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Looking ahead of the Curve - Chinese Market post 2024 Rally - Incremental Liquidity

Updated: Oct 24

Allen Zhou, Cosmos Quant Investment, nzhou@cosmosquant.com



Cycles in China Equity Market - CSI 300 Index
Cycles in China Equity Market - CSI 300 Index

When Market Flow Dominates Logic

In the current market—driven almost entirely by sentiment and liquidity flow—traditional tools such as fundamental valuation models or technical indicators like RSI and MACD have become largely irrelevant.

Instead, it’s more useful to look at statistical patterns from past market cycles. While such “pattern tracing” may sound simplistic, it still provides valuable macro-level guidance.


Major Bull-Bear Cycles in A-Share History

2014–2015 Bull Market and Crash

  • Phase 1 (Nov 20, 2014 – Jan 5, 2015): The first leg of the bull market—about 30 trading days—saw the CSI 300 surge 43.5% with virtually no meaningful pullback.

  • Phase 2 (Jan – Mar 2015): The market consolidated for nearly two months.

  • Phase 3 (Mar – Apr 2015): The main phase—another 30 trading days—brought an additional 40% rally in the CSI 300.

  • Phase 4 (Apr – Jun 2015): The final euphoric phase, roughly 30 trading days, saw another 15% gain (relative to early March levels) before the crash began.


Evolution of Market Sentiment and Capital Sources

  • Phase 1: Primarily policy-driven, supported by interest rate cuts and early monetary easing.

  • Phase 2: Fueled by margin financing and leveraged speculation, with retail participation surging rapidly.

  • Policy Rhythm:

    • The initial phase coincided with early easing measures.

    • The second phase featured explicit government support for capital markets, especially via SOE reform and stock market liberalization, further boosting expectations.

  • Sector Leadership:

    • The early rally was broad-based.

    • Later stages were sector-concentrated, led by financials and technology.


Late-Stage Characteristics (Apr–Jun 2015)

Compared with the earlier phases, the final stage exhibited much higher volatility, driven by multiple interacting forces:

  1. Speculative excess:Expanding margin financing channels attracted hot money, significantly increasing market instability.

  2. Overheating and profit-taking:Extended rallies pushed valuations to extremes, leading to intermittent corrections.

  3. Tightening expectations:Regulators became concerned about leverage risk and hinted at potential restrictions, heightening uncertainty.

  4. Euphoria and retail inflows:Despite interim corrections, optimism persisted. Retail investors poured in, propelling the market to its final peak.


The 2024 Rally

Between September 13 and September 30, 2024, the CSI 300 Index jumped 27% in just nine trading days.

If this rally indeed marks the start of a new bull cycle, one key question emerges:

How does the scale of potential incremental liquidity today compare with 2014–2015?

Leverage and Capital Inflows in 2014–2015

At the 2015 peak, total leverage in the A-share market—through both onshore and off-balance-sheet financing—was estimated between ¥2–4 trillion.

Breakdown of major funding channels:

Source

Estimated Scale

Leverage

Cost

Key Participants

Off-balance-sheet margin financing

¥1–2 trillion

1:4–1:5

13–20%

Online platforms, brokers, retail investors

Umbrella trusts

¥700 billion

1:2–1:3

~10%

Trusts, banks, HNW clients

Formal margin financing (“两融”)

¥2 trillion

1:1

—

Institutions, HNW individuals

In short, leverage-driven liquidity was the dominant accelerant of that bull market.


Incremental Liquidity in 2024

Authorities are expected to tightly control illegal margin lending this time, so the total leverage pool will be far smaller than in 2015.However, other potential sources of incremental capital remain:


1. Policy-driven liquidity

Monetary easing via reserve requirement ratio (RRR) cuts, lower mortgage rates, and reduced bank reserve ratios could release substantial liquidity into the system.


2. Redeployed fund capital

Over the past three-year bear market, total A-share quantitative AUM dropped from roughly ¥1.5 trillion to ¥800 billion.Other private equity, bond, and hybrid funds shrank by around ¥500 billion, while public mutual funds contracted by about ¥2 trillion.Though part of this reduction was market-driven, a meaningful portion represents capital rotation rather than destruction.


3. Northbound (foreign) inflows

Foreign investors currently hold about ¥3–4 trillion in A-shares, roughly 5% of total market capitalization.This segment alone could contribute an incremental ¥1 trillion in inflows if sentiment improves.


4. Pension and social security funds

Large, stable pools of long-term capital. Their allocation pace is gradual but has significant room for expansion in both equities and bonds.


Putting It All Together

When viewed comprehensively, the total scale of potential incremental liquidity today may not differ drastically from that of a decade ago.

In plain terms:

“If history rhymes, then following the old map (‘按图索骥’) may still provide useful reference points—both for target zones and for risk management.”

Disclaimer

The content herein is for informational purposes only and does not constitute investment advice, solicitation, or any form of commitment.Neither the author nor this publication assumes any responsibility for losses or consequences arising directly or indirectly from the use of this information.Markets involve risks. Trade prudently.

 
 
 
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