Goldman flags fresh state buying in China stocks, awaits volume recovery

China's state-backed investors recorded ETF inflows over the past two weeks that exceeded the total for April 2025, while six index ETFs each traded more than 10 billion yuan on Tuesday—the first time since Sept. 24, 2024. Authorities added support measures, including a 25-basis-point cut in the PBOC relending rate for share-buyback financing to 1%; 31 brokers and fund managers also applied for more than 100 billion yuan under a swap facility. Goldman Sachs said the market may have reached a policy bottom, but a sustained recovery remains uncertain: margin balances are below 2.3 trillion yuan versus a 3 trillion-yuan July peak, and margin buying is about 7% of turnover, its lowest share this year.

Analysis

The policy backstop is more credible as a volatility-control mechanism than as evidence of a durable earnings-led recovery. Concentrated purchases can support CSI 300 constituents and reduce near-term tail risk, but they may also widen the gap between large-cap index performance and the broader A-share market. Falling leverage cuts forced-selling risk; at the same time, weaker margin participation removes a source of incremental demand and turnover, limiting the read-through to broker activity and market breadth.

The key contrarian point: “policy bottom” does not establish a demand bottom. Buyback funding and liquidity facilities can improve market plumbing, but without sustained private inflows, better earnings expectations, or easing selling pressure, the support may produce a tradable floor rather than a lasting rerating. In the next few weeks, flows and turnover matter more than policy announcements; over 1–3 months, breadth and margin balances are the confirmation tests. Over 6–18 months, durable upside still depends on corporate profits and household risk appetite.

A reversal in state-backed ETF flows, renewed margin deleveraging, or persistently narrow participation would falsify the stabilization thesis. Verify daily ETF flows, turnover breadth, margin balances, and earnings revisions before increasing exposure.

Key Decisions for Investors

• Do not chase the policy headline. Treat CSI 300-linked exposure as a tactical watch until turnover improves across multiple sessions and participation broadens beyond the largest index names.
• If those flow and breadth signals confirm, consider a small, defined-risk upside position in a liquid CSI 300 ETF or its options; size it as a policy-flow trade, not a structural recovery call. Exit or stand down if ETF inflows reverse alongside renewed margin-balance declines.
• Prefer large-cap A-share exposure over broad small-cap exposure for any near-term policy-support trade, while recognizing this is a relative-liquidity thesis—not evidence of superior fundamentals.
• Monitor broker-sector activity as a second-order indicator: sustained turnover recovery would support transaction-related revenues, while continued weak trading would undercut that read-through. No standalone broker long is warranted without confirmation.