In recent weeks, the financial landscape has been tumultuous, reflecting a broader narrative of uncertainty that many have attempted to navigateThe release of financial data last Friday by the central bank served as a stark reminder of the prevailing challengesNotably, while M1 figures exceeded market expectations, other indicators like M2, social financing, and new Renminbi loans fell shortThis overarching trend of weakness in credit expansion signals a macroeconomic environment that remains quite fragile.

At the start of the year, a surge in social financing in January had sparked hopes for a quick recovery in the macroeconomic outlookHowever, the recent realities suggest that any talk of an economic bottom might be prematureAdditionally, the reimposition of widespread nucleic acid testing in Shenzhen has cast further doubt, as the city effectively pressed the “pause” button on economic activities for a week, delivering a hard blow to both economic growth and market sentiment.

Meanwhile, the impending interest rate hike by the Federal Reserve has catalyzed a swift return of capital to the United States

Our previous analysis noted substantial net sell-offs from northbound capital, signaling that the A-share market braced for significant headwinds.

Indeed, these predictions proved accurate as the A-share market witnessed alarming declinesDespite some attempts at stability indicated by previous market rebounds, the persistent downward drift on this occasion has left investors feeling deflatedAs of the latest update, the Shanghai Composite Index registered a decline of 2.60%, with the Shenzhen Component down by 3.08% and the ChiNext Index plunging 3.56%. Northbound capital recorded a staggering net sell-off of 14.4 billion yuan, contributing to an overall market turnover of 960 billion yuan.

The carnage in the Hong Kong market was even worse, as the Hang Seng Index slid below the critical 20,000 points mark, reaching its lowest level since the 2015 market crash

The Hang Seng Technology Index experienced a staggering drop of over 11%, marking the largest single-day decline in its historyFor investors, this day was not about realizing gains; it was a day to witness an unfolding historical moment.

To put things into perspective, the last instance where the Hang Seng Index fell below the 20,000 threshold occurred in early 2016. As of mid-March, the index has recorded a maximum retracement of 36.48%, surpassing the declines seen during the 2015 crisisNotably, the Hang Seng Technology Index has now declined below its pandemic-level lows from 2020, completely erasing all gains made during the bull market phase for China concept stocks.

It's not uncommon to perceive a sense of panic among investors, especially those invested in Hong Kong and U.Slisted Chinese companiesSuch share price fluctuations induce a palpable sense of trepidation and uncertainty

Lamentably, the sentiment is mirrored in my own hesitance to articulate thoughts in the usual spirited fashion.

Instead of dwelling on our emotional responses, it’s more prudent to analyze the market mechanics at playThe movement of stock prices hinges fundamentally on trading activityRegardless of stock-promoting news or adverse reports, the tangible outcomes are reflected in tradesThe active participants in the A-share market consist of domestic enterprises, foreign investment experts, and individual shareholders; interestingly, the latter often follow market trends which can lead to increased volatility, while institutions—perceived as having a stabilizing role—have recently faced criticism.

Despite skepticism regarding the behavior of institutional investors, the data reveals that many stock-oriented funds still maintain high positioning and have not significantly reduced their holdings in recent times

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According to quarterly disclosures from public funds, the levels of stock holdings remained at historic highs, with fund managers exhibiting a neutral to optimistic outlook regarding the equity markets.

The recent sharp downturn, therefore, has taken most fund managers by surprise, prompting them to reluctantly decrease their holdingsThis indicates that they still view the market as largely holding more potential than risk, as overall fund allocations remain above historical lows.

In contrast, equity fund managers have noted that while aggressive selling has transpired, a disciplined approach has been adoptedThe true lack of steady principles appears to align more with certain fixed-income products that are solely focused on absolute returns.

Northbound capital, however, emerges as the principal catalyst of the recent market spirals

Last week’s commentary detailed the reasons behind this flowing capital, warning of accompanying risksIn a mere six trading days, the northbound capital net outflows accumulated to a staggering 50.7 billion yuan, indicating desperate selling behaviors.

Delving into potential motivations for this trend reveals a few factors: Firstly, looming interest rate hikes by the Federal Reserve could attract dollar investments back to the U.S., leading to sell-offs in emerging marketsWhile this rationale appears cogent, a deeper examination exposes its flawsThe Fed's rate hikes have been anticipated; hence, selling at this stage is akin to buying high and selling low.

Moreover, if capital really was escaping emerging markets to liquidate stock positions, significant declines should have been observed in all emerging markets, which hasn’t been the case