【Investment Strategy】 Continuous net outflow of funds can be tracked, with trading volume gradually declining — Weekly Report on Financial Market Liquidity and Regulatory Developments

（Source: China Merchants Securities Strategy Research）

In the secondary market, followable funds have continued to net outflow. In addition, ETFs have continued to see net outflows; theme and sector ETFs accelerated their net outflows, while broad-based index ETFs saw large net inflows on some trading days. On the overseas side, persistently high oil prices keep inflation concerns on the table, and the market has fully priced in that the Federal Reserve will not cut rates within the year.

Key Takeaways

⚑ ETF changes in the recent period and the behavior of major institutional investors: In the recent period, ETFs have continued the net outflow trend. Only on March 23 did they record a relatively large net inflow, and the incremental contribution mainly came from broad-based index ETFs represented by the CSI 300. Based on two judgment indicators—trading value and intraday trading cadence—major institutional investors have not entered the market at present. Recently, when the market faced a significant liquidity shock, sector and theme ETFs also turned to net outflows, and with the shock expanding, there is an accelerating trend of net outflows. This may be related to the underlying capital’s behavior pattern of being “pro-cyclical.”

⚑ Monetary policy and interest rates: Last week (3/23–3/27), the People’s Bank of China conducted net open market operations of CNY 281.9 billion. In the coming week, CNY 474.2 billion of reverse repos will mature. Money market rates rose; yields on short- and long-end government bonds fell. The issuance size of interbank certificates of deposit increased; issuance rates moved in different directions. As of March 27, R007 rose 3.0 bp, DR007 rose 1.9 bp, the 1-year government bond yield fell 0.5 bp, and the 10-year government bond yield fell 1.3 bp. The issuance size of interbank certificates of deposit increased by CNY 12.23 billion; the 1M interbank certificate of deposit rate rose, while the 3M/6M interbank certificate of deposit rates fell.

⚑ Capital supply and demand: In the secondary market, followable funds have continued to see net outflows. Financing balance declined; net selling of financing funds was CNY 24.01 billion. ETF net outflows were CNY 12.82 billion. The number of shares of newly established equity-oriented mutual funds decreased. The scale of net selling by major shareholders increased, while the announced planned selling scale decreased.

⚑ Market sentiment: Last week, the activity level of financing funds trading weakened, and equity risk premium rose. Style indices and broad industry categories that saw relatively higher attention last week included healthcare/biologicals, discretionary consumption, and the ChiNext index. The VIX index rebounded, and overseas markets’ risk appetite declined.

⚑ Market preference: On the sector preference side, electric equipment, utilities, and coal received relatively higher net inflow amounts from various types of funds. Broad index ETFs mainly saw net redemptions, with the A500 ETF having the largest redemptions. Sector ETFs saw a mix of subscriptions and redemptions; among them, information technology ETFs saw more subscriptions, while materials ETFs saw more redemptions. The highest net subscriptions were from the Cathay CES Semiconductor ETF; the highest net redemptions were from the Huaxia CSI A500 ETF.

⚑ Overseas developments: During remarks in Connecticut, Federal Reserve Governor Cook said that the current balance of risks has shifted, with inflation risks now exceeding employment risks. Federal Reserve Governor Mester said the Fed has the capability to significantly reduce its current balance sheet of about USD 6.7 trillion, but that process “will likely take years” and needs to be carried out in phases. At the same time, balance-sheet reduction itself has tightening effects, so it may require additional rate-cut operations beyond a benchmark scenario to offset the impact. In the future, policy combinations where balance-sheet reduction and rate cuts proceed in parallel may emerge.

⚑ Risk warning: Economic data and policy measures falling short of expectations; overseas policies tightening beyond expectations.

01

Liquidity special topic

※ ETF changes in the recent period and the behavior of major institutional investors

In the recent period, ETFs saw net outflows, with only a large net subscription on Monday. This week, the market operated weakly, and ETFs also displayed persistent net outflow. This week’s cumulative ETF net outflow was CNY 12.8 billion, continuing the prior trend. However, when the market fell sharply on Monday, ETFs recorded a net inflow against the trend of CNY 16.3 billion, the second-highest level since the beginning of this year. Breaking it down, on March 23, the ETF net inflow was mainly contributed by broad-based index ETFs, including the CSI 300, STAR Market and ChiNext ETF, which saw inflows of CNY 1M, CNY 3M, and CNY 1.7 billion, respectively.

In terms of trading value and trading cadence, major institutional investors did not take action. When the market faced a significant liquidity shock recently, some investors expected that major institutional investors would support the market through broad-based index ETFs and restore the post–April 2025 tariff-shock行情, but currently, major institutional investors have not entered the market. To observe when major institutional investors enter, there are mainly two signals: trading value and intraday trading cadence. First, based on historical experience, when major institutional investors enter, mainly broad-based index ETFs typically experience a significant expansion in trading volume; the trading volume can reach more than three times the 20-day moving average, while currently the trading value of mainly broad-based index ETFs has not shown an obvious change. Second, when major institutional investors enter, intraday time-slice trading volumes often show a “pulse-like” pattern, and around the top of the hour they are usually at trading peaks. On March 23, the time-sliced trading of the main broad-based index ETFs represented by the CSI 300 ETF was relatively steady and did not show any obvious pulse.

In addition, in the recent period, sector and theme ETFs saw clear net outflows. Since the beginning of the year, sector and theme ETFs have been heavily favored, and large amounts of capital entered the market quickly through them, offsetting—to a certain extent—the selling pressure caused by the outflows of broad-based index ETFs. This also enabled popular tracks such as chemicals and non-ferrous metals to continuously receive more incremental capital. But this trend has reversed recently. When the market faced a liquidity shock, sector and theme ETFs also turned to outflows, and as the shock expanded, the outflow accelerated. This may be related to the underlying funds’ behavior pattern of favoring a “pro-cyclical” approach.

02

Regulatory developments

03

Monetary policy tools and funding costs

Last week (3/23–3/27), the PBOC conducted net open market operations of CNY 281.9 billion. To maintain reasonably ample liquidity in the banking system, the PBOC carried out reverse repos of CNY 474.2 billion. Meanwhile, CNY 242.3 billion of PBOC reverse repos matured, resulting in net reverse repo operations of CNY 231.9 billion. At the same time, it conducted MLF operations totaling CNY 500.0 billion; simultaneously, CNY 450.0 billion of MLF matured, resulting in net MLF issuance of CNY 50.0 billion. In the coming week, there will be CNY 474.2 billion of reverse repos maturing.

Money market rates rose; the spread between R007 and DR007 widened. Yields on short- and long-end government bonds fell, and the term spread narrowed. As of March 27, R007 was 1.51%, up 3.0 bp from the prior period; DR007 was 1.44%, up 1.9 bp from the prior period. The spread between the two widened by 1.1 bp to 0.07%. The yield to maturity on 1-year government bonds decreased by 0.5 bp to 1.25%, and the yield to maturity on 10-year government bonds decreased by 1.3 bp to 1.82%. The term spread narrowed by 0.8 bp to 0.57%.

The issuance scale of interbank certificates of deposit expanded, and issuance rates moved differently. In the week (3/23–3/27), there were 370 certificates of deposit issued, down 135 from the previous period. The total issuance size was CNY 772.02 billion, up CNY 12.23 billion from the previous period. As of March 27, the issuance rates for 1-month, 3-month, and 6-month certificates of deposit changed by +1.6 bp, -0.5 bp, and -0.6 bp respectively from the prior period to 1.52%, 1.57%, and 1.55%.

04

Equity market capital supply and demand

(1) Capital supply

On the capital supply side, in the week (3/23–3/27) new equity-oriented public mutual funds were established with 11.08 billion shares, down 9.74 billion shares from the prior period. Equity-based ETFs saw net outflows compared with the prior period, corresponding to net outflows of CNY 12.82 billion. In the entire market last week, financing net sold CNY 24.01 billion; the net selling amount expanded by CNY 5.58 billion compared with the prior period. As of March 27, the A-share financing balance was CNY 2,590.81 billion.

(2) Capital demand

On the capital demand side, last week (3/23–3/27) it fell to CNY 2.76 billion. There were 2 companies conducting IPO issuance. As of March 27, it was announced that 2 companies will conduct IPO issuance in the coming week, with a planned fund-raising size of CNY 2.98 billion. The net selling scale of major shareholders shrank, with net selling of CNY 2.45 billion. The announced planned selling scale was CNY 4.57 billion, down from the prior period.

The value of shares subject to lock-up release was CNY 81.48 billion (CNY 27.47 billion of lock-up shares from original shareholders in the initial offering, CNY 6.23 billion of general shares from the initial offering, CNY 47.38 billion of locked-up shares from private placements, and CNY 0.40 billion of others), up from the prior period. In the coming week, the release scale is expected to fall to CNY 29.30 billion (CNY 25.86 billion of lock-up shares from original shareholders in the initial offering, CNY 0.16 billion of general shares from the initial offering, CNY 1.64 billion of lock-up shares from private placements, and CNY 1.64 billion of others).

05

Market sentiment

(1) Market sentiment

In the week (3/23–3/27), financing purchase amount was CNY 938.73 billion. As of March 27, it accounted for 10.0% of A-share trading value, down from the prior period. The activity level of financing fund trading weakened, and the equity risk premium rose.

In the week (3/23–3/27), the Nasdaq index fell 3.2%, and the S&P 500 index fell 2.1%. Last week, the VIX index rebounded, rising 4.3 points from the prior period (3/20) to 31.1, indicating a decline in market risk appetite.

(2) Trading structure

In the week (3/23–3/27), the style indices and broad industries that received relatively higher attention were healthcare/biologicals, discretionary consumption, and the ChiNext index. The top 5 industries by historical percentile ranking of turnover rate for the week were: cyclical (93.6%), North Star 50 (90.7%), CSI 1000 (89.5%), CSI 300 (89.3%), and SSE 50 (88.7%).

06

Investor preferences

(1) Industry preference

On industry preference, in the week (3/23–3/27) electric equipment, utilities, and coal received relatively higher net inflows from various kinds of funds. In the week, equity-based ETFs saw net outflows of CNY 12.31 billion. Industries with relatively higher net inflow included electric equipment, utilities, and coal, with inflow amounts of CNY 1.75 billion, CNY 1.42 billion, and CNY 1.14 billion respectively. Industries with relatively higher net outflows included non-ferrous metals, electronics, basic chemical industry and others. Financing funds had net outflows of CNY 24.01 billion. Industries with relatively high net buying included electric equipment (+CNY 1.79 billion), utilities (+CNY 1.02 billion), communications (+CNY 0.37 billion) and others; net selling included computer (-CNY 3.51 billion), electronics (-CNY 3.33 billion), defense and military industry (-CNY 2.75 billion) and others.

(2) Stock-level preference

Industries/individual stocks with relatively high financing net buying included Demingli (+CNY 0.96 billion), Ping An of China (+CNY 0.76 billion), Luxshare Precision (+CNY 0.67 billion), and others. Stocks with relatively high net selling included Contemporary Amperex Technology (-CNY 0.86 billion), Zijin Mining (-CNY 0.63 billion), Jianghuai Automobile (-CNY 0.62 billion), and others.

(3) ETF preference

In the week (3/23–3/27), ETFs had net subscriptions. Net subscriptions for the week were 8.14 billion shares. Broad index ETFs mainly saw net redemptions, with the A500 ETF having the most redemptions. Sector ETFs had a mix of subscriptions and redemptions; within them, information technology ETFs had more subscriptions, and materials ETFs had more redemptions. Specifically: the CSI 300 ETF had net subscriptions of 1.12 billion shares; the SSE 50 ETF had net redemptions of 0.43 billion shares. The STAR 50 ETF had net subscriptions of 0.42 billion shares. The A50 ETF had net redemptions of 0.11 billion shares; the Double Innovation 50 ETF had net redemptions of 2.60 billion shares; the ChiNext ETF had net subscriptions of 0.11 billion shares; the CSI 500 ETF had net redemptions of 0.16 billion shares. For sector ETFs: the information technology sector had net subscriptions of 12.89 billion shares; the consumer sector had net subscriptions of 0.23 billion shares; the healthcare/pharmaceutical sector had net subscriptions of 0.44 billion shares; the broker sector had net redemptions of 0.69 billion shares; the financial real estate sector had net redemptions of 0.93 billion shares; the defense and military sector had net redemptions of 0.46 billion shares; the materials sector had net redemptions of 6.53 billion shares; and the new energy & intelligent vehicles sector had net subscriptions of 2.18 billion shares.

In the week (3/23–3/27), the equity-based ETF with the highest net subscription size was the Cathay CES Semiconductor ETF (+5.59 billion shares). The Huabao CSI Medical ETF (+1.52 billion shares) ranked second by net subscription size. The ETF with the highest net redemption size was the Huaxia CSI A500 ETF (-2.26 billion shares), followed by the Fullgoal CSI Sub-segment Chemical Industry Theme ETF (-1.05 billion shares).

07

Changes in external liquidity

(1) Actions by major overseas central banks

Federal Reserve Governor Cook, speaking in Connecticut, said that the current balance of risks has shifted, with inflation risks exceeding employment risks. Federal Reserve Governor Mester said the Fed has the ability to significantly reduce its current balance sheet of about USD 6.7 trillion, but that process “will likely take years,” and needs to be advanced in phases. Meanwhile, balance sheet reduction itself has a tightening effect; it may require additional rate-cut operations beyond a benchmark scenario to offset the impact. In the future, a policy combination in which balance sheet reduction and rate cuts occur in parallel may emerge. A Governing Council member of the ECB, Wunsch, said that although April rate hikes are an option, the central bank will avoid overreacting to geopolitical shocks, and any action will strictly depend on subsequent data.

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