Recent liquidity characteristics of three markets

We have observed three liquidity characteristics in domestic and overseas markets recently.

Characteristic One: The fund flows of ETFs are significantly differentiated, with broad-based ETFs decreasing while industry/theme ETFs are increasing, and A-shares decreasing while Hong Kong stocks are increasing. From the perspective of various ETF holders and FOF clients' positions, the aforementioned fund behavior reflects that institutional allocation funds still have a clear high-cut low characteristic, while the strong trending sectors recently are mainly driven by actively selected stocks.

Characteristic Two: The market may be entering the last round of intensive subscription and redemption turnover phase for actively managed public funds since 2021. With the rise of core assets heavily held by institutions, the aforementioned products are expected to gradually digest the pressure brought by redemptions. The corresponding institutional stocks may become the focus of allocation in the next round of industrial trends and economic recovery. The strategy of being light on large caps and heavy on small caps, avoiding stocks held by institutions, may no longer hold, and returning to core assets is becoming a reality.

Characteristic Three: The coexistence of high debt funding rates and passive interest rate cuts by central banks overseas. Under the environment of high debt funding rates, European and American countries are forced to enter a rate-cutting cycle. The pressure on Chinese manufacturing in global competition is easing. Under the trend of anti-involution, the future transformation of China's manufacturing sector from share advantages to pricing power, and then to a long-term recovery in profit margins, is one of the most important fundamental clues that can be foreseen in the medium to long term, and the attractiveness of RMB assets is continuously increasing.

In terms of allocation strategy, we recommend downplaying market volatility, adjusting the position structure, and continuing to focus on structural opportunities in consumer electronics, resources, innovative pharmaceuticals, chemicals, and gaming.

Characteristic One: The fund flows of ETFs are significantly differentiated, broad-based ETFs decrease while industry/theme ETFs increase, A-shares decrease while Hong Kong stocks increase

1) The ETF market shows a net outflow from A-share broad-based ETFs and a net inflow into Hong Kong stock ETFs. Since July, A-share broad-based ETFs have seen a cumulative net outflow of 203.8 billion yuan, while industry and theme ETFs have seen a cumulative net inflow of 114.2 billion yuan. At the same time, Hong Kong-related ETFs have seen a cumulative net inflow of 143.1 billion yuan (of which non-QDII ETFs have a net inflow of 104.8 billion yuan). We estimate that about 50% of the holders of industry and theme ETFs related to dividends, cycles, and manufacturing are institutional holders, and assuming that the recent net outflow from broad-based ETFs mainly comes from institutions (in fact, the proportion of institutional holders in such ETFs exceeds 90%), then the institutional funds reducing their allocation to A-share ETFs is approximately 146.7 billion yuan (203.8 - 114.2 × 50%), which is roughly on par with the inflow into Hong Kong-related ETFs (143.1 billion yuan). This generally reflects that institutions have a clear "reduce A, increase Hong Kong" characteristic in their ETF allocation, which also means that many institutional allocation funds have chosen to high-cut low during the recent market uptrend. During the same period, the cumulative net buying amount of southbound funds reached 252.5 billion yuan. If we exclude the 104.8 billion yuan net buying of Hong Kong-related ETFs, the actual funds for actively allocating individual stocks southbound reached 147.7 billion yuan, accounting for about 58.5% of the net buying amount southbound 2) The net inflow of industry/theme ETFs has significantly increased, with cyclical and dividend ETFs being the most notable. Statistics on the cumulative net subscription of various industry/theme ETFs since the beginning of the year show that as of September 5, 2025, the top three cumulative net subscriptions for the year are cyclical (+44.5 billion yuan), manufacturing (+38.1 billion yuan), and non-bank financials (+28.5 billion yuan), while technology (+25.9 billion yuan) ranks fourth. Technology ETFs have seen significant net redemptions in early to mid-August and since September. From the perspective of holder structure, the institutional holdings of dividend, cyclical, technology, non-bank financials, consumer, and pharmaceutical sectors account for 48%, 47%, 27%, 27%, 26%, and 18%, respectively, indicating that the main incremental force this year still comes from institutional funds rather than retail investors. Since July, the net inflow of technology ETFs (+1.6 billion yuan) has also lagged, performing only better than pharmaceuticals (-4.8 billion yuan), with the largest net inflows being cyclical (+42.9 billion yuan) and manufacturing (+12.8 billion yuan). Therefore, considering the holder structure and fund flow of ETFs/FOFs, the technology and innovation ETFs with a high proportion of individual holdings have not seen sustained significant large-scale net inflows, and the allocation of FOFs to ETFs remains relatively limited (overall only around 7 billion yuan), thus we believe that the previous upward momentum in technology stocks mainly came from actively managed funds rather than a bundled purchase in ETF form.

Feature Two: The market has entered the last round of intensive subscription and redemption phase for actively managed public funds since 2021

As of September 5, we calculated based on unit net value (adjusted for dividends reinvestment, same below) that the total scale of actively managed public funds issued from 2020 to 2021, with unit net values below the breakeven line, amounts to 660 billion yuan, accounting for 52.0% of all actively managed public funds issued during this period. Among them, products near the breakeven line (unit net values between 0.9 and 1.1 yuan) have a scale of 316.7 billion yuan, accounting for 25.0% of all actively managed public funds issued during this period. We calculated the share changes of actively managed public funds issued from 2020 to 2021, where the first quarter of unit net value turned from loss to profit; these funds saw a quarter-on-quarter share decline of only 0.85%, while products whose unit net values rose from below 0.9 yuan to above 1.1 yuan saw a quarter-on-quarter decline of 13.24%, indicating that redemption pressure is generally controllable. From the holding structure, for products issued in 2020 to 2021 with current net values between 0.9 and 1.1 yuan, the top three heavily weighted industries are electronics, pharmaceuticals, and media (mainly influenced by Tencent Holdings), with heavy holdings concentrated in core assets such as Tencent Holdings, Xiaomi Group, Alibaba, and CATL. It is expected that as these core assets rise, the aforementioned products are likely to gradually alleviate the pressure from redemptions, and the corresponding institutional tickets may become the focus of allocation in the next round of industrial trends and economic recovery processes. The strategy of focusing on small caps while avoiding institutional holdings may no longer hold, and a return to core assets is becoming a reality

Feature 3: The coexistence of high debt funding rates overseas and passive interest rate cuts by central banks continues to enhance the relative attractiveness of RMB assets

1) High debt funding rates in Europe and the United States continue to crowd out private sector investment. Since the beginning of this year, government bond yields in major developed countries have continued to rise, including Germany, which has always adhered to fiscal discipline, where recent government bond yields have also been on the rise. Long-term government bonds in the United States, the United Kingdom, and Japan have recently faced continuous sell-offs. Although many countries are trying to increase government budgets and drive investment, the manufacturing PMI has not shown improvement. The manufacturing PMIs for Germany, France, the UK, and the US have generally remained below the expansion line this year, with some improvement in August, recording 49.8, 50.4, 47.0, and 48.7 respectively, with month-on-month changes of +0.7, +2.2, -1.0, and +0.7 percentage points compared to July. It is evident that government investment has crowded out private sector investment, and the lack of overall economic growth momentum has further exacerbated concerns about fiscal sustainability, leading to a continuous rise in debt financing costs, which further suppresses private sector investment. This may constrain capacity expansion in overseas sectors, including critical minerals and energy infrastructure, while also posing risks to the sustainability of investments in emerging fields such as data centers and biopharmaceutical research and development. For example, the impact of China's innovative drug research and development on overseas competitors is largely related to the rising capital costs in relevant overseas fields. Even in hot areas like artificial intelligence data centers, the sustained high credit costs may also become a hidden danger. Currently, the capital expenditure as a proportion of operating cash flow for major cloud service providers in North America continues to rise, with Amazon reaching 85%, and Microsoft and Google approaching 50%. However, at the same time, debt financing costs have significantly increased compared to previous years. At the end of April, Google issued €6.75 billion in bonds and $5 billion in bonds, with a total scale reaching a historical single-issue high, but the coupon rate for the 10-year dollar bonds was as high as 4.5%, while the coupon rate for the 10-year dollar bonds issued in 2020 was only 1.1%.

2) Overseas central banks are forced into a rate-cutting cycle in the context of a weakening economy, leading to continued ample financial liquidity. Since 2020, the proportion of months with manufacturing PMIs below the expansion line in major countries has exceeded 60% in Germany and France, and over 50% in Italy, the US, and the UK, with Germany experiencing as many as 38 months below the expansion line. Even in the US, there have been obvious signs of a weakening labor market recently. According to data released by the US Bureau of Labor Statistics, the seasonally adjusted non-farm payrolls in the US recorded an increase of 22,000 in August, far below the market expectation of 75,000. The three-month moving average of non-farm employment data is also at the lowest level in nearly 10 years outside of recession periods (according to NBER definitions), indicating a significant cooling of the labor market. Following the release of non-farm data, the probability of the Federal Reserve cutting interest rates by 50 basis points in September has also significantly increased 3) The pressure on China's manufacturing industry in global competition is easing, and there is potential for long-term capital returns to improve. In the current global environment of high financing rates, the competitive pressure on China's manufacturing industry in terms of global market share is easing rather than increasing, with China's low capital costs (especially the cost of debt) becoming a global cost advantage. This will bring advantages in many industries, such as the construction of data centers, the research and development of innovative drugs, and the construction of new energy power plants. In the face of a high-interest-rate environment, the overseas private sector will ultimately tend to slow down investment and transformation, which means that for China's industrial capital goods industry, which occupies a high production share, there is a conditional opportunity to create excess profits in overseas markets for a considerable period of time through share advantages, transforming share advantages into pricing power, and then into a long-term recovery of profit margins, thereby building innovation-driven competitive barriers. This is one of the most important fundamental clues that can be foreseen in the medium to long term. In an environment where high debt financing rates, overseas central banks face passive interest rate cut pressures, and China's long-term capital returns are improving under the backdrop of "anti-involution," global capital allocation to Chinese equities and fixed-income assets seems to be a necessary option. Furthermore, compared to the past few years, China's position in the geopolitical environment has also significantly improved, which may be further strengthened under the expectations of a certain trade agreement between China and the United States after the 93rd military parade.

Diminish market volatility, adjust position structure, continue to focus on consumer electronics, resources, innovative drugs, chemicals, and gaming

Having understood some of the liquidity characteristics discussed in this article regarding domestic and global markets, we have reason to remain calm about short-term market volatility and respond to fluctuations through structural adjustments rather than position adjustments. We still recommend focusing on industries with real profit realization or strong industrial trends, particularly consumer electronics, resources, innovative drugs, chemicals, and gaming. For consumer electronics, we focus on the revaluation opportunities in the supply chain after Apple's fall event on September 9, and closely monitor the diffusion of AI logic from the end of this year to the entire next year, which may bring broader opportunities including end-side devices, computing chips, and communication modules. If expressed through ETFs, we find that the sample stock structure of the VR ETF has a higher proportion of supply chain components (the computing component in the consumer electronics ETF is still relatively high). For other recommended industries, resources, innovative drugs, and gaming can be expressed through non-ferrous metals ETF and rare metals ETF (focusing on rare earths and energy metals), Hang Seng Innovative Drug ETF (focusing on large pharmaceutical companies rather than small-cap stock speculation), and gaming ETF. At the same time, we emphasize the need to pay attention to supply and demand growth; industries in China that already have or are expected to have sustained pricing power should be monitored, such as rare earths, cobalt, tungsten, phosphorus chemicals, pesticides, fluorochemicals, and photovoltaic inverters. If expressed through ETFs, the chemical ETF can be considered. Finally, regarding the recently adjusted military industry sector, we believe that the increase in military trade exports is the core breakthrough for profitability and growth. The market must see more instances to validate this; the military parade on September 3 is not the realization of a catalytic event but rather the beginning of the long-term logic of the military industry sector, and patience is needed in this regard Authors: Qiu Xiang, Gao Yusen, Yang Jiajie, Liu Chuntong, Chen Zeping, Zhang Mingkai, Source: CITIC Securities Research, Original Title: "Recent Liquidity Characteristics of Three Markets"

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