After a roundabout journey, we return to our previous analysis, with the A-share market once again being determined by the ebb and flow of foreign capital. We have previously concluded that due to domestic institutional investors being in a state of being trapped, the issuance of new funds is extremely sluggish, and domestic institutional investors are entirely unreliable. If the stock market continues to plummet, this fragile capital structure could be easily punctured. Here, either foreign capital needs to repurchase or large funds such as insurance, bank wealth management, and social security need to enter the market to offset the outflow of foreign capital; otherwise, the A-shares could experience systemic risks.
We had initially thought that the capital market combination of "reducing stamp duty" and the real estate combination of "recognizing property but not loans" could boost the confidence of both domestic and foreign capital, thereby attracting incremental funds to enter the market and resolve this dilemma, especially the funds lying idle in the bond market. However, it appears that such expectations have not been met.
In the past two weeks, the yield on China's ten-year government bonds has risen sharply, approaching 2.7%, returning to levels prior to the interest rate cut, and naturally, the bond market has experienced a significant downturn. This trend indeed reflects the positive impact of policies, but even if these funds suffer losses in the bond market, they have not come to the stock market.
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Regarding foreign capital, on Monday, there was indeed a significant purchase by foreign investors, which led us to momentarily believe that foreign capital was about to return. In reality, on Tuesday and Thursday, there were substantial outflows. From August 7th to today, over the course of a month, foreign capital has only purchased on two days, which is a continuous record-breaking trend.
However, there is another frightening fact: foreign capital still has two trillion, and the market is in turmoil after selling only ten billion in A-shares. If they were to sell hundreds of billions, wouldn't that lead to a stock market disaster? The day before yesterday, Li Xunlei suggested that the management should establish a market stabilization fund, a proposal we strongly agree with. In the face of such a massive short-selling force by foreign capital, can we still expect retail investors to hold the line? It can only be official forces that step in. The past two weeks were about policy, but now it's about providing funds; the market is entirely incapable of self-rescue.
As for the reasons behind foreign capital's sell-off, it's still those few: concerns about real estate and local debt risks, lack of confidence in the economy, and the depreciation of the renminbi. In the past two weeks, policies have been introduced for both real estate and local debt, which should have alleviated foreign capital's concerns. Otherwise, the real estate stocks in Hong Kong wouldn't have risen so sharply yesterday. The main concern now is the depreciation of the renminbi.
Last night, the US dollar index strengthened significantly, and the market interpreted this mainly due to the release of the August ISM non-manufacturing PMI in the United States, which greatly exceeded expectations. However, we find this explanation rather far-fetched. Recently, both Europe and the United States have published relatively weak data, including employment and PMI figures. The number of bankruptcies in the United States in August surged by 54% year-on-year, reaching a new high for this phase. At this stage, to talk about a strong economy is nothing but a blatant lie. The market only sees the ISM non-manufacturing PMI exceeding expectations but fails to notice the Markit services PMI falling short of expectations.Then, the recent depreciation of the yuan is more of a passive devaluation, mainly due to the European economy being worse than the United States and the dovish stance of the Bank of Japan, leading to the devaluation of the euro, pound, and yen. These three currencies have a large weight in the US dollar index, causing the US dollar to appreciate relatively. In fact, the yuan has appreciated relative to the euro and yen.
Specifically, due to the significant negative factors such as the sharp drop in US stocks last night and the strengthening of the US dollar leading to the depreciation of the yuan, foreign capital sold off more than 7 billion yuan. By the close, the Shanghai Composite Index fell by 1.13%, the ChiNext Index fell by 2.11%, the Hang Seng Index fell by 1.34%, and the Hang Seng Tech Index fell by 2.04%. The total turnover of the two markets was basically the same as yesterday, with more than 4,700 stocks falling, and the ChiNext Index is just one point away from a new low.
The remaining significant news includes the export data for August, SK Hynix investigating the presence of its chips in Huawei smartphones, and statements from the president of the US Semiconductor Industry Association, which we will not analyze, as they cannot change the trend of the A-share market anyway.
Our current mood is one of helplessness and a sense of futility, akin to being disappointed with something that is not up to expectations. Foreign capital is selling heavily, and the large funds outside the market are not entering. These large funds lack the awareness; do they still expect us to support the market and continue to fall? The management will also be very anxious. The A-share market at this position is worth looking good upon, and it can be allocated with a certain position to avoid missing out on a violent rebound due to a sudden policy attack. The remaining position waits for the right side, to see when there is an increase in funds entering the market or when foreign capital buys back.
The next key point for the US dollar will be waiting for next week's inflation data, with the Federal Reserve's interest rate meeting on the early morning of the 21st. It can only be said that the bottom is full of tribulations, and it is good to have divergences as they are good buying points. When everyone is optimistic, there won't be much room left.