Ye ZHANG, co-CIO of Millburn Asset Management, explores what he believes is a constructive environment for China A-Shares, supported by improved liquidity, rising equity carry, and policy- and tail-risk repricing—and explains why the Q1 2026 pullback has not, in his view, altered the structural thesis.
PLEASE SEE THE IMPORTANT DISCLAIMERS AT THE END OF THIS ARTICLE. This article reflects the author's current views as of the date hereof. These views are subject to change.
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Following a very strong 2025, China A-shares entered 2026 with continued momentum through mid-January, before giving back some of their gains in the first quarter. We believe the pullback reflected a combination of factors—some consistent with the cyclical digestion we had anticipated, others less so.
On the domestic side, profit-taking after a sharp advance, seasonal liquidity tightening around the Chinese New Year, and a measured pace of policy follow-through were broadly within the range of outcomes we considered likely. Less anticipated was the escalation of geopolitical risk—most notably the outbreak of the Iran conflict—which tightened global risk appetite and weighed on sentiment across emerging markets in the near term. While we take such developments seriously, we do not view them as materially altering the medium-term trajectory for China A-shares: the direct economic linkages are limited, and historically, exogenous geopolitical shocks of this nature have tended to compress Chinese equity risk premia only temporarily before domestic fundamentals reassert themselves.
We continue to view the underlying advance as a flow-supported and risk-premium–compression rally with structural legs, not a one-off sentiment spike. We think the case for further upside rests on three reinforcing factors that remain intact despite the recent consolidation. The first of which is liquidity, driven by incremental demand as domestic balance sheets reallocate. Secondly, equity carry is rising as shareholder return becomes a more credible valuation anchor. Finally, policy & tail-risk repricing are compressing the equity risk premium.
Liquidity
Incremental Demand Returns through a Domestic Reallocation Channel
A-shares are priced at the margin. When the incremental buyer shifts from “wait-and-see” to “allocate,” prices can move meaningfully even before earnings revisions fully catch up. Market action has been consistent with that: onshore turnover recently printed fresh records around RMB 3.6–3.65 trillion on consecutive days, while major indices had already advanced for weeks into early January.[B1][B2]
A large stock of household term deposits is set to mature in 2026, forcing a redeployment decision: roll them into lower-rate deposits, seek alternatives within the financial system, or return to the traditional household wealth pot (i.e., property). The key is not that “all maturities go into equities,” but that a small marginal shift from a very large maturity base can create meaningful incremental demand for market assets. For example, a widely cited estimate (from China Daily, citing CICC) indicates that roughly RMB 32 trillion in 2y+ household time deposits are maturing in 2026 and suggests that approximately RMB 2–4 trillion may shift into non-deposit investment channels.[CD] Huatai Securities similarly highlights the scale of the maturity wave, citing RMB 50 trillion in deposits with maturities over one year that mature in 2026, of which RMB 30 trillion are held at large state-owned banks.[HT]
Property’s Weakened Absorption Keeps More Flows Inside the Financial System
A crucial onshore reality is that property has historically been the default wealth sink in China. With property remaining structurally less compelling as a “storage-and-return” vehicle, a larger portion of incremental savings is more likely to remain within the financial system and search for alternatives, often starting with insurance and wealth management products before being expressed through capital markets. Caixin has explicitly linked the deposit maturity wave to “weak consumption and a soft property market,” expecting redeployed savings to favor conservative products initially—an observation that actually strengthens the equity thesis because it implies institutionalized, intermediated flows rather than purely retail “hot money.”CX]
Deposit Repricing Reinforces the Incentive to Diversify
Deposit rate and product repricing are concrete “push” factors. Reuters recently reported that major Chinese banks are withdrawing high-yield, long-term products and shifting to shorter tenors at lower rates, as part of efforts to manage funding costs.[RT1] This behavior makes “roll deposits” less attractive at the margin and increases the probability that incremental savings—via intermediaries—reach market assets.
The Bottom Line on Liquidity
All this leaves us with a key takeaway: the liquidity bid does not appear to be driven solely by “animal spirits,” and the Q1 pullback has not disrupted the underlying reallocation mechanics. The system appears to be re-channeling savings away from legacy sinks and toward financial assets, and the observed record turnover is consistent with the market processing a large repositioning. [B1][B2][HT][CX]
Equity Carry
Reallocation Meets a More Investable Equity Market
A rising equity carry can change the valuation anchor. A historical offshore objection to Chinese equities has been that “cheap can stay cheap if shareholder returns are uncertain.” What is changing is the visibility and discipline of cash returns to shareholders, which matters more in a lower-rate environment. The Shanghai Stock Exchange (SSE) reports that in 2024, SSE Main Board companies paid RMB 1.77 trillion in cash dividends (+6% YoY), reached an overall payout ratio of 39%, and indicated a dividend yield of ~3.6%.[SSE] We believe this is important because it gives A-shares a clearer “carry” component, improving their underwriteability for long-duration capital and making them more naturally compatible with reallocation flows that initially seek stability. SSE messaging also emphasizes continued efforts around “corporate value enhancement” and shareholder return tools, reinforcing the direction of travel in payout behavior.[SSE][SC]
Can Carry-driven Repricing Support Continued Upside?
In our view, when early repricing phases occur, markets can rise through risk-premium compression before earnings upgrades do the heavy lifting. A rising carry profile can accelerate the process by strengthening the discount-rate anchor and providing conservative capital a bridge from deposits to equities. To us, this is exactly the environment implied by the deposit-maturity and deposit-repricing backdrop.[CX][RT1][SSE]
The Bottom Line on Equity Carry
All this means that, in our view, the reallocation story may be even more powerful when equities offer a credible carry component. SSE’s published dividend/payout metrics make this argument concrete rather than narrative.[SSE]
Policy & Tail-risk Repricing
Reduced Uncertainty and Lower Tail Risk
A lower perceived downside can compress the equity risk premium. In our experience, sustained rallies typically require not “miracle growth” but rather a decline in perceived tail risk and a more stable macroeconomic and credit policy backdrop. In China, policy needs not create earnings overnight to be market-positive; it needs to reduce uncertainty and lower the probability assigned to adverse states.
Useful framing appears in Reuters Breakingviews: as deposit rates fall below psychological thresholds, part of China’s large deposit stock may be nudged toward market risk-taking (including equities), consistent with a broader policy objective—while acknowledging constraints and risks.[RBV]
Geopolitical Shocks and the China Risk Premium
The Iran conflict, which escalated in Q1 2026, introduced a fresh source of global uncertainty, prompting a broad pullback in risk assets. For China A-shares, the impact was primarily transmitted through sentiment and cross-asset risk-off flows rather than through direct fundamental channels. China’s trade exposure to the region, while nontrivial for energy imports, is manageable given its strategic petroleum reserves and diversified supply arrangements. We view the geopolitical shock as a short-duration headwind for risk appetite, not a structural impairment of the domestic drivers outlined above. As the initial uncertainty premium is absorbed, we expect the underlying risk-premium compression trend to reassert.
The Bottom Line on Tail Repricing
If the left tail is perceived as less severe, we believe the equity risk premium can continue to grind lower, potentially supporting further upside even if earnings improvement is gradual.
Conclusion: Why We See Opportunity for A-shares to Continue Rising
We remain constructive on China A-shares. The Q1 pullback—driven by a mix of anticipated cyclical digestion and the less-expected escalation of geopolitical tensions—has moderated near-term sentiment but has not, in our assessment, impaired the structural drivers underpinning the advance. Liquidity is improving through a large-scale, increasingly intermediated reallocation of domestic balance sheets, creating stickier incremental demand.[CD][CX][RT1] Additionally, equity carry is rising and becoming a more credible valuation anchor, improving the market’s absorption capacity for long-duration capital. [SSE][SC] Finally, tail-risk repricing is compressing risk premia, enabling a sustained re-rating process that does not require an immediate earnings boom. [RBV]
Ultimately, while near-term volatility may persist—particularly as geopolitical developments unfold—we see the conditions in place for China A-shares to resume their advance as the structural tailwinds of domestic reallocation, rising equity carry, and risk-premium compression continue to operate.
Addressing the “Overheated” Narrative
A recent Bloomberg article argued that China’s rally has “cooled” and may be “overheated,” pointing to record turnover (RMB 3.65 trillion) and an increase in margin balances (RMB 2.65 trillion, with margin trades up 1.8% on the day), alongside a 0.6% CSI 300 decline.[B2] We disagree with the implied conclusion (“momentum is lost”) for three reasons:
1. A One-day Pullback after a Sharp Advance is not a Regime Shift
In a flow- and repricing-led tape, periodic dips are normal digestion (profit-taking, re-hedging, risk-budget adjustments). That does not invalidate the underlying impulse to reallocate.[B2]
2. Record Turnover is not Inherently Bearish
At inflection points, high turnover often reflects broad participation and accelerated price discovery as portfolios reposition—especially when the narrative is “reallocation + risk-premium compression.” In our view, the correct question is “who is trading, and why?”, not “turnover is high, therefore the rally is soon to be over.”[B1][B2]
3. Margin Growth is Not Necessarily a Late-cycle Indicator
In our view, margin growth on its own is not a decisive late-cycle warning, especially if it does not dominate marginal pricing. Bloomberg’s own figures show rising activity and leverage, but that is equally consistent with improving confidence from previously cautious positioning—especially when domestic reallocation is a key driver.[B2]
Our Takeaway:
The “momentum lost” interpretation overweights short-horizon price action and treats elevated activity as intrinsically negative. We see the observed cooling as tactical consolidation within a structurally supported uptrend, with direction still governed by domestic reallocation, rising equity carry, and risk-premium compression. The subsequent Q1 pullback, while more extended than a single session, reinforces rather than contradicts our framework: the drivers of the advance are structural and flow-based, and periodic corrections—whether triggered by profit-taking or exogenous shocks—are a feature, not a bug, of a repricing-led market.
References
[B1] Bloomberg News, Jan 12, 2026: record onshore turnover (around RMB 3.6tn) and market context.
[B2] Bloomberg News, Jan 13, 2026: “rally loses momentum,” CSI 300 down day, turnover ~RMB 3.65tn, margin balance ~RMB 2.65tn.
[CD] China Daily, Jan 9, 2026: citing CICC estimates on 2026 2y+ deposit maturities and potential non-deposit flow.
[CX] Caixin Global, Jan 26, 2026: deposit repricing pressure and household reallocation patterns (insurance/wealth management products, soft property market).
[HT] Yahoo Finance/Bloomberg, Jan 18, 2026: Huatai Securities estimate of RMB 50 trillion deposits maturing in 2026, with RMB 30 trillion at large state banks.
[RT1] Reuters, Dec 3, 2025: major banks repricing/withdrawing long-tenor high-yield deposit products.
[SSE] Shanghai Stock Exchange (SSE), May 7, 2025: 2024 dividends/payout ratio/dividend yield metrics.
[SC] english.gov.cn / State Council summary referencing SSE communications on enhancing shareholder returns (Jun 7, 2025).
[RBV] Reuters Breakingviews, May 20, 2025: deposit-rate declines and potential savings reallocation framing.
IMPORTANT DISCLAIMERS
The opinions expressed herein are solely those of the author and do not constitute financial advice. Past performance is not indicative of future results. These opinions, views and observations represent the current views of the author as of the date hereof; those opinions, views and observations are subject to material change. Investing in the markets involves risks, including the potential loss of principal. Market conditions can change rapidly; predictions may not materialize.
The appropriateness of any investment strategy depends on individual circumstances and objectives. Please consult with your own financial advisor to assess your specific situation. There are no guarantees that any investment strategy will be successful. All investments carry risks, and it is possible to lose money.