China Equity Strategy: A-Share Sentiment Calming Down; Tightening Measures in Effect
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Following recent regulatory tightening on margin requirements by Chinese exchanges, Morgan Stanley notes a significant cooling in A-share investor sentiment. The weighted MSASI sentiment indicator dropped 33 percentage points to 57% as of January 21, returning to its normal historical range of 22-78. The firm views these measures as a targeted effort to curb speculation without derailing the intended slow-bull market trajectory.
Trading activity has contracted notably across major metrics. ChiNext turnover fell by 24% to 756 billion yuan, total A-share turnover decreased by 18% to 2.806 trillion yuan, and index futures turnover declined by 12% to 548 billion yuan. Meanwhile, southbound capital flows remain robust, with net inflows reaching $2.6 billion between January 16 and 21, and $8.2 billion year-to-date.
December macroeconomic data presented a mixed picture. Industrial output grew 5.2% year-over-year, but retail sales fell to a post-pandemic low of 0.9%. The GDP deflator remained in deflationary territory at -0.7%, restricting nominal GDP growth to just 3.8%. While infrastructure spending showed early strength through elevated government bond issuance and cement shipments, consumption and real estate remain weak links.
Morgan Stanley maintains its expectation that liquidity support for both A-shares and Hong Kong-listed equities will persist through the first quarter, driven by bond reallocations and insurance inflows. However, they flag three near-term risks: seasonal spring festival liquidity tightening, further regulatory crackdowns, and geopolitical surprises.