China Securities Co., Ltd.: Review of the five bull markets in A-shares and Hong Kong stocks.

China Securities Co., Ltd. has released a research report stating that since 2000, there have been five rounds of bull markets in AH shares. Although each bull market has had different durations, elasticity, and industry styles, there are some similarities. The elements of a bull market include: economic recovery or strong growth, regardless of whether the improvement comes from policy or the internal cycle; loose financial conditions, not necessarily limited to the nominal money supply of the central bank, China's liquidity is wide and credit conditions need to be loosened; the rise of ShenZhen New Industries Biomedical Engineering or traditional cyclical industries; and the impact of incremental funds on style preferences. The main points of China Securities Co., Ltd. are as follows: 1. From 2003 to 2007, economic growth and institutional reform resonated in the bull market. During this bull market, the global economic recovery and China's rapid economic growth led to a resonance in AH shares, essentially pricing in a growth bull market. The performance of cyclical sectors in AH shares was strong. A-shares were also driven by factors such as the reform of non-tradable share reform and RMB appreciation, making the securities sector outperform H-shares. Under the support of global economic recovery and China's rapid economic growth, AH shares experienced a resonance bull market driven by strong fundamentals. The liquidity of this bull market in AH shares came from the global expansion of credit. Hong Kong's liquidity benefited from the weak US dollar. From 2003 to 2007, the US dollar index fell from above 100 to below 80. H-shares took the lead in April 2003, mainly driven by foreign capital inflows, especially Warren Buffett's purchase of PetroChina H-shares boosting market confidence. A-shares, on the other hand, touched a historical low in June 2005 and then followed suit driven by the release of benefits from the non-tradable share reform and RMB appreciation. The bull market in AH shares eventually ended with the onset of the subprime mortgage crisis after the tightening of US monetary policy. At that time, China was benefiting from the dividend of joining the WTO, with exports driving double-digit economic growth. The high growth of foreign exchange led to a passive easing of the basic money supply. Overseas markets were in a "weak dollar" environment, and the bull market ultimately ended due to domestic policy tightening to suppress speculative sentiment, combined with the initial signs of the subprime crisis in August 2007. 2. 2008-2009: Recovery bull market under strong stimulus after the crisis. Facing the global financial crisis, the world simultaneously embarked on an unprecedented period of loose monetary policy. The US, Japan, and Europe adopted extremely loose monetary policies, while China implemented massive fiscal stimulus. AH shares simultaneously entered a recovery bull market driven by strong policy stimulus. Both markets hit a low in late October 2008. A-shares rebounded rapidly due to the strong stimulus policies such as the "four trillion" stimulus package, doubling in ten months. Hong Kong stocks rebounded more modestly but lasted longer, peaking in December 2009. As it was a policy-driven bull market, the Chinese government implemented a large fiscal stimulus package and accommodated it with excess credit and loose monetary policy. In this bull market, policy-stimulated sectors such as infrastructure, real estate, upstream resources, and industry revitalization themes performed strongly in A-shares. In Hong Kong, the rise in the raw materials sector was strong, driven by favorable policies such as new healthcare reforms and the issuance of 3G commercial licenses. This pushed the healthcare and information technology sectors to lead the market. The liquidity of the bull market in AH shares came from strong policy stimulus. To support the four trillion fiscal stimulus, China significantly expanded its liquidity and credit. In the first quarter of 2009, credit grew rapidly, and the M2 money supply continued to rise, reaching a historical high of nearly 30% in the third quarter of 2009. After the bankruptcy of Lehman Brothers, the US government urgently intervened in the financial system. In November 2008, the Federal Reserve implemented quantitative easing, and in March 2009, the Federal Reserve announced an expansion of its bond purchases. Subsequently, the European Central Bank and the Bank of England also adopted loose policies. The US dollar index began a sustained decline from March 2009, falling by 14%. This bull market ended with global recession signals and China's exit from counter-cyclical policies. The massive fiscal and monetary stimulus led to an economic "V-shaped" turnaround, and signs of overheating began to show. In the second half of 2009, the Chinese central bank restarted issuing central bank bills to withdraw liquidity. Meanwhile, in overseas markets, the US implemented unconventional fiscal and monetary measures to alleviate the real estate and financial issues, but the global impact of the subprime crisis began to emerge. By the end of 2009, the Greek debt crisis had surfaced, leading to a decline in both markets. This signaled a confirmation of a global recession. 3. 2011-2015: Technology bull market driven by the wave of mobile internet. This round of AH shares' bull market was derived from the global emergence from deflation and a technological revolution led by "Internet+" in China. Under the wave of mobile internet, AH shares priced in a technology bull market in China. Benefiting from the loosening of overseas liquidity, the Hong Kong stock market started its bull market earlier in October 2011. A-shares, on the other hand, experienced deflation and tried to start a bull market during a period of policy loosening. The pace of the bull market was not smooth, and the structure was not constant. In 2011, with the rapid popularity of smartphones and the improvement of 3G networks, mobile internet applications developed rapidly. In 2015, "Internet+" became a national strategy, further igniting the market. During this period, mergers and acquisitions policies were relaxed, leading traditional industries to embrace the internet, creating numerous investment opportunities. This bull market in AH shares had strong commonalities, essentially pricing in economic recovery and a new technology cycle. Boosted by the development of the mobile internet and the slowdown of traditional economic growth, Hong Kong's market saw pronounced style differentiation, with growth stocks continuing to outperform. Tencent, as a leading technology stock of Hong Kong, played a central role in driving the Hang Seng Index higher. A-shares underwent a style shift from growth to value and back to growth. The ChiNext market, a growth-driven board, opened in 2013, and in the second half of 2014, stimulated by the "Belt and Road" initiative and a broadening of policy stimulants, economic growth expectations improved, leading to a surge in value stocks. By 2015, a shift back to growth occurred. The liquidity of this bull market in AH shares mainly came from loose domestic and international monetary conditions. Amid weak global economic conditions and the outbreak of the Eurozone debt crisis, global liquidity remained loose. In the second half of 2011, the Eurozone crisis surfaced, leading to a renewed phase of loose monetary measures in Europe and the US. In March 2012, a debt restructuring in Greece marked the beginning of efforts to handle the Eurozone crisis. Following the four trillion stimulus package in China, the country experienced an unusual deflation after years of reform and opening up, leading domestic policies to shift from tight to loose monetary conditions. In addition, China initiated deleveraging in the financial sector, weighing on small and medium-cap A-shares sensitive to liquidity. The profit squeeze caused by supply-side reforms widened the gap between Producer Price Index (PPI) and Consumer Price Index (CPI), concentrating profits in upstream industries and industry leaders, fostering a consensus among AH shares to buy industry leaders. A-shares saw a polarization in performance, with consumer and pharmaceutical stocks leading the large-cap blue-chip core assets, while TMT (technology, media, and telecommunications) and small-cap stocks experienced declines. This bull market in AH shares ended with the escalation of the US-China trade war and the tightening of credit conditions due to new asset management regulations. In 2017, the Federal Reserve raised interest rates three times and began to shrink its balance sheet in September. In the same year, the European Central Bank started to shift its monetary policy as the economy improved. In March 2018, the US-China trade friction intensified, causing a sharp drop in risk appetite. Market performance was also weighed down by industry-specific challenges such as declining smartphone sales. 4. 2016-2017: Style divergence in the stock market under liquidity mismatch. A-shares experienced a rare bull market under tightening total monetary conditions, driven by China's entry into a phase of stable real estate development. Meanwhile, Hong Kong stocks, benefiting from incremental funds, saw a synchronous bull market. A-shares experienced a bull market driven by "core assets" based on earnings growth, while Hong Kong stocks experienced a bull market driven by incremental funds. Both markets entered a recovery phase in February 2016. During this period, there was a clear divergence in the performance of AH shares, with Hong Kong stocks outperforming A-shares, especially in the technology sector. Information technology and raw material sectors in Hong Kong performed strongly, with quality internet companies delivering strong financial performance, leading to a "double Davids" effect. Moreover, A-shares witnessed a significant divergence, with value sectors benefiting from economic recovery and growth sectors showing relative weakness, particularly among conceptual stocks. The liquidity conditions in this bull market in AH shares were significantly different. Global liquidity remained relatively loose in 2016, with the US raising interest rates only once throughout the year, Europe maintaining negative interest rates and bond purchases, and the US dollar index declining. Apart from the loose global liquidity conditions, the deepening of the Shenzhen-Hong Kong Stock Connect in late 2016 created a closed loop along with the Shanghai-Hong Kong Stock Connect, leading to a substantial influx of southbound funds to the Hong Kong stock market and a systematic increase in mutual fund allocations to Hong Kong stocks. In contrast, China experienced an unusual tightening of financial and monetary conditions. This was due to the need to control the high real estate prices and to deflate financial bubbles, leading to the initiation of deleveraging measures. This tightening had a significant impact on mid-cap and small-cap A-shares sensitive to liquidity. Additionally, supply-side reforms widened the gap between the Producer Price Index (PPI) and the Consumer Price Index (CPI), concentrating profits in upstream industries and industry leaders, and fostering a consensus on buying industry leaders among AH shares. A-shares exhibited a divergence between "core assets" such as consumer and pharmaceutical stocks and high valuations in TMT (technology, media, telecommunications) and mid-cap stocks. This bull market ended with the policy tightening in the property, finance, and internet sectors. In 2021, concerns about inflation emerged, leading to a spike in US bond yields. The tightening of domestic policies, including strict supervision of the real estate sector through the implementation of the "three red lines" policy, along with antitrust measures targeting internet companies, signaled the end of the bull market. Risk prompts: The sustainability of the consumer recovery remains uncertain. While consumer spending has started to rebound this year, the level of recovery is limited, and whether it can continue to move towards normal growth or remain at a low level needs close monitoring. If consumer spending continues to be weak, economic recovery momentum will be limited. The uncertainty of whether the real estate industry can continue to improve. The current real estate downturn has lasted for a long time, and while there is a brief trend of improvement, several indicators still show negative growth. It remains to be seen whether the industry can maintain this trend of improvement. There is a risk of incomplete statistics due to data availability issues, model failure leading to measurement errors, and statistical errors. The impact of tightening monetary policies in Europe and the US or any unexpected tightening measures could drag down global economic growth prospects and asset prices. Geopolitical conflicts remain uncertain, disturbing global economic growth prospects and market risk appetite.