"The Essence and Systemic Secrets of A-Shares" -- China Merchants Securities has "figured it out"

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If you only focus on performance and indices, the A-share market is sometimes hard to explain. Profits haven’t immediately improved, but the market rises first; macro data looks fine, but stock prices may not buy it.

The real question is: What future is the market willing to price in now?

On June 1st, China Merchants Securities published a strategy report for the A-share market, attempting to explain the A-share's long-term operation patterns using four dimensions: “main line, funds, games, and cycles.” Analyst Zhang Xia’s core judgment in this topic is: “Cognitive repricing is the key to understanding all phenomena in the A-share market: The market is not trading the economy itself, but is trading the market’s perception of the economy.”

This statement is big, but it does capture a long-term feature of A-shares. The transition between bull and bear markets may not be a mechanical linear reflection of GDP, profits, or interest rates. More often, it is the market re-evaluating: Whether the old growth mode can continue to be told, and whether anyone is willing to believe and buy into the new growth mode. After the old narrative is exhausted and before the new one takes shape, the market tends to enter an adjustment; only when the new narrative is accepted by capital and the main line starts to spread, does the bull market base appear.

The report applies this judgment to after 2026: The start of a new Five-Year Plan, a U.S. midterm election year, and A-shares shifting from valuation-driven to profit-driven—all these coincide. The path hypothesis is that corporate profit growth is expected to turn positive in 2025, and achieve a moderate 5%-10% growth; domestic demand recovery and technology self-reliance are the two main lines most worth tracking.

A-shares trade first in "switching old and new drivers", not just GDP

Since its inception, A-shares are not just a mirror of corporate profits but also a weather vane for economic transformation.

Capital markets serving the real economy mean the supply side is long-term abundant: new stocks keep coming into the market, diluting existing funds. The high proportion of individual investor accounts and high institutional market value naturally give the market strong speculative features.

This explains a common contradiction: The economy is not bad, the stock market may not rise; the economy is under pressure, but the stock market might do well.

2006-2007's urbanization and resources, 2015’s Internet+, and 2020’s new energy were all stages when new narratives were centrally priced in the market. Bear markets also often occur during the transition period when the old main line fades and the new main line has not yet taken over.

In other words, A-shares are often not trading "how good things are now", but "who will represent the next round of growth".

Identifying the Main Line: Don’t force it, look at penetration rate

The main line is the most fundamental directional variable for A-shares.

There’s a very direct line in the framework: “You can’t create a main line, you can only identify it.”

The main line is not the short-term boom of an industry or the profit growth of a stock, but the industrial trend formed when the economy shifts from old to new drivers. Urbanization, mobile Internet, new energy, and artificial intelligence are all main lines of their respective times. Whether they can truly become the market’s main line depends on how deep their penetration rate is.

There are three levels to the main line: micro is industry trend, meso is structural transformation, macro is the theme of the era. Only by fitting the era’s theme, the direction of structural change, and reaching a key penetration rate, can an industry trend become the main line.

The most critical quantitative tool is the penetration rate S-curve:

0%-5%: Introduction period, more about thematic investment;
5%-35%: Acceleration period, industry trend turns from story into fact;
35%-80%: Maturity period, growth slows, valuation logic switches;
Above 80%: Saturation, obvious narrowing of growth space.

5% is key. Surpassing this usually implies the technology route, business model, supply chain, and demand are verifying each other. 5%-35% is the most comfortable section—profits easily exceed expectations, and valuations may rise together.

But the main line doesn't last forever. When penetration peaks, it ends naturally; if technology, policy, or business models are denied, it ends early; if liquidity dries up, it can be forcibly snuffed out.

Funds: Decide Bull/Bear Pace, “Personality” of Money Determines Market Style

Funds determine the speed and style of bull-bear transitions in A-shares, but “funds” can't just be viewed as one lump sum.

Here, funds are not a vague concept; analysts split them into three layers: macro liquidity, market liquidity, and structural liquidity.

Macro liquidity is about the size of the pool, like monetary policy, credit cycles, and money supply. Market liquidity is about whether the money flows into stocks, such as public fund issuance, northbound funds, margin trading, and insurance capital allocation. Structural liquidity looks at internal rotation, for instance from consumption to tech, large to small caps, value to growth.

In the old paradigm, the credit cycle was the core. From 2005 to 2017, credit expansion often matched bull markets, credit contraction matched bear markets.

But since 2018, this relationship has clearly weakened. There are three reasons: the economy shifted from incremental expansion to stock optimization; corporate financing moved from indirect to direct; property’s reservoir role declined, and household asset allocation gradually shifted to financial assets.

So, in the new paradigm, sources of funds are more complex: industry trends, global liquidity, household asset allocation shifts, and the credit cycle all affect A-shares.

More importantly, the attributes of incremental funds determine style.

Northbound and industrial capital are more left-side and value; public funds and insurers are more trend and growth; individual and leveraged investors chase themes and momentum; policy funds are more counter-cyclical. Market style rotations are often not about changing "taste," but about changes in dominant funds.

“Game” — A-shares’ High Volatility Is Not Just About Sentiment

The source of A-share volatility is not just investor sentiment, but the result of overlapping systems, fund structure, and trading approach.

First, capital markets serve the real economy. In the past, fund-raising played a bigger role; IPOs, refinancing, and stake reductions all affect the money balance. The framework notes that, as the market rises, if IPO, refinancing, and shareholder selling exceed incremental inflows, a fundamental reversal is likely.

Second, individuals and institutions coexist. 90% of accounts are individuals, 60% of market value is institutional. Pricing power rests more with institutions, sentiment swings come more from individuals. Together they shape the A-share trading ecosystem.

Third, policy. Policy can affect liquidity, define main lines, and possibly change the rules of the game.

After the new “Nine National Rules” were issued in 2024, one change is notable: top-level capital market design is shifting from favoring fund-raising to balancing investment and financing. Analysts say that in 2024-2025 A-share dividends and buybacks will reach 5.24 trillion yuan, for the first time significantly exceeding equity financing in the same period. By the end of 2025, various medium and long-term funds will hold about 23 trillion yuan of freely-tradable A-shares.

This shows the A-share system is changing, moving from a “financing market” toward a “return market.” But don’t expect overnight overhaul. Old modes still exist; new rules will soak in gradually.

Cycle: It’s a Time Coordinate—Same Main Line, But Season Changes Results

Cycle is not a separate indicator. It's more like a time coordinate: the same main line and money in different stages can yield completely different results.

An industry trend is a left-side opportunity when starting, can become the main surge when rising, splinters when trends turn, and even good stocks get dumped in decline.

The framework divides the A-share five-year cycle into four stages:

Starting: Policy and credit bottom, new main line emerges, suitable for early positioning;
Rising: Main line is clear, funding feedback, trend strategies work best;
Turning: Profits still release, but marginal liquidity tightens, market differentiation intensifies;
Falling: Old main line collapses, funds dry up, focus shifts to defense and researching the next main line.

One more observation: Policy inflection points often appear in years ending in '9' or '4', like 2004, 2009, 2014, 2019, and 2024. These correspond to overlaps in policy, credit, economic, and market cycles. Of course, this is not fortune-telling, just a clue to positional timing.

The practical meaning of the cycle is straightforward: season determines strategy. Early stage emphasizes layout, rising stage emphasizes holding, turning stage emphasizes cashing in, and falling stage emphasizes research.

The key after 2026 is whether profits pick up

Looking to 2026 and beyond, the framework gives the context of “three periods superimposed.”

First, the start of the 15th Five-Year Plan. The new Five-Year Plan cycle begins, fiscal policy remains proactive, and the core driver shifts from past credit cycles to broader fiscal expenditure cycles.

Second, US midterm election year. Historically, US midterm years are more likely to see policy expansion, which may resonate with China’s new planning, jointly boosting global industrial demand and PPI.

Third, A-share’s own phase switch. The market is transitioning from the liquidity-driven second up-phase into the profit-driven third up-phase. The main watchpoint is PPI bottoming and recovery, as this determines whether corporate profits truly improve.

In terms of sectors, tech innovation remains a long-term strategic field. AI, computing power, and robotics are discussed in the rapid penetration zone; early-cyclical metals and chemicals, benefiting from PPI rebound, will see greater profit elasticity; domestic consumption has structural repair opportunities.

But this is not unconditionally optimistic. The path hypothesis requires profits to take over, PPI to recover, and cooperation from liquidity and policy. Cited risks are mainly two: economic data below expectations, or tighter-than-expected overseas policy.

Finally, there’s a change not to be ignored: AI is not only a market main line but may also change investment methodology. The framework notes that future AI investment tools may offer portfolio suggestions based on their grasp of world and stock operation patterns. But investment results must still be borne by humans—AI cannot replace investors in the short-term.

Risk warning & disclaimerThe market involves risk; investments should be made cautiously. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this article is at your own risk. ```