Net Inflow Nearly 14 Billion! Northbound Funds Hit Second-Highest Single-Day Volume of the Year

Financial Daily Reporter Wang Haimin, Financial Daily Editor Xiao Ruidong

At noon on May 31, the State Council issued the “Notice of the State Council on Printing and Distributing a Set of Policies and Measures to Steadily Stabilize the Economy” (hereinafter referred to as the “Notice”), which includes 33 specific policies and division of responsibilities across six areas: fiscal policy, monetary and financial policy, policies to stabilize investment and promote consumption, policies to ensure food and energy security, policies to stabilize industrial and supply chains, and policies to safeguard basic livelihoods.

The State Council requires all regions and departments to implement the decisions and deployments of the Party Central Committee and the State Council with a “nail-biting” spirit, effectively stabilizing the economy in the second quarter, laying a good foundation for development in the second half of the year, and keeping economic operation within a reasonable range.

The “Notice” boosted the A-share market on the same day, with the market showing a broad rally. Among the 31 Shenwan first-level industries, 26 industries rose. Leading sectors included beauty and personal care, electronics, agriculture, forestry, animal husbandry, fishery, food and beverages, and power equipment. Is a rebound in the A-share market possible from here? In response, the chief analysts from several brokerage strategy research teams were interviewed by the Daily Economic News.

Notably, on May 31, northbound funds saw a net inflow of nearly 14 billion yuan, the second-largest daily net inflow of the year.

Chief Analysts Interpret Policy Benefits

Yi Bin, Chief Strategy Analyst at Western Securities, pointed out to reporters that the release of the set of policies to stabilize the economy indicates that an economic rebound is expected. From the policy documents, the government is clearly committed to stabilizing the economy. Recently, Shanghai also issued the “Shanghai Accelerate Economic Recovery and Revitalization Action Plan,” focusing on resuming work and production, stabilizing demand, and striving to return the economy to a normal track within a reasonable range.

Yi Bin believes that in June, the market’s main focus will shift from policy battles to economic verification. Since the end of April, market trends have been highly correlated with the pandemic situation, and the intensive policy signals in May have been a major factor boosting market sentiment. For the market, the first half of May saw a passionate recovery driven by pandemic repair, but in June, trading pace will gradually slow, and trading styles will become more balanced.

Wu Kaida, Chief Strategy Analyst at Debon Securities, told reporters: “The State Council issued the ‘Notice of the State Council on Printing and Distributing a Set of Policies and Measures to Steadily Stabilize the Economy.’ We believe the main areas of focus are: first, tax cuts and fee reductions will continue to increase, with a VAT rebate of 142 billion yuan, totaling 2.64 trillion yuan in tax reductions and refunds for the year, further lowering corporate costs and stabilizing employment; second, special bonds will be mostly issued by the end of June, aiming to be fully used by the end of August, significantly ahead of the March 29 State Council executive meeting’s statement that bonds should be issued by the end of September; third, a phased reduction of 60 billion yuan in vehicle purchase tax, directly offering discounts to consumers to stimulate auto sales; fourth, structural monetary policy will be further strengthened, with the funding support ratio for inclusive small micro loans increased from 1% to 2%.”

He added, “Currently, the overall economy remains in a passive inventory replenishment cycle. Coupled with frequent outbreaks of COVID-19 in some regions and high commodity prices under the Russia-Ukraine conflict, May’s manufacturing PMI was 49.6%, below the expansion-contraction line, indicating that macroeconomic confidence remains low. It is urgent for domestic policies to counter-cyclically boost overall demand. The State Council’s executive meeting on May 23 made deployment, and the official notice was issued just eight days later. The May 25 meeting to stabilize the economy emphasized implementation, seizing the window of opportunity to ensure that policies are largely implemented in the first half of the year. It is expected that May will reveal an ‘economic bottom,’ with the equity market gradually recovering from lows. The logic of the first wave of pandemic impact waning and resumption of work and production has been fulfilled. With fiscal efforts to open up the monetary and credit channels, the market will gather strength for a second wave of upward movement. Industry opportunities include stabilizing growth, maintaining independence and control, consumer recovery, and strategic resources,” Wu Kaida said.

Further Progress in ETF Interconnection

Notably, on May 31, northbound funds saw a net inflow of nearly 14 billion yuan, the second-largest daily net inflow of the year.

According to Choice data, the highest single-day net inflow of northbound funds this year occurred on May 20, with 14.236 billion yuan. In May, the total net inflow was 16.867 billion yuan, setting a new high for the year.

Recently, some policies introduced by regulators will provide more options for foreign investment in the domestic equity market. For example, on May 27, the CSRC issued a public consultation on the “Announcement on Inclusion of Exchange-Traded Funds (ETFs) in the Interconnection Arrangements,” marking substantial progress in ETF inclusion into the interconnection scheme.

In response, the strategy team at China Merchants Securities (600999) issued a recent view: based on the consultation draft from the Shanghai and Shenzhen stock exchanges regarding ETF inclusion in interconnection, 77 ETFs meet the basic inclusion criteria, accounting for 13.75% of all A-share ETFs; these have a net value scale of 551.2 billion yuan, representing 65.35% of all stock ETFs. Among these, 33 are broad-based index ETFs with a scale of 320.5 billion yuan, and 44 are industry or thematic ETFs with a scale of 230.7 billion yuan. Many of these industry and thematic ETFs focus on TMT and new energy sectors, such as semiconductor ETFs, communication ETFs, new energy vehicle ETFs, and photovoltaic ETFs.

The team believes that the inclusion of northbound funds will promote the development of the domestic ETF market. On one hand, it will bring incremental capital, improve liquidity and trading activity of related ETFs, and boost primary market subscription enthusiasm, accelerating ETF scale expansion. On the other hand, with the addition of northbound funds, the proportion of institutional investors in the ETF investor structure is expected to increase, which is beneficial for the healthy development of the ETF market.

Additionally, the team at China Merchants Securities noted that, according to the consultation draft, ETFs under interconnection are limited to secondary market trading only. This means they will not directly bring incremental funds to the A-share market nor impact component stock prices through arbitrage between the primary and secondary markets, so the direct impact on A-shares will be limited.

(Edited by: Yue Quanli HN152)