Major stock indices in China experienced a pullback today, with the Shenzhen Component Index falling over 2% and the ChiNext Index dropping more than 3%. Trading volume across the two markets expanded compared to yesterday, reaching 3.1 trillion yuan. Among primary Shenwan industries, the electronics sector was among the worst performers.
The domestic liquidity environment remains relatively accommodative overall. As we move into June, the central bank continues to monitor seasonal tax peaks and liquidity needs associated with the quarter-end. Non-bank financial institutions have ample liquidity. However, expectations for a tightening of overseas liquidity conditions have strengthened. Recent resilient U.S. economic data has bolstered expectations for Federal Reserve rate hikes, keeping the 10-year U.S. Treasury yield elevated and volatile. The market is closely watching the upcoming first FOMC meeting under the new chair. This external interest rate constraint is notably suppressing A-share valuations.
Under these circumstances, domestic market activity is bifurcated. On one hand, there is trading focused on opportunities in upstream AI hardware, the high-demand resource chain, and policy-driven sectors like the "urban renewal" plan. On the other hand, overseas disturbances are dampening risk appetite. Consequently, the market may remain in a volatile state in the short term. For asset allocation, a combination of "defensive dividend anchors + high-growth sectors" is suggested.
Key Developments
On June 4 local time, Ukrainian President Volodymyr Zelenskyy publicly sent a letter to Russian President Vladimir Putin, proposing a face-to-face meeting in a third country to end the war. Putin had earlier reiterated Russia's willingness to reach a peace agreement with Ukraine based on the outcomes of the Russia-U.S. Anchorage meeting.
Comment: The Russia-Ukraine conflict has entered a phase with a substantive window for mediation. The warming expectations for peace talks are weakening geopolitical disturbances in Europe. Improved expectations for European energy supply are beneficial for stabilizing the Eurozone economy. In the long term, geopolitical easing reduces global economic uncertainty, aiding the implementation of China's policies to stabilize foreign trade and optimizing the environment for macroeconomic recovery throughout the year.
The central bank conducted a 500 billion yuan outright reverse repo operation with a 3-month tenor on June 5. With 800 billion yuan in 3-month outright reverse repos maturing in June, this operation will result in a net withdrawal of 300 billion yuan. This marks the fourth consecutive month of reduced rollover for the 3-month outright reverse repos. Simultaneously, the volume of 7-day reverse repo operations was zero on June 4, the second consecutive day with no such operations. As 101.3 billion yuan in reverse repos matured on the day, the open market realized a net withdrawal of 101.3 billion yuan.
Comment: This reduced rollover, coupled with the suspension of short-term reverse repo injections, confirms that domestic liquidity is shifting towards a reasonably ample level. Marginal tightening of funds helps curb pure speculative trading. The banking sector benefits from expectations of improved net interest margins due to rising funding rates. At the macro level, these operations represent a structural fine-tuning; the prudent monetary policy stance remains unchanged. Concentrated fiscal spending in June will offset the withdrawal pressure, keeping the overall financing environment for the real economy stable, with no significant risk of a sharp increase in financing costs for the manufacturing sector.
A June 3 report from state media highlighted that optical fiber preforms, also known as "optical rods," are the raw rod materials that determine fiber performance. They are categorized into three main types: A, B, and C. Among these, the price of A2-class high-end optical fiber preforms has surged from 22-30 yuan per equivalent core-kilometer in early 2025 to the current 160 yuan per equivalent core-kilometer, an increase of nearly 550%. The expansion cycle for optical preform production typically takes 18-24 months, meaning the supply shortage may persist in the short term.
Comment: This round of fiber optic price increases is primarily driven by explosive demand fueled by the large-scale construction of global AI computing clusters. High investment in the computing power industry chain is driving up the growth rate of fixed-asset investment in digital infrastructure, helping new infrastructure support domestic macro-level investment. Recently, the optical communication industry chain in the A-share market has been boosted by tight supply and demand, leading to rising sector sentiment. From a medium to long-term industry perspective, the continued rollout of global computing power construction will support fiber optic demand. Capital expenditure in the industry chain is expected to keep expanding, driving steady growth in fixed-asset investment for related digital economy industry chains.
Market Review
On June 5, the three major A-share indices closed lower. At the close, the Shanghai Composite Index was at 4027.74 points, down 0.74%. The Shenzhen Component Index stood at 15314.70 points, down 2.21%. The ChiNext Index was at 3957.94 points, down 3.20%. The STAR 100 Index was at 1873.99 points, down 2.07%. Among primary Shenwan industries, banking, commercial retail, and social services were among the top gainers, rising 1.33%, 1.05%, and 0.65% respectively. Electronics, utilities, and communications were among the biggest decliners, falling 3.59%, 3.25%, and 3.12% respectively. A total of 3,277 stocks advanced while 2,113 declined.
Capital Flows
Total market turnover was 3101.072 billion yuan, an increase from the previous trading session. The margin trading and securities lending balance settled at 2920.686 billion yuan yesterday, also up from the prior day.
Data source: Tonghuashun, as of June 5, 2026. Funds carry risks; investing requires caution. Fund managers are committed to managing and utilizing fund assets with honesty, diligence, and responsibility, but do not guarantee that funds will be profitable or promise returns. Past performance of a fund is not indicative of its future results.
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