As 2025 begins, the A-share market in China is facing considerable turbulence, marked by significant fluctuations in investor sentiment driven by various external and internal factorsOn January 2nd, the People’s Bank of China took a proactive approach to stabilize market conditions by launching its second swap facility operation, increasing the number of participating institutions from an initial 20 to 40, with a total operational amount of 55 billion yuanFurthermore, the minimum self-funding ratio required for applying for stock repurchase loans has been lowered to 10%, reflecting an effort to enhance liquidity in the capital markets.

Multiple analysts, including Chen Shi, a fund manager at Mingze Investment, are concerned about the impact of disappointing macroeconomic indicators and upcoming annual reports from listed companies that could fall short of expectationsConsequently, many investors are adopting a strategy of moderate asset reduction to mitigate potential risks

Simultaneously, there are apprehensions regarding potential trade measures and a lack of a clear market direction, which is contributing to an overall decrease in market activity“The market is in a phase of wait-and-see,” Chen remarked, underscoring that these elements have led to reduced trading volumes.

According to recent research reports by CITIC Securities, the monetary policy committee of the central bank has suggested intensifying monetary policy controls and opportunistically lowering reserve requirements and interest ratesThese adjustments are poised to improve market liquidity significantly, especially in light of the anticipated easing measures.

In its investment strategy report for A-shares in 2025, Morgan Stanley Fund voiced optimism about market liquidity, stating that “liquidity remains ample, with the elasticity of the market denominator exceeding that of the numerator.” The central political bureau’s shift to a moderately accommodative monetary policy after years indicates that interest rate cuts will likely deepen in 2025. Coupled with the strong growth in resident savings, there is a growing expectation that these funds will channeled into the capital markets, further improving liquidity in response to a backdrop of widening repurchase activities and reduced financing scales.

The A-share market has experienced a downward trend at the start of 2025. Activity levels in the markets have seen a notable decline over the initial trading days of the new year

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Li Yanzheng, a fund manager from Furong Fund, pointed to two critical reasons behind the recent adjustments in the market: declining policy expectations due to a lack of new directives following the Central Political Bureau meeting in December 2024, and increased risk aversion among investors as companies approach their annual report forecastsHe indicated that smaller-cap stocks, along with certain technology shares, have particularly faced steep declines due to these sentimentsNevertheless, Li highlighted that the systematic risks within the equity market remain relatively controllable.

Meanwhile, the margin trading balance has seen a slight decrease, causing some concerned speculation regarding potential margin call risksChen Shi noted that overall financing risks are manageable, as brokerages have shown flexibility in their margin requirements allowing investors some breathing room

The proactive monetary policies initiated since September 24—such as swap facilities and repurchase loan programs—have provided critical support to the stock indices.

In addition, the implementation of new delisting rules in January may also have contributed to the market’s volatilityOn January 2nd, the China Securities Regulatory Commission (CSRC) refuted rumors alleging that regulators had instructed listed companies to disclose all negative news by January 15, coupled with rumors about insurers redeeming large volumes of public funds, which sparked concern among investorsThe CSRC firmly stated that such claims are baseless and has pledged to pursue and address misinformation vigorously.

The recent introduction of monetary policy tools, particularly swap facilities and repurchase loans, has yielded encouraging resultsAccording to reports, the CSRC collaborated with the central bank to execute an initial swap facility operation amounting to 50 billion yuan, with approximately 20 securities and mutual fund companies participating

To date, over 90% of the initial operation has been delivered, playing a vital role in stabilizing the capital market.

With overwhelming institutional enthusiasm, additional participants were selected, raising the total from 20 to 40 based on compliance evaluations and risk management criteriaSelected institutions are then chosen to participate in each operation based on the scale of their intended involvement.

As of the end of December 2024, financial institutions had established partnerships with over 700 listed companies and major shareholders, with more than 200 of these companies announcing plans to request loans exceeding 500 billion yuanThe successful implementation of these monetary policy instruments has already begun to inject significant capital into the market and further optimizations are expected to enhance this effect.

The latest reports indicate that the recent policies will not only help listed companies secure financing for stock repurchases and capital increases but will also lift investor confidence, which is crucial for stabilizing stock prices

The swap facilities are expected to increase both the frequency and size of operations while broadening participation, which will guide additional funds toward capital markets and bolster investor sentimentSuch momentum for sustained liquidity is seen as essential for the long-term health of the market.

Tian Lihui, the director of the Financial Development Research Institute at Nankai University, stated that the announcement of the second round of swap facilities and the optimization of the repurchase loans aims to increase market liquidity and stabilize investor confidence to prevent further market declineThis alignment of policies reflects the financial management authorities’ commitment to maintaining stability, utilizing a variety of tools to relieve market pressures, and promoting stable market operations.

Amidst liquidity constraints, Chen Shi suggested that investors adopt a rational approach, avoiding undue pessimism, and focus on value investing from a mid-to-long-term perspective

He advocates for an adaptive strategy involving adjustment in positions and asset allocation to navigate tighter liquidity conditions.

Looking ahead, questions emerge regarding what additional policy tools may be introduced to further enhance the capital market's developmentSuggestions from experts include the potential establishment of a stabilizing fund funded through fiscal allocations and significant injections of state capital as a means of market regulation and stability.

During the implementation of the comprehensive monetary policy adjustments in September 2024, the governor of the central bank, Pan Gongsheng, indicated that options to create a stabilizing fund were “under research.” Elevating the inherent stability of the capital market could involve issuing special treasury bonds to form a stabilizing fund, which would facilitate the low-purchase and high-sale of blue-chip stocks and ETFs to enhance market stability.

“In times of market imbalance, the stabilizing fund mechanism can effectively provide liquidity support, easing market volatility and emotional strain,” Tian emphasized

However, he warned that the implementation of such a mechanism must include clear regulations, comprehensive transparency, and a commitment to value investment approaches that prioritize market stability over profitsSpecific operational rules and triggers must be established to ensure effective action under genuine market distress.

Furthermore, alternative methods for injecting liquidity into the A-shares may include cutting reserve requirements, lowering benchmark interest rates, engaging in open market operations, and fiscal policy interventionsEach of these tools can work together to increase liquidity within the banking system, indirectly supporting the equity market.

Wu Xiaoqiu, the dean of the National Finance Research Institute at Renmin University, called for a structured liquidity reserve mechanism that would provide market stability during significant risks to restore confidence among investors