In the four trading days following the National Day holiday, the Shanghai Composite Index fluctuated repeatedly around the 3,800-point mark. The market saw volatility with investors rebalancing positions rather than exiting the market. According to industry experts, the post-holiday market correction and structural divergence indicate that short-term swings stem mostly from external shocks and amplified sentiment, representing a phased adjustment at the expectation and trading levels. Going forward, as external disturbances ease marginally, coupled with policy backstop and rising corporate earnings, A-shares’ medium-to-long-term fundamentals will keep strengthening, and market sentiment is expected to recover.

Multiple Factors Fuel Market Volatility

A-shares trended sideways in the four sessions after the National Day break. On October 8, the Shanghai Composite Index fell 0.79%, briefly breaking the 3,800-point psychological threshold during trading hours. On October 9, A-shares staged a V-shaped reversal, with the Shanghai Composite Index closing at 3,813.79 points, edging up 0.05%. On October 12, the market witnessed renewed volatile divergence: the Shenzhen Component Index and ChiNext Index once slumped more than 1%, while bank stocks bucked the trend and hit new all-time highs. On October 13, the Shanghai Composite Index rose 0.1% to 3,800.86 points, and the ice-and-snow economy sector saw active trading.

Zhang Jun, Chief Economist and Dean of Research Institute at China Galaxy Securities, believes the current correction is “the combined effect of external liquidity shocks, internal trading structures, sentiment and expectations.” Some tech tracks were overcrowded in terms of share holdings. After a rally, investors had demand to lock in profits. Meanwhile, the window for Q3 earnings verification drew near, prompting investors to shift from pure speculation on industrial prospects to prudent scrutiny of earnings delivery. He noted that incremental capital inflows remained weak. In a stock picker’s market dominated by existing capital, investors’ risk appetite is sensitive and can easily drag the index down amid swings.

Overseas-wise, persistently high long-end US Treasury yields serve as the core source of disturbance. “The 2-year US Treasury yield retreated somewhat while long-end yields kept climbing. On October 7, the 30-year US Treasury rate climbed to 5.67%, the highest since 2002.” The Chen Gang team from the Strategy Research Department of Soochow Securities argued that long-end rates demand risk premium compensation. Sustained high rates reflect tight liquidity in the medium term and continue to weigh on global risk appetite.

Domestically, crowded positions in earlier tech sectors also triggered the correction. Research by Chen Gang’s team shows the average monthly turnover rate of heavy-position portfolios dropped from 105.8% in August to 81.25% in September; that of medium-position portfolios fell from 109.9% to 89.63%; while low-position portfolios edged up slightly from 85.99% to 88.34%. Dwindling trading enthusiasm in turn drove corrections in fund heavyweight stocks.

Nevertheless, capital did not flee amid the adjustment; instead, structural rebalancing took place. On October 8, total turnover across the two bourses surged by over 240 billion yuan from the previous session. On October 9, the securities sector staged a sharp rally in the afternoon. The strategy team at GF Securities stated that corrections accompanied by shrinking turnover are common in periodic markets. The rolling average turnover of all A-shares has contracted by roughly 55% in this round, which has historically tended to signal decent short-term rebound opportunities.

A-Share Fundamentals Keep Strengthening

Short-term sentiment swings cannot alter solid fundamentals. Xuan Wei, Chief Strategy Analyst at ChinaAMC, presented a set of data: Driven by robust export growth and demand from the AI industry, earnings of all A-shares excluding financials, oil and petrochemical sectors rose 14.1% in the first half of the year. Q2 earnings grew 16.0% year-on-year, accelerating further from Q1. ROE of all A-shares rebounded markedly to 7.97% in Q2, up 0.47 percentage points from Q1, demonstrating strong corporate earnings growth. Half-year reports show high-boom industries are spreading. The share of high-growth industries with net profit growth above 30% climbed further to 29.01%, hitting the highest level since 2022.

Over the medium to long run, accelerated transformation between old and new economic growth drivers fuels the re-rating of A-shares. Xun Yugen, Chief Economist and Director of the Economic Research Institute at Guosen Securities, previously said A-shares are pricing in the shift between old and new growth drivers in advance. Although new economy sectors still lag old economy in revenue and profit share, their turnover share is far higher. He expects industrial innovation, backed by technology rollout, capacity expansion and earnings realization, will continuously empower A-shares to lift listed company quality and valuation repair, forming the foundation for steady long-term market performance.

A string of positive policy signals have also been released intensively. On October 8, the People’s Bank of China issued a policy statement on the RMB exchange rate. It brings three positive impacts on RMB-denominated assets represented by A-shares: lowering policy uncertainty for financial markets, strengthening monetary policy independence, and boosting confidence in China’s economy and corporates.

Besides, the Report on China’s Fiscal Policy Implementation in H1 2026 released on October 9 states that authorities will promptly formulate and introduce practical incremental policies in light of macroeconomic conditions, ramp up counter-cyclical adjustment, further expand domestic demand and optimize supply. On October 10, the CSRC held an expert forum on capital market and financial conditions, proposing continuous improvement of market stabilization mechanisms, encouraging qualified listed firms to boost dividend payouts and share buybacks, and researching and reserving more incremental policy tools.

Structural Opportunities Gradually Emerge

Industry insiders note the recovery will be gradual instead of happening overnight. The market will most likely maintain a structural trend of fluctuating repair and upward movement.

Valuations also provide a safety cushion. In Zhang Jun’s view, the equity risk premium of CSI 300 and all A-shares stands at historically high levels. Compared with major overseas indices, A-shares boast notable valuation cost-effectiveness, especially dividend blue-chips with prominent dividend yields.

Zhang Jun identifies three pillars for valuation repair: domestic risk-free rates stay low to underpin equity valuations; corporate earnings see structural recovery, with Q3 and annual reports continuously verifying industrial performance, and earnings act as the core anchor for valuation repair; market pessimism has eased somewhat, with negative expectations for many sectors fully priced in. Still, valuation recovery will feature structural divergence and fluctuating upside.

Xuan Wei analyzed that the PE ratio of Wind All A Index currently stands at 20.8x, at the 74th percentile over the past decade, meaning the market is not overvalued overall. The ChiNext Index, representing emerging industries, has a PE of 34.8x, only at the 26.8th percentile in 10 years, a relatively low level. “Against the backdrop of rising prosperity in emerging industries, major indices lack momentum for sustained valuation contraction. The market has not fully priced in double-digit earnings growth for this year,” he commented.

Zhang Jun sees three categories of structural opportunities ahead. First, the hard technology main line, prioritizing tech leaders in computing hardware and semiconductors with deliverable orders and revenues. Second, high-dividend assets including finance, energy, telecom operators and public utilities, suitable for long-term capital pursuing steady returns. Third, domestic demand recovery plays: niche leaders in consumer and healthcare sectors with stable cash flows and fully digested valuations. Overall, companies with verifiable earnings and sound micro position structures have higher odds of rallying.

Source: Shanghai Securities News