**Capital Flows: Decline in Foreign Allocation Ratios** 1️⃣ **Foreign Investment**: Under the EPFR framework (as of Wednesday): - Active foreign capital saw a slight inflow of $70 million into A-shares this week (vs. an outflow of $90 million last week). However, Hong Kong stocks continued to experience outflows, though the scale narrowed to $200 million (vs. $280 million last week). Funds targeting the Chinese market turned to inflows, while Asia ex-Japan and global funds continued outflows. - Passive foreign capital accelerated inflows into A-shares, reaching $800 million (vs. $20 million last week), and surged into Hong Kong stocks at $1.95 billion (vs. $1.1 billion last week).
As of October, active foreign allocation to China dropped to 6.9% from 7.2% in September, while passive allocation fell to 8.2% from 8.6%. The underweight gap narrowed slightly to 1.28ppt from 1.37ppt. Notably, Asia ex-Japan funds shifted from overweight to underweight, while emerging markets and global ex-US funds saw reduced underweight levels.
2️⃣ **Southbound Flows Slowed**: This week’s inflows totaled HK$19.8 billion (vs. HK$38.6 billion last week), averaging HK$5 billion daily (vs. HK$7.7 billion). Top inflows targeted Alibaba, Kuaishou, and Pop Mart, while SMIC, Huahong Semiconductor, and Zijin Mining saw outflows.
**Market Overview**: Last week, both A- and H-shares rebounded, supported by renewed rate-cut expectations and easing AI concerns—consistent with CICC’s view that a December rate cut remains plausible and AI "bubble" fears are premature.
However, the market remains directionless. High expectations and positioning in tech-growth sectors make them sensitive to negative news, while domestic consumption—despite attractive valuations—faces weakening fundamentals. In this context, dividend stocks have emerged as a temporary alternative.
CICC’s year-end target of 26,000 for the Hang Seng Index remains appropriate, as limited upside stems from China’s Q4 credit cycle downturn. Recent data confirmed this trend, with October’s fiscal deficit and private financing pulse declining alongside M1, aligning with CICC’s warning of a potential inflection point in Sino-US credit cycles.
Earlier, low-base effects, sectoral resilience, and liquidity narratives masked structural issues. Now, as these drivers fade, structural weaknesses—like renewed property sector softness—resurface. Without accelerated policy support, China’s credit cycle weakness implies market gains will hinge on pullbacks or sector rotation. Near-term focus includes the December 11 rate decision, the economic work conference, and the new Fed Chair appointment.
**Portfolio Strategy**: Investors should maintain a "barbell" approach—dividend stocks + tech/internet as core holdings—adjusted dynamically based on crowding metrics for balance. Cyclicals tied to external demand (e.g., non-ferrous metals like copper/aluminum, chemicals, machinery, and property-related sectors) and innovative pharma offer tactical flexibility, especially with rising PPI and copper prices. Conversely, domestic consumption lacks fundamental support.
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