BOC International: Confidence is expected to be restored, a rebound is possible.

Core Conclusion Regulatory active posture is expected to help restore market confidence, focusing on the part of consumption race and the technology sector with both policy and economic benefits. 01 Overall Trend and Style Regulatory active posture is expected to restore market confidence. This week, the market weakened due to year-end fund pressure and expectations of stricter regulations. On December 31 and the first two trading days of the year, major indices all experienced significant adjustments. Structurally, consumer and dividend stocks led the gains, showing high risk aversion in the market since the beginning of the year. Current market concerns are focused on: on one hand, President Trump's inauguration on January 20, his policy agenda and executive orders may cause fluctuations in US-China trade relations; on the other hand, the outlook for domestic demand remains uncertain, as the latest manufacturing PMI data for December saw a marginal decline after three consecutive months of increases. In terms of liquidity, the liquidity injected by the central bank in December was significantly lower than the seasonal average, and market expectations for reserve requirement ratio reduction have increased in the short term. Looking ahead, we believe that market confidence is expected to be restored. (1) On one hand, over the weekend, the central bank stated that in 2025, they will "cut reserve ratios and interest rates at the right time, maintain ample liquidity, and stabilize financial aggregate growth," reinforcing market expectations for reserve requirement ratio cuts; in addition, the China Securities Regulatory Commission stated that "rumors about regulatory authorities guiding listed companies to release all negative news before January 15" and "insurance companies massively redeeming public funds" are all rumors. The positive stance of regulatory authorities is expected to have a positive effect on market confidence. (2) On the other hand, the marginal improvement in the non-manufacturing PMI in December and the relatively stable manufacturing PMI, though slightly lower, still above the seasonal average level, reflect that the new order index continues to rise, indicating that domestic demand expectations should not be overly pessimistic. With the implementation of the central bank's monetary easing, we believe that market confidence and liquidity conditions are expected to be restored. The stock-bond risk premium index, reflecting A-share sentiment, has fallen to the lower edge of the 1 standard deviation level. Combined with the annual strategic prediction, there is still room for the A-share ERP level to recover. From an annual perspective, the brief decline at the beginning of the year can be seen as a window for increased investment during the year. 02 Mid-term Industry and Economic Conditions Industries have undergone significant adjustments, with dividend factors temporarily favored. The rate of actual improvement is slower than expected, amplified by rapid micro-level adjustments, leading to a rapid decrease in fund balances represented by margin trading. After oscillating within a range, the market has taken an early direction. In terms of industry structure, industries with smaller declines are mainly concentrated in sectors with lower cumulative increases and a more dividend-focused nature. Industries with larger cumulative increases, more growth-oriented and non-banking sectors with higher risk preferences have led in declines this week. The speed of industry rotation may significantly increase. The difference between 2025 and 2023-2024 lies in the change of the assumed base for prediction. In 2023-2024, investors' judgments on countercyclical policies were based on whether they existed or not, while in 2025, it has become whether they are strong or weak. The former forms a single dominant style based on trend, continuity, self-reinforcement throughout the entire time range, and a larger trend reversal after a flip of the existing conditions. The change in the assumed conditions for 2025 will significantly reduce the probability of a recurring single dominant style with trend continuity from 2023-2024, or more will depend on marginal changes between strong and weak, and faster overall trends, styles, and industry rotations. Under the continuous catalytic effect of the "two new" policies, sectors such as home appliances, consumer electronics, etc., have shown positive economic trends. Since the release of the State Council's action plan to promote large-scale equipment updates and replacing old products in March of 2024, the consumer goods sectors such as automobiles, home appliances, and consumer electronics have shown signs of recovery. The total retail sales of household appliances have continued to recover year over year, and the passenger cars, consumer electronics, and other sectors have maintained superior economic outlook. On January 3, 2025, at the "China's High-quality Economic Development Achievements" series press conference held by the State Council Information Office, Deputy Secretary-General of the National Development and Reform Commission, Yuan Da, stated that in 2025, China will significantly increase the scale of long-term special national bond funds, and accelerate the implementation of the "two new" policies. The relevant consumer sectors are expected to continue to be catalyzed. With the launch of the "gift giving" feature on WeChat, "social e-commerce" is expected to drive the recovery of online retail economy. On December 19, 2024, WeChat announced the start of the grey test for the "gift giving" feature on the WeChat small shops. WeChat users can send gifts to their friends on WeChat in a similar way to "red envelopes". Currently, except for jewellery, education and training, and goods over 10,000 yuan, all other types of goods have the "gift giving" feature enabled by default. In early January 2025, WeChat Small Shop released the 2025 private domain incentive plan, with service fees reduced to 1% for transactions generated through sharing, public accounts, and mini-program scenes, and up to 0.4% maximum incentive in the form of e-commerce growth cards for transactions generated through reservation notification scenes. On the first day of the launch of the WeChat "gift giving" feature, the official store account of Three Squirrels Inc. on the WeChat small shop saw a daily transaction volume and new sign-up rate increase by more than 500%, and the average increase in matrix account dimensions exceeded 10%. Data from the Luckin Enjoy Coffee small shop also showed that they conducted a New Year's gift campaign for WeChat on December 30, 2024, and more than 10,000 orders were "gifted" by users within one day. The new "gift giving" feature on WeChat Small Shop introduces a new model of "social e-commerce," which is expected to drive the recovery of the online retail economy. With the continuous efforts of the "two new" policies recently, some sectors of the consumer sector such as home appliances, consumer electronics, automobiles, etc., have shown positive economic trends, and industries such as the "IP economy" have also shown positive trends. With the launch of the WeChat "gift giving" feature, "social e-commerce" is expected to drive the recovery of online retail economy to a certain extent. With the recent market adjustments, a decrease in risk appetite, and accelerated industry rotation, some sectors in the consumer sector with both policy expectations and economic catalysis are worth attention, such as home appliances, consumer electronics, social e-commerce, and the IP economy. In addition, following the high crowding and strong market sentiment in the growth sector such as Siasun Robot & Automation, AI applications, after experiencing a decline since mid-December, they have already returned toComparatively cost-effective locations can be considered for appropriate configuration.03 Weekly Market Overview, Portfolio Performance, and Hotspot Tracking The industry most welcomed by the market funds this week is the trade and retail industry, with a net inflow of funds reaching 19.92 billion yuan. The textile and apparel industry ranks second, with respective net inflows of 10.34 billion yuan, while the three industries with the largest net outflows of funds are electronics, non-bank financial institutions, and computers. This week, the net purchase amount of stock ETFs on the exchange was 33.877 billion yuan, marking the 7th consecutive week of net purchases with an increase of 26.419 billion yuan compared to the previous week, the largest net purchase amount in 3 months. The top five products with the most increase in shares are Huaxia CSI-KCB 50 ETF, Guolian An Zhongzi Quanzhi Semiconductor and Equipment ETF, Nanfang CSI 1000 ETF, Nanfang CSI A500 ETF, and Guotai CSI A500 ETF. On January 2nd, the central bank issued a notice to initiate the second round of currency swap facility operations and completed the bidding on the same day. The amount for this operation was 55 billion yuan, an increase of 5 billion yuan compared to the first round of currency swap facility. The winning bid rate was 10 basis points, a significant decrease compared to the 20 basis points in the first round. Additionally, the range of eligible collateral for this operation has been further expanded, allowing participating institutions to submit restricted shares and stocks held under the Hong Kong Stock Connect, significantly increasing the range of available collateral. In terms of fees, China Clearing Corporation announced a halving of the securities pledge registration fee for institutions participating in the currency swap facility business, further reducing the cost pressure for institutions. Based on the estimated "swap rate + pledge rate," the current DR007 level is around 1.68%, so the rate for the second currency swap facility operation is around 1.78%, a significant decrease compared to the comprehensive cost of funds of over 2% in the first round. A total of 20 institutions participated in the bidding, with 7 securities firms having already issued relevant announcements. In the long term, the currency swap facility provides a new stable financing channel for non-bank institutions led by securities firms, increasing the source of new funds in the stock market and further enhancing the intrinsic stability of the stock market. In the short term, with the arrival of funds from the second currency swap facility operation, the dividend sector is expected to benefit immediately from carry trade, and it is recommended to focus on this sector this month. Risk Warning Potential risks include policy implementation falling short of expectations, macroeconomic fluctuations exceeding expectations, market volatility risk, overseas economic recession exceeding expectations, and liquidity risk. This article comes from a strategy report released by BOC International; edited by GMTEight: Wenwen.