Net inflow of nearly 14 billion! Northbound funds hit the second-highest daily scale of the year

[Daily Economic News] reporter Wang Haiming; [Daily Economic News] editor Xiao Ruidong

At noon on May 31, the State Council issued the “Notice of the State Council on Issuing a Package of Policy Measures to Solidly Stabilize the Economy” (hereinafter referred to as the “Notice”), which includes 33 specific policy measures and the corresponding division of responsibilities across six areas, covering fiscal policies, monetary and financial policies, policies to stabilize investment and boost consumption, policies to safeguard food and energy security, policies to ensure the stability of industrial and supply chains, and policies to protect basic people’s livelihoods.

The State Council requires that all regions and departments should implement the decisions and arrangements of the Party Central Committee and the State Council with the spirit of driving in nails, effectively stabilize the economy in the second quarter, strive to lay a good foundation for development in the second half, and keep economic operations within a reasonable range.

The “Notice” had a boosting effect on the A-share market that day, with the market showing an across-the-board rise. Among 31 Shenwan first-level industries, 26 industries rose. Among the industries with the largest gains are beauty and personal care, electronics, agriculture, forestry, animal husbandry and fishery, food and beverages, and power equipment, etc. Is the A-share market likely to kick off a new round of rebound from here? In response, reporters from the “Daily Economic News” interviewed chief analysts from multiple brokerage strategy research teams.

It is worth noting that on May 31, northbound funds recorded a net inflow of nearly RMB 14 billion, setting the second-highest single-day net inflow level for northbound funds this year.

Brokerage firms’ chief interpretations of policy positives

Yi Bin, chief strategy analyst at Northwest Securities, told reporters that the release of the package of policy measures to solidly stabilize the economy signals that a faster economic recovery is likely ahead. Judging from the policy document, the government’s determination to stabilize the macroeconomic situation is clear. Recently, Shanghai has also issued the “Shanghai Municipal Implementation Plan for Accelerating Economic Recovery and Revitalization.” Overall, the policy’s guiding approach focuses on resuming work and production, stabilizing demand, and striving to push the economy back onto a normal track to ensure it operates within a reasonable range.

Yi Bin believes that in June, the market main line will shift from the policy game period to the economic verification period. Since the end of April, market trends have had a high correlation with the pandemic situation. The dense policy signals in May are also the main factors boosting the market’s sentiment. For the market, it can be seen that in May the first half of the market’s pandemic-recovery rally was enthusiastically played out, but in June the trading pace will gradually slow down, and trading styles will become more balanced.

Wu Kaida, chief strategy analyst at Debon Securities, said in an interview with reporters: “The State Council issued the ‘Notice of the State Council on Issuing a Package of Policy Measures to Solidly Stabilize the Economy.’ We believe there are several key aspects to focus on: first, tax cuts and fee reductions will continue to be stepped up, with an additional RMB 142 billion in tax refunds; the total amount of tax reduction and tax refund for the full year will be RMB 2.64 trillion, further lowering corporate costs and stabilizing employment. Second, special-purpose bonds will basically be fully issued by the end of June; efforts will be made to use them up by the end of August. Compared with the wording at the March 29 State Council executive meeting—that special-purpose bonds would complete issuance by the end of September—this schedule has been significantly brought forward. Third, a phased reduction of the vehicle purchase tax totaling RMB 60 billion will be directly provided as car-purchase discounts to consumers to stimulate auto consumption. Fourth, structural monetary policy will be strengthened again: the funding support ratio of the inclusive small and micro loan support tool will be raised from 1% to 2%.”

“At present, the overall economy is still in a passive inventory replenishment cycle. Combined with the sporadic and frequent outbreaks of COVID-19 in some regions domestically, and the impact of high commodity prices under the Russia-Ukraine conflict, the manufacturing PMI in May was 49.6%, below the boom-bust line. Macroeconomic sentiment remains lackluster, and there is an urgent need for domestic policies to act countercyclically to stabilize total demand. On May 23, the State Council executive meeting made arrangements. Just 8 days later, the official notice document was issued. On May 25, the meeting to stabilize the economic big picture focused on implementation, seized the time window, and ensured that policy measures would be basically implemented in the first half of the year. It is expected that May will help clarify the ‘economic floor,’ and the equity market will gradually come out of the trough and climb step by step. In terms of pace, the logic of the first wave of reduced pandemic impact and the start of work resumption and production resumption has already been realized. As fiscal efforts step in and help unblock the mechanism from broad money supply to broad credit, the market will gather strength for a second wave of upside push. In the industry dimension, seize the four opportunities of stabilizing growth, independent and controllable capabilities, consumption recovery, and strategic resources.” Wu Kaida said.

Further progress in ETF interconnection

It is worth noting that on May 31, northbound funds recorded a net inflow of nearly RMB 14 billion, setting the second-highest single-day net inflow level for northbound funds this year.

According to Choice data, this year to date, the highest single-day net inflow of northbound funds occurred on May 20. On that day, the net inflow was RMB 26.4k. For the full month of May, total net inflow was RMB 14.24B, reaching a new high for this year.

In recent times, some policies issued by regulatory authorities will provide more choices for foreign investors investing in domestic equity markets. For example, on May 27, the CSRC publicly solicited opinions on the “Announcement on Relevant Arrangements for ETFs Being Included in the Stock Connect/Mutual Market Access Mechanism,” indicating that the inclusion of ETFs into the mutual market access mechanism has made substantive progress.

In response, a strategy team from China Merchants Securities (600999) released a view earlier, stating that, based on the draft solicitation of opinions from the Shanghai and Shenzhen stock exchanges regarding the inclusion of ETFs in the mutual market access mechanism, the selection of A-share ETFs was made. The total number of ETFs that basically meet the inclusion conditions is 77, accounting for 13.75% of all A-share ETFs. Corresponding net asset value scale is RMB 551.2 billion, accounting for 65.35% of the total size of stock ETFs. Among these ETFs, 33 are broad-based index ETFs, corresponding to a scale of RMB 320.5 billion; 44 are sector or thematic ETFs, corresponding to a scale of RMB 230.7 billion. Among sector & thematic ETFs, ETFs in the TMT and new energy fields account for most, such as semiconductor ETFs, communication ETFs, new energy vehicle ETFs, photovoltaic ETFs, and so on.

China Merchants Securities’ strategy team believes that the addition of northbound funds will drive the development of the domestic ETF market. On the one hand, it brings incremental capital to the ETF market, which is conducive to improving the liquidity and trading activity of related ETFs, thereby increasing the enthusiasm for subscription in the primary market and accelerating the expansion of ETF scale. On the other hand, in the future, as northbound funds are added, the proportion of institutions in the ETF investor base is expected to recover to some extent, which will have a positive effect on the healthy development of the ETF market.

In addition, the China Merchants Securities strategy team also said that, according to the draft solicitation of opinions, the ETFs under the mutual market access mechanism are clearly limited to trading in the secondary market, so they do not directly bring incremental funds to the A-share market. They also will not affect the prices of constituent stocks through primary-secondary market arbitrage trading of ETFs, so the direct impact on the A-share market is limited.

(Editor: Yue Quanli HN152)

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