CHINA EQUITIES
Darkness Before Dawn
Waiting for near-term stabilisation; constructive on a medium-term valuation recovery
恒峰资本 HENGFENG CAPITALA-shares are at a transition point between sentiment and liquidity clearing and a potential valuation recovery. Near-term pressure has not fully passed, but repricing in the equity risk premium is gradually improving medium-term allocation value.
01
Near-term weakness is driven more by liquidity and sentiment
Recent weakness has mainly reflected tighter liquidity and declining risk appetite, with forced deleveraging amplifying price moves. The medium-term logic of core industries has not deteriorated to the same extent. The adjustment therefore appears closer to a release of trading pressure than the start of a new fundamental downturn.
A further near-term decline or a sharper release of selling pressure remains possible. Yet lower valuations and a higher equity risk premium are gradually improving the medium-term appeal of quality equity assets.
02
Policy room and liquidity improvement are central to recovery
The key variable is not the size of any single rate cut, but whether the renminbi, monetary policy and domestic market liquidity can reinforce one another. Bond markets already discount some easing. A relatively stable or firmer currency could ease capital-flow constraints and give policy makers greater room to act.
Exporter conversion of foreign-currency receipts also matters. If the external trade environment improves at the margin and conversion activity rises, renminbi liquidity could strengthen and feed through to the real economy and financial markets. That combination may allow the market to move from risk compression toward a liquidity-supported valuation recovery.
03
A durable reversal still requires three signals to align
Medium-term recovery potential does not mean the market has already confirmed a bottom. Low valuations improve prospective returns but do not determine timing on their own. A more durable advance requires better liquidity, recovering risk appetite and stable industry fundamentals to align.
Key indicators include turnover and fund flows, the renminbi, policy rates and the operating momentum of core industries. Whether these variables improve together will determine if a rebound is tactical or develops into a more durable trend.
04
Maintain medium-term conviction while waiting for confirmation
We remain cautiously constructive on A-shares. The market may remain uneven in the near term and may need to release more risk before forming a base. Over the medium term, the delivery of policy easing and an improving liquidity environment could support a new phase of valuation recovery.
At this stage, position discipline and liquidity reserves matter more than aggressive early entry. Equity exposure can be increased gradually once price stabilisation, returning flows and an improvement in risk appetite begin to confirm one another.
Written in October 2026 and reflecting the market assessment at that time. Market conditions and policy paths may change. This material is for research discussion only and does not constitute investment advice, a return promise or a basis for any securities transaction.
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