mainly have three destinations: equity financing (where the scale of additional issuance only considers cash subscriptions and deducts the proportion subscribed by major shareholders), net reduction of industrial capital (calculated through detailed transactions of company shareholders in the secondary market), and transaction taxes and fees (financing costs, stamp duty, and other transaction fees). Historically, the fluctuation of A-shares shows a significant positive correlation with the scale of incremental funds entering the market. We analyzed in "The Supply and Demand of Stock Market Funds is Relatively Balanced - 2022 A-share Outlook Series 6-20211231" that in the short term, the inflow and outflow of stock market funds are more related to the bull and bear cycles of the market. In bull and bear markets, funds flow in and out significantly, while in a volatile market, funds balance out. For example, from 2013 to 2015, the market overall was bullish, with the Wind All A index rising 122.6%, and micro funds cumulatively entering the market by about 6.2 trillion yuan; in 2016-2017, the market was generally volatile, corresponding to a tight balance of micro funds; in 2018, the market weakened and fell, with the Wind All A index dropping 28.3% for the year, and micro funds cumulatively flowing out of the market by about 1.4 trillion yuan. This shows that the flow of micro funds is closely related to the switching of market environments

Review of 2024: Before September 24, market sentiment was weak, with long-term funds being the main increment, and the market was relatively volatile during this period. We further review the relationship between the micro fund flow and market trends in 2024. Before September 24, long-term funds represented by Central Huijin continued to invest in passive broad-based ETFs, becoming the most significant incremental funds among various types of funds in the A-share market. Specifically, breaking down the sources of incremental funds for ETF expansion, the growth of ETFs this year has mainly been driven by Central Huijin, with an estimated net subscription of nearly 800 billion yuan for A-share ETFs in the first three quarters of 2024. Additionally, although the overall equity position of commercial insurance funds has seen limited growth since the beginning of the year, there has been a significant increase in the balance of insurance fund utilization, growing about 18% in Q3 2024 compared to the end of last year. Therefore, the incremental funds directly entering the market from insurance funds are also considerable, with an estimated entry scale exceeding 300 billion yuan in the first three quarters, while we estimate that the cumulative net subscription of ETFs by insurance funds in the first half of 2024 exceeded 55 billion yuan. In contrast, the sentiment of other investment entities is relatively weak, with foreign capital and leveraged funds showing a net outflow, and actively managed public funds facing a sluggish issuance and overall net redemption. For details, see "Which Funds Have Dominated Style Switching Since 9/24? - 20241007." Therefore, the overall A-share market faced volatility before September 24, with the Wind All A Index cumulatively falling by 14%.

Since 9/24: The incremental main force may be retail investors, while other funds have fluctuated, resulting in significant market volatility. Since the market surged on September 24, a large amount of incremental funds represented by active retail investors and leveraged funds have entered the market On one hand, from the perspective of retail investor funds, from September 24 to October 11, the estimated transfer of funds from retail investors to securities accounts was 170 billion yuan, with an entry speed similar to early 2015. At the same time, based on the analysis of stocks with significant movements on the Dragon and Tiger List, the relevant transaction volume of speculative funds and retail investors since mid to late October has been about four times that of institutions, significantly higher than in previous obvious rising markets. On the other hand, from the perspective of leveraged funds, since September 24, the net inflow of financing trading funds has exceeded 500 billion yuan, and the current scale has surpassed the peak of the bull market in 2021. However, since mid to late October, the sentiment for financing trading has begun to slow down, and the rolling 30-day scale of financing funds entering the market has continued to decrease after mid-November. Institutional funds have fluctuated greatly, with a significant inflow at the beginning of the market on September 24, but have turned to outflows since mid to late October. From the perspective of foreign capital, according to our high-frequency tracking estimates of the Stock Connect funds, the estimated net inflow of northbound funds in the week of September 27 exceeded 80 billion yuan, setting a new record for the historical weekly net inflow of northbound funds. However, it has gradually turned to a net outflow trend, with an estimated cumulative net outflow of 33.2 billion yuan from northbound funds since October 18, as of December 27. From the perspective of private equity funds, the position of private equity long-only stock funds in November 2024 was 55.0%, a slight decrease from the position of 55.6% in September 2024. Considering that small-cap stocks, which are heavily held by private equity, have seen significant gains from October to November, there may be a noticeable proactive reduction in positions at the private equity level. From the perspective of passive stock funds, since mid-October, the expansion speed of broad-based ETFs has significantly slowed down, with the main incremental source coming from the CSI A500 Index ETF products. As of December 27, the cumulative net subscription of the CSI A500 ETF since October 15 has exceeded 230 billion yuan, while the cumulative net redemption scale of other ETFs has exceeded 200 billion yuan.

![](https://mmbiz-qpic.wscn.net/sz_mmbiz_png/PjY3ia1nPGibPCUvgx4ric9kgJt3r3I3aVVl4HH9nlAibW35mkTwTcAzAFNvicAtmLSxZx2mVBsEK0bBTWibl9Sm6qmg/640? 3. Next year's micro funds are expected to net inflow of 2 trillion yuan

Looking ahead to 2025, the micro liquidity of A-shares is expected to improve, with incremental funds reaching 2 trillion yuan. As mentioned earlier, the macro liquidity in our country is expected to further loosen next year, but whether it can significantly boost the A-share market depends on the micro funds entering the market, focusing on whether the market's expectations for fundamentals can trend positively. We previously analyzed in "How Can Expansionary Fiscal Policy Drive Corporate Profits? — 2025 Strategy Outlook Series 1-20241127" that the current A-shares are at the bottom of the capacity and inventory cycle. Under two scenarios of fiscal strength, the net profit attributable to non-financial companies in the entire A-share market in 2025 may grow by 20% and 10% year-on-year, respectively, indicating that the fundamental expectations for A-shares may improve in 2025. Therefore, looking ahead to 2025, as macro liquidity improves and the recovery of fundamental expectations drives a rebound in risk appetite, the situation of micro funds entering the A-share market may further improve compared to 2024, with an expected annual incremental fund reaching 2 trillion yuan.

Key fund inflow project estimates: Passive funds and insurance funds are still expected to be the main market players in 2025. First, looking at the funds related to residents entering the market, from the perspective of bank-securities transfers and financing, the inflow of such funds is highly correlated with market trends and trading sentiment. With the overall uplift of the market center in 2025, there may still be a certain increment in the future, with an expected bank-securities transfer scale of 300 billion yuan and a leverage fund scale of 200 billion yuan. From the perspective of public funds, comparing with the development of public funds in the United States, the overall scale of public funds in our country in 2023 is 27.6 trillion yuan, which is only 22% of nominal GDP, indicating significant development space compared to the nearly 100% level in the United States in recent years. We expect the incremental public fund in 2025 to reach 700 billion yuan. In addition, on September 26, the Central Financial Office and the China Securities Regulatory Commission jointly issued a document to guide medium- and long-term funds into the market, addressing the bottlenecks for social security, insurance, and wealth management funds entering the market, further boosting the capital market. In the future, medium- and long-term funds are still expected to accelerate their inflow into the A-share market through ETFs, and next year, A-share ETF funds are still expected to occupy an important position in public funds Looking at other institutional investors, from the perspective of insurance funds, in recent years, thanks to the stable growth of insurance companies' premium income, the cumulative premium income from January to October 2024 has increased by 12.4%, making insurance funds one of the main sources of incremental capital for A-shares. Looking ahead, due to the Ministry of Finance's requirement for listed insurance companies to implement new financial instrument standards starting in 2023, the fair value changes of stock assets under the FVOCI category will not be included in profit and loss but will be included in other comprehensive income, which can better reduce the volatility of insurance companies' profit and loss statements. In 2025, there is still significant incremental space for the equity asset allocation of insurance funds, with an expected annual inflow of 450 billion yuan. From the perspective of foreign capital, looking at the long-term trend, northbound funds show a stable trend of increasing holdings in A-shares, but in recent years, the long-term trend of foreign capital inflow into A-shares has slowed down, possibly due to the pressure on core assets with fundamental advantages under the backdrop of economic recovery. With the improvement of fundamental expectations in China, foreign capital is expected to continue net inflows in 2025, with an estimated increase of 150 billion yuan. Finally, in recent years, supported by policies, the scale of cash dividends implemented by A-shares and the number of individual stocks have continued to rise, especially with the new "National Nine Articles" in April 2024 further strengthening the regulation of cash dividends for listed companies and increasing incentives for high-quality dividend-paying companies. The total scale of cash dividends implemented in 2024 is approximately 2.4 trillion yuan, with about 4,000 individual stocks implementing dividends, both reaching historical highs. Looking ahead, in December 2024, China Securities Depository and Clearing Corporation announced that starting in 2025, it will halve the handling fees for cash dividends of listed companies on the Shanghai and Shenzhen A-shares. In the future, there may still be incremental space for cash dividends in A-shares, with an expected cash dividend amount (calculated only from the perspective of secondary investors) reaching 750 billion yuan in 2025.

Key Capital Outflow Project Estimation: A-share Financing Scale May Marginally Rebound in 2025, Transaction Costs May Increase. Since September 2023, with the gradual tightening of regulations on financing activities, the scale of A-share IPOs and refinancing has continued to shrink. However, based on historical experience, the suspension periods of A-share IPOs often end with a warming market environment. Additionally, historically, the scale of industrial capital reduction is closely related to the A-share market performance. Therefore, looking ahead to 2025, with the improvement of fundamental expectations driving an increase in risk appetite, coupled with the continuous improvement of the capital market system, the A-share investment and financing environment is expected to continue to recover, and the financing environment may marginally turn active. It is estimated that the IPO scale in 2025 will be 100 billion yuan, the refinancing scale will be 200 billion yuan, and industrial capital reduction will be 300 billion yuan. Furthermore, regarding stock market-related taxes and fees, the expected scale of transaction taxes and fees is calculated based on the predicted market transaction volume for 2025. Financing costs arise from leveraged funds, and the forecast for leveraged funds refers to previous discussions. We expect that the market trading enthusiasm will rebound in 2025, and the transaction volume is expected to marginally increase. The scale of transaction stamp duty + financing costs in 2025 is approximately 450 billion yuan.

Risk Warning: The data on capital flows are mostly rough estimates and may differ from the actual situation; some data predictions are based on general trend assessments and may change due to future market conditions.

Source: Xun Yugen (ID:gh_9c673a59364f), Haitong Securities Original Title: "Can 2025 Welcome a 'Liquidity Bull Market'?"

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