Recently, the government has introduced several new policies, such as the "Two New" policy and interest rate cuts, which have been surprisingly effective, bringing delight to many. However, to further boost public confidence, the government must redouble its efforts in the following three areas.

Firstly, last week, the government proposed for the first time to use special treasury bonds to support the upgrade and replacement of equipment and consumer goods, expanding the scope of application from before. This implies that the use of special treasury bonds may become more flexible in the current and coming years, marking a significant shift. For instance, the government plans to use 300 billion in special treasury bonds to advance this initiative, a scale and speed that have exceeded expectations. Take the automotive industry as an example; the government's contribution ratio has increased from the original 6:4 to 9:1, meaning that the central government will bear a larger share of the costs. Additionally, subsidies for home appliances have been intensified, with more subsidies available for purchases and no longer requiring the reporting of scrapped old goods. The subsidy intensity can reach up to 15% of the total sales amount.

Secondly, regarding monetary policy, the government reduced the interest rates of OMO (short-term liquidity management tool) by 10 basis points within a week, and the LPR (Loan Prime Rate) for one year and over five years also decreased by 10 basis points, while the MLF (Medium-term Lending Facility) rate was lowered by 20 basis points. These measures were earlier and more substantial than the market expected. Recently, the US dollar has weakened, alleviating pressure on the renminbi and providing the government with more policy maneuvering space, resulting in policy outcomes that have surpassed expectations.

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Although the global market's risk appetite has decreased, with foreign capital selling off in the A-share market, active private equity, and margin trading diminishing, the impact on the market is still limited. This is because the redemption pressure from public funds has always been present. From the gradual clarity of policies and external signals, the market's original pessimistic sentiment is being improved. Once the price signals become clear, we may see more funds flowing to well-performing growth enterprises and the domestic demand market.

Currently, the domestic consumer market in our country is not very strong, and this trend continues. In the second quarter of this year, China's GDP growth did not meet the expected target, and starting from June, fiscal revenue and retail sales data have been rapidly declining. For example, corporate income tax fell by 26.8% year-on-year in June, personal income tax decreased by 4.0%, and the growth rate of the total retail sales of social consumer goods also slowed down to 2%. The real estate market situation is also not optimistic, with housing prices in first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen falling in June.

Faced with this situation, the government needs to introduce more effective policies to stimulate the economy. For example, it could continue to reduce the interest rates of housing provident fund loans and housing loans, which might make the return on real estate investment more attractive than government bonds. Now that housing prices are at a relatively reasonable level, the government should prioritize stabilizing housing prices to avoid significant fluctuations, as this will affect many people's asset conditions, thereby influencing their consumption and investment behavior and potentially triggering new financial risks.

The government should also intensify efforts to stabilize the real estate market, expand the scope of special treasury bonds, and settle overdue payments to enterprises as soon as possible. Currently, the balance of re-lending for affordable housing is only 12.1 billion yuan, far from the policy target of 300 billion yuan. Expanding domestic demand and promoting supply-side reforms have always been the government's focus, but due to the limited fiscal capacity of local governments, the central government needs to directly support these policies. At the same time, settling government arrears to enterprises is extremely important, which helps restore corporate confidence, accelerate capital turnover, and boost market confidence. The latest audit report shows that although some regions have set up arrears accounts, new arrears issues continue to increase. The government should introduce new policies to resolve these arrears issues in one go, especially the arrears to private enterprises.

Global market high-value assets adjust significantly at the same time

Recently, many high-value assets worldwide have experienced significant adjustments, reflecting a significant reduction in global investors' risk appetite. Whether it is technology stocks and semiconductor stocks in the US stock market, low-volatility dividend stocks, energy stocks, and non-ferrous metal stocks in the A-share market, or even the Japanese stock market, gold, and Bitcoin, etc., there has been a significant price correction since July. These assets have performed strongly in the past two years, accumulating a large amount of floating profits, and their synchronized adjustment now indicates that global investors are actively reducing risk exposure. If this trend continues, it may lead to further deterioration of the financial environment, which may prompt the Federal Reserve to be more inclined to cut interest rates. The market generally expects that the possibility of the Federal Reserve cutting interest rates at the September meeting has reached 100%.

For the A-share market, although foreign capital outflow, active private equity funds, and leveraged funds have decreased recently, the space for large-scale capital outflow in the future is limited. Since June 7, the net outflow of northbound funds has reached 79.2 billion yuan, offsetting all the net inflows after the Spring Festival. The proportion of foreign capital in the A-share configuration has also returned to the level at the beginning of the year, so the possibility of large-scale outflow in the future is low. The position of private equity funds has decreased from 78.6% on June 7 to the current 73.8%, falling below the median level since 2017. At the same time, since mid-June, the balance of leveraged funds has also been rapidly declining, reducing by 91.8 billion yuan from the high point in May, a decrease of 6.11%.In the public mutual fund sector, despite the ongoing redemption pressure, it has become a market norm and its impact on the market is relatively limited. In the second quarter of 2024, the net redemption scale of active equity funds was 89.4 billion yuan, a decrease from 152.6 billion yuan in the first quarter. The net redemption rates in the past four quarters were -2.4%, -1.4%, -3.9%, and -2.5%, respectively. The -2.5% in the second quarter of this year was reduced compared to the -3.9% in the first quarter, which is at a historical median level. The scale of newly issued funds remains low, leading to a continuous deficit of funds for active equity funds for five consecutive quarters, which is the first time since 2005. The latest data shows that during the market adjustment period, the redemption rate of public mutual funds has remained basically stable, and there has been no accelerated redemption due to the market decline.

Two out of three major signals have gradually become clear.

At present, the overall market sentiment is indeed quite pessimistic, but some positive signs have quietly appeared, which may indicate that the situation will gradually improve.

There have been some positive trends at the policy level. Since the Third Plenary Session, the government's introduction of policies to stabilize the economy has exceeded market expectations. In particular, the expansion of the scope of special treasury bonds has injected new vitality into the market. To further stabilize market sentiment, the government needs to introduce more specific measures in stabilizing housing prices, expanding the scope of special treasury bonds, and clearing overdue corporate payments.

Changes in the external environment are also becoming clear. For example, Trump's high approval rating means that he may be re-elected as President of the United States, which could increase the risk of trade disputes, thereby prompting China to strengthen domestic demand policies to cope with potential external challenges. In addition, the slowdown in U.S. inflation trends and the deterioration of the global financial environment may prompt the Federal Reserve to cut interest rates in the near future, providing more operational space for China's domestic demand policies.

Currently, the trading activity of the A-share market is at a low level, and the market's response to marginal changes has become sluggish, reflecting the extremely pessimistic market sentiment.

We need to patiently wait for the clarity of price signals, especially housing price signals, which will be the key to the change in market sentiment. Once all signals point to the positive side, the market may shift its focus to well-performing growth stocks and investment opportunities related to domestic demand. Specifically, attention can be paid to companies with stable free cash flow in hydropower and nuclear power, as well as property insurance companies with continuous premium growth. With the further clarification of policies, prices, and external conditions, it is recommended to focus on the manufacturing leaders in the machinery, home appliance, and electronics industries, as well as the pharmaceutical industry that may benefit from policy support and market environment improvement, and the internet and consumer leaders in Hong Kong stocks.