As 2025 commenced, the Chinese A-share market experienced heightened volatility due to a confluence of internal and external factorsAnalysts widely believe that despite this round of adjustments, the medium-term upward trajectory of the A-share market remains intactThe growing expectations of improved economic fundamentals and enhanced corporate profitability support a positive outlook for the A-share market throughout 2025.

The market's recent fluctuations can be attributed to a variety of factorsAccording to data compiled by Wind, by January 8, the Shanghai Composite Index had fallen by 3.63% since the start of the year, while the Shenzhen Component Index and the ChiNext Index experienced declines of 4.51% and 6.22%, respectivelyMarket experts generally agree that the current economic and policy window has led to recalibrated market expectationsThe surge in external uncertainties has further inhibited market risk appetite, serving as a primary driver for these adjustments.

CITIC Securities noted that the integration of micro liquidity issues, currency adjustments, a policy vacuum, performance forecasts, and uncertainties in the external environment has fueled a rise in market aversionThe firm asserts that the current expectations surrounding policies, liquidity conditions, and fundamental trends appear more promising compared to early 2024. Notably, the proportion of transaction volumes from small-cap stocks has not regained levels seen at the beginning of 2024, complemented by timely implementations of policy tools, such as swap convenience operations, aimed at stabilizing the marketAs a result, the ongoing market evolution differs significantly from patterns observed in early 2024.

Meanwhile, Zhongtai Securities highlighted January as a traditional economic and policy window periodHistorically, the success rates and odds of the CSI 300 index have taken a noticeable dip compared to DecemberThey also pointed out that the present market conditions exemplify a typical valuation correction driven by policy expectations, which necessitates adjustments to bridge existing expectation gaps

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Additionally, they recognized that the recent downturn in small-cap stocks primarily stems from elevated historical valuation percentiles in certain sectors, paired with increasingly stringent regulations.

Recent assessments from Shenwan Hongyuan Securities suggest that since mid-December 2024, the market has entered a phase of shrinking profitability benefits, leading to a decline in trading activityThe anticipated contraction in risk tolerance has concentrated the pricing of external uncertainties, which could suppress bullish sentiments and maintain a cautious approach until late January 2025.

Statistical data indicates a decline in the scale of margin financing since its peak of 1.88 trillion yuan on December 30, 2024, dropping to 1.83 trillion yuan by January 7, 2025. Similarly, the ratio of margin financing transactions to total A-share turnover has plummeted from 10.19% on December 26, 2024, to 8.59%. Specifically, net financing buy numbers from December 31, 2024, to January 6, 2025, showcased negative figures like -15.56 billion yuan and -70.22 billion yuan, reflecting a marked retreat of leveraged trading capital.

Despite the short-term adjustments in the market, many industry experts assert that the sustained improvement in China's economic fundamentals provides robust support for the long-term upward trajectory of the A-share market.

Data from the National Bureau of Statistics' Service Industry Survey Center and the China Logistics and Purchasing Federation reveals that the manufacturing Purchasing Managers' Index (PMI) stood at 50.1% in December 2024, reflecting a 0.2 percentage point decrease from the previous monthIn contrast, both the non-manufacturing business activity index and the comprehensive PMI output index registered at 52.2%, indicating increases of 2.2 and 1.4 percentage points, respectivelyAll three indices remain in the expansion zone, pointing to accelerated production and operational activities and a persistent upward shift in China's economic climate.

Looking at corporate profitability, national revenue from large-scale industrial enterprises grew by 0.5% year-on-year in November 2024, marking two consecutive months of recovery

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Concurrently, profits for these enterprises saw a year-on-year drop of 7.3%, though this decline has somewhat slowed, improving by 2.7 percentage points relative to October 2024. The continued narrowing of the margin decline reflects an overall enhancement in industrial profit conditions.

Bo Yu, the chief macro analyst at Changjiang Securities, believes that positive economic indicators are consolidating in ChinaA shift towards proactive policies from September 2024 onwards has spurred the economy's recovery momentum, with steady growth in industrial output from October through NovemberManufacturing PMI remained in expansion during these months, indicating sustained improvement in business expectations.

According to Yan Xiang, chief economist at Huafu Securities, China's ongoing reform efforts, expansion of domestic demand, and optimization of economic structures have propelled high-quality development, resulting in steady economic performance despite significant transitionsHe anticipates that 2025 will yield further opportunities for growth in China, noting several positive highlights including reinforced economic resilience, accelerated formation of new productive capacities, ongoing industrial upgrades, and strengthened consumer and investment demand.

Furthermore, Zheshang Securities forecasts that with low base effects and a recovery in profit cycles, A-share earnings are poised for gradual restoration, particularly by the end of 2024 and into 2025. They emphasize that a typical profit cycle spans 3 to 4 years, with downturn phases extending 2 to 2.5 years—a cycle that has been experiencing a downward trend since the 2021 peaksWith a slight rebound in the third quarter of 2023, they postulate that the decline in profits is drawing to a close, with potential improvements in 2025 driven by stronger domestic demand, inventory replenishment, and modest profit margin recoveries.

The overall sentiment among institutions remains optimistic regarding the A-share market

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