Policy Support and Rising Corporate Earnings Strengthen the A-Share Outlook

Highlights

China’s A-share market fluctuated around the 3,800-point level during the four trading days after the National Day holiday, as external pressures, crowded technology trades, and cautious investor sentiment prompted short-term adjustments. Market funds rotated between sectors rather than leaving altogether. Analysts say stronger corporate earnings, supportive policy signals, and the ongoing transition toward new economic drivers underpin the market’s longer-term outlook. High dividends, domestic-demand recovery, and technology companies with verifiable orders and revenue are among the identified areas of interest. The article’s central point is that short-term volatility has not erased the improving fundamental case for A-shares.

Sentiment Analysis

• Overall sentiment: Cautiously positive. The article acknowledges recent market declines and volatility but argues that these are largely short-term and do not invalidate the medium- to long-term outlook.
• Sources of caution: High long-term U.S. Treasury yields, crowded positions in technology stocks, weak incremental inflows, and uncertainty ahead of quarterly earnings reports have weighed on risk appetite.
• Reasons for optimism: Corporate earnings and return on equity have improved, policy authorities have signaled support, and analysts see room for valuation recovery in parts of the market.
• Market character: The assessment is not uniformly bullish. It anticipates a gradual, uneven recovery with sector divergence rather than a broad, uninterrupted rise.
• Investor implications: The article favors selectivity, emphasizing companies with demonstrable earnings, healthier trading-position structures, or stable cash flows. Its tone is analytical and measured, presenting potential opportunities alongside risks.

Article Text

China’s A-share market saw repeated fluctuations around the 3,800-point level during the four trading days after the National Day holiday. The movement reflected both shifts in investor positioning and changing sentiment, but market participants did not simply withdraw their funds. Analysts cited in the report describe the pullback as a temporary adjustment shaped by external pressures, trading patterns, and expectations, rather than a decisive deterioration in the market’s longer-term foundations.

On October 8, the market fell sharply and the Shanghai Composite Index dropped 0.79%, briefly slipping below the 3,800-point threshold. On October 9, shares staged a V-shaped reversal, with the index closing at 3813.79 points, up 0.05%. On October 12, the market again diverged: the Shenzhen Component Index and ChiNext Index briefly fell by more than 1%, while bank stocks moved against the broader trend and reached new all-time highs. On October 13, A-shares rebounded from their intraday lows and the Shanghai Composite closed higher.

Zhang Jun, chief economist and head of research at China Galaxy Securities, attributed the adjustment to the convergence of external liquidity shocks, domestic trading structures, and investor expectations. Some technology sectors had accumulated crowded positions after a period of gains, creating incentives to take profits. With the third-quarter earnings reporting period approaching, investors also shifted from focusing primarily on industrial prospects toward scrutinizing whether companies could deliver earnings. Zhang said that relatively weak inflows of new capital made risk appetite more sensitive in a market dominated by trading among existing funds.

International bond markets formed another source of pressure. The report describes sustained high yields on longer-dated U.S. Treasuries as a key external disturbance. Although the two-year U.S. Treasury yield had eased, longer-term yields continued to rise. On October 7, the 30-year U.S. Treasury yield reached 5.67%, its highest level since 2002. A research team led by Chen Gang at Soochow Securities said higher long-term yields reflected tighter medium-term liquidity conditions and continued to weigh on global risk appetite.

Domestic positioning also changed. Research from Chen Gang’s team showed that the average monthly turnover rate for heavily weighted portfolios fell from 105.8% in August to 81.25% in September, a decline of 23.2%. The rate for medium-position portfolios dropped from 109.9% to 89.63%, while that for low-position portfolios edged up from 85.99% to 88.34%. This cooling in turnover contributed to weakness in stocks heavily held by funds. However, trading activity and sector rotation suggested that capital was being rebalanced. On October 8, turnover across the two exchanges rose by more than 2400 billion yuan from the previous trading session, and securities-brokerage stocks surged during the afternoon session on October 9. A strategy team at GF Securities observed that contractions in trading volume are common during bull-market pullbacks; the rolling average of total A-share turnover had contracted by about 55% in this adjustment, a pattern that the team said has often coincided with short-term rebound opportunities.

Analysts argue that these swings have not changed the improvement in corporate fundamentals. Xuan Wei, chief strategy analyst at China Asset Management, said that earnings for all A-share non-financial companies excluding petroleum and petrochemicals grew 14.1% in the first half, driven by strong exports and demand from the artificial intelligence industry. Growth in the second quarter alone was 16.0% year on year, accelerating from the first quarter. Return on equity for all A-shares rose to 7.97% in the second quarter, an increase of 0.47 percentage points from the first quarter. The share of high-growth industries with net-profit growth above 30% increased to 29.01%, the highest level since 2022.

Over the longer term, the transition from traditional to newer economic growth drivers is viewed as a potential source of repricing. Xun Yugen, chief economist and head of the economics research institute at Guosen Securities, has argued that A-shares are pricing in this transition ahead of its full realization. New-economy companies still account for a smaller share of revenue and profits than traditional-economy companies, but their share of trading volume is already much higher. As technology is commercialized, production capacity expands, and earnings are delivered, industrial innovation could support improvements in listed-company quality and valuations. The report presents verified earnings delivery as a crucial link between industrial promise and lasting market value.

Policy announcements have added to the supportive backdrop. On October 8, the People’s Bank of China issued a policy position document concerning the renminbi exchange rate. The report says the stance could reduce policy uncertainty in financial markets, strengthen monetary-policy autonomy, and bolster confidence in China’s economy and companies. A report on the implementation of China’s fiscal policy in the first half of 2026, released on October 9, said that practical incremental policies would be planned in response to macroeconomic conditions, with stronger countercyclical adjustments, expanded domestic demand, and improved supply. At a capital-market and financial-conditions expert meeting held by the China Securities Regulatory Commission on October 10, participants called for continued development of market-stabilization mechanisms, greater dividends and share buybacks by eligible listed companies, and preparation of additional policy tools.

Market recovery is expected to be gradual rather than immediate, with a likely pattern of sector divergence and fluctuating gains. Valuation measures offer some support: Zhang said the equity risk premiums of the CSI 300 and the overall A-share market were at historically high levels, while A-shares compared favorably with major overseas indexes. He identified low domestic risk-free interest rates, a structural recovery in corporate earnings, and the release of some pessimistic expectations as foundations for a possible valuation recovery.

Xuan reported that the price-to-earnings ratio of the Wind All A Index was 20.8 times, at the 74% percentile of its history over the past 10 years, and described the broad market as not overvalued. The ChiNext Index, representing emerging industries, had a price-to-earnings ratio of 34.8 times, at the 26.8% percentile of the past 10 years. He argued that continued valuation contraction in major indexes may have limited momentum given improving prospects for emerging industries, and that current prices may not fully reflect the possibility of double-digit earnings growth this year.

Zhang outlined three areas of potential opportunity: hard technology, including computing hardware and semiconductor leaders whose orders and revenue can be verified; high-dividend assets in finance, energy, telecommunications operators, and utilities for long-term investors seeking stable returns; and domestic-demand recovery, including consumer and healthcare companies with stable cash flows and valuations that have already adjusted. The report’s broader conclusion is that companies with verifiable earnings and healthier shareholder-position structures may be better placed to advance, although the recovery is expected to remain selective and uneven.

Key Insights Table