A-shares fall below 4,000 points: institutions fiercely debate the main reasons for the correction, and the next strategy is here!

21st Century Business Herald Reporter: YANAN Yang

On March 20, with the A-share market hovering at the 4,000-point threshold, bulls and bears engaged in a fierce tug-of-war.

However, as the index weakened again into the close, the Shanghai Composite Index fell 1.24% to close at 3,957.05, hitting a new intrayear low.

In sharp contrast to the sluggishness of the SSE Index, the ChiNext Index surged more than 3% at one point during the session, and ultimately closed up 1.3%. More than 4,700 stocks across the entire market declined, but a small number of sectors—including photovoltaics and CPO (optical modules)—moved against the trend and strengthened. GenPower Technology even broke through the 1,000-yuan mark in one leap, becoming a newly listed A-share “1,000-yuan stock.”

This extreme structural divergence has become a snapshot of the market’s complex sentiment at present. Institutions are holding heated discussions about the nature of the adjustment, and a view put forward by a strategy analyst at a certain securities firm has sparked a lively debate within the industry.

External shocks concentratedly released

Looking back at the root causes of the recent major market selloff, multiple institutions attribute it to the concentrated release of external risks.

Citic Securities’ analysis holds that the market’s core overhang currently comes from overseas. The escalation of the Middle East situation has triggered turbulence across global capital markets. Concerns about “stagflation” stemming from a surge in oil prices have suppressed risk appetite. This has delayed expectations for Fed rate cuts, increased volatility in U.S. Treasury yields, and imposed valuation pressure on global equity assets—especially technology growth stocks with high valuations.

XinYuan Fund points out that the decline on March 19 was not essentially a single technical pullback. Rather, it reflected a state in which global risk assets saw a decline in risk appetite, resulting from external risks resonating in a short period of time. Specifically, there are three major suppressing factors. First, the escalation of the conflict between the U.S. and Iran further intensifies tensions, with military confrontation spilling over into attacks on energy infrastructure, significantly lifting global crude-oil risk premiums. Second, signals from the Fed’s March policy meeting tilted “hawkishly,” pushing further back global expectations for ample liquidity; full-year rate-cut expectations have been lowered to below one cut. Third, the market begins to worry that a rise in oil prices could be transmitted again into global inflation, which then suppresses risk appetite—especially for equity assets, particularly high-valuation growth directions.

China Europe Fund also holds a similar view, arguing that significant uncertainty still remains in current Middle East geopolitical risk. An aggravation of geopolitical uncertainty may keep global market volatility at a high level. If oil prices remain at an elevated level for an extended period, global assets may further compress risk appetite under concerns about stagflation.

Different from the external geopolitical risks that most investors are focused on, another view also circulates regarding the market’s decline—put forward by a strategy analyst at a certain securities firm.

This view argues that the main reason the market has fallen over the past two days is not the war or energy shocks. The global market has been basically stable over these two days, yet A-shares have fallen more. The core reason is that the insurance industry’s 2026 second-generation solvency regulation requirements are being fully implemented, and March 31 is the first assessment. In recent weeks, bonds and stocks have been declining together, creating substantial solvency pressure for small- and mid-sized insurance companies. The passive behavior of reducing positions has also spilled over into annuity and fixed-income plus (fixed income +) products, forming a “negative feedback loop” pressure.

However, some institutional insiders have offered an opposing view. Li Jin, deputy general manager of Shenzhen Zhuode Investment, said that he agrees that selling stocks by insurance companies has had some impact on the market decline, but he does not believe it is the main cause.

Li Jin’s analysis indicates that since the evolution of the Middle East situation, global markets have been in a volatile state. “People’s worries about war and energy, combined with uncertainty about annual report performance, have led to a market decline. In such an unclear geopolitical environment, China’s stock market is also difficult to stay unaffected.” In addition, the “Generation Two Solvency” rules have been implemented by the insurance industry since 2022, and the latest transition period ended in 2025. For insurance companies to sell some stocks for certain reasons should be more of a structural adjustment rather than a systemic de-risking—“for example, insurance favors China Securities Index Red Dividend; there has still been roughly a 5% increase this year.”

In his view, some insurers do have selling behavior to maintain adequate solvency ratios, but more often it acts as a fuse that triggers further selling by fixed-income plus and similar product categories. Among fixed-income plus products—including bank wealth management products, public funds, broker asset management products, and dividend insurance—most typically drive scale growth by ranking based on returns. Some institutions compete for rankings by raising risk appetite for equities. When the market continues to pull back, the pressure for these products to passively cut equity holdings rises significantly. Meanwhile, selling further makes related stocks pull back, forming a negative feedback loop.

Li Jin believes that simply attributing the market decline’s main cause to insurer funds cutting positions under “Generation Two Solvency” assessment overlooks the actual impact of the external environment and market sentiment, and is also not entirely aligned with the policy direction of continuously guiding insurer funds to increase allocation to equity assets.

A fixed-income plus fund manager who asked not to be named further confirmed this observation to a reporter from 21st Century Business Herald. “I feel there’s some connection. Funds with drawdown constraints—like insurers, annuities, wealth management products—have been operating more cautiously recently,” the fund manager told the reporter. These funds have gone through two rounds of accumulation: from June to August last year, and from December to February this year. Currently, their positions are at relatively high levels. During the recent market adjustment, some wealth management and annuity products began adjusting their positions.

But he added that these de-risking operations are more concentrated among small and mid-sized insurers, while the situation for leading institutions is relatively stable.

“Going forward, it may still play out a round of small-scale adjustments.” Another institution also said that because the insurance industry is highly concentrated, leading large companies hold most of the industry’s investable assets, and their operations and investment behavior are steady. Indeed, some small and mid-sized companies do reduce positions due to solvency pressure, but this falls within normal industry conditions, and its share in total funds is low, making it difficult to have a major impact on the stock market.

The institution also noted that insurance’s equity holdings are more concentrated in large and medium-to-large insurance companies. The core reason is that leading companies have more robust solvency, and regulation has been very explicit in continuously guiding long-term capital to enter the market. “From our research, since the beginning of this year we haven’t seen clear position reductions among large, medium, or small insurers. Some institutions even made small increases. Annuities’ current positions are indeed quite high, but based on recent research, equity positions have not shown a clear downward adjustment either. Equity-involved assets have a big impact on annuities’ comprehensive returns. If they cut positions and the market rebounds afterward, in an extremely competitive annuity environment, the pressure on investment managers will be huge.”

The institution also reminded that this year, how to offload elevated annuity positions at an appropriate market timing is a question that principals, trustees, and investment managers should all consider.

That said, the “resilience against falling” tone in this round of A-share adjustments has already shown up. Multiple institutions believe that despite facing dual pressures from both domestic and external fronts, A-shares have still demonstrated a degree of resilience in the adjustment. XinYuan Fund observed that during this round of geopolitical shocks, the magnitude of A-share adjustments was lower than that of surrounding markets, and the pace of repair has been faster.

Yao Pei, Chief Strategy Analyst at China Chuang Securities, clearly pointed out that A-shares have currently pulled back to around the 4,000-point area, or are approaching the bottom region. “Especially under the basic trend in which PPI is expected to accelerate the digestion of EPS valuations, the effect of position adjustments downward is limited.”

Caitain Securities also believes that as overseas macro disturbances repeatedly hit the market, and as A-shares are about to enter the earnings season, confidence and the momentum for funds to go long still need to be strengthened in the short term. However, in the medium term, under the joint drivers of the continued “dual easing” stance in fiscal policy and monetary policy, residents’ savings assets continuously entering the market, improvements in listed company performance driven by “anti-involution,” and ongoing breakthroughs in global AI technology, the foundation of this round of A-share performance remains solid. It is expected that the Middle East conflict will only affect A-shares’ short-term sentiment and market operating rhythm, and will not change the market direction. Confidence should still be maintained regarding the market’s long-term positive trend, and over-concern is not advisable.

Funds embrace “certainty”

The biggest feature of today’s market is extreme divergence. During the 4,000-point tug-of-war, more than 4,700 stocks across the market fell, yet a small number of sectors moved against the trend and strengthened, meaning market money-making effects are highly concentrated. On the board, energy-transition directions such as photovoltaics and power generation are active, and computer-power hardware sectors such as CPO also attracted capital attention. The market appears to be declaring an extreme divergence: the structural game around industrial trends and earnings certainty has become the main theme for now.

Yang Bo, general manager of Shenzhen Zhuode Investment’s strategy team, believes that current A-share valuations show structural differences. For example, the upstream and downstream segments related to the AI industry chain have relatively higher valuations, compounded by recent developments pushing sectors such as energy, power, and optical communications driven by geopolitical factors. Meanwhile, in some other areas such as the consumer sector, valuations are still near the bottom. He believes that the current pullback is a relatively good repair-and-entry opportunity for parts of the industry, but structurally it needs careful selection rather than a broad-based “everyone gains” rally like last year.

Facing the current complex domestic and external macro environment and a market structure of extreme divergence, major institutions have all put forward strategies for the second half.

Defensive characteristics are emphasized across the board. China Europe Fund believes that in a context where volatility is rising, and because expectations for domestic PPI to rebound make it difficult to switch sufficiently between stock and bond asset allocations to provide adequate defensive protection, investors should seek defensive protection within stock assets by focusing on the dividend (value/risk-resilient) style. In terms of specific directions, it can focus on three areas: traditional low-volatility dividend, especially the banking sector; technology hardware with significant marginal improvement in fundamentals (such as storage and optical communications); and cyclical sectors driven by defensive/hedging needs (such as oil and gas).

XinYuan Fund proposes an offense-defense structure of “new and old energy + utilities.” It aims to hedge external volatility by using energy value reappraisals and the relative certainty in demand for power equipment, while also capturing the phased configuration window for the “certainty segments” within the AI compute-power industrial chain. It seeks to control the portfolio’s overall elasticity and drawdowns. Boshi Fund also suggests controlling position sizes and adopting a defensive strategy, focusing on opportunities to build positions on dips around high dividend yields, revaluation of real assets, and highly certain growth directions.

Manulife Fund also points out that recently the market has shown a tendency to look for safer assets at high oil-price levels. Sectors such as coal, basic chemicals, and new energy benefit from an energy-security logic and were positioned relatively low beforehand, leading the market. Meanwhile, the oil and petrochemicals sector—where trades were previously crowded—has lagged, and the TMT sector has seen a pullback due to delayed expectations for Fed rate cuts and profit-taking.

But most institutions believe that external shocks from geopolitical conflicts are unlikely to change the medium- and long-term trend for A-shares, which is led by fundamentals and policy. Li Qiusuo, Chief Domestic Strategy Analyst at CICC Research, noted that if the changes in geopolitical patterns further accelerate the process of rebuilding the international monetary order, it could actually reinforce China-asset revaluation logic.

CITIC Securities also emphasized in a recent published note that the rebound in corporate profit margins is the key to the next stage of A-share bull market continuation. Disturbances to the global supply chain are precisely providing an opportunity to test and validate China’s pricing power for its competitive manufacturing industries.

Warm macro policy breezes keep blowing

As market volatility increases, positive signals from the policy front are also being released.

On March 18, the Communist Party Committee of the People’s Bank of China held an expanded meeting. It emphasized fully leveraging the central bank’s macroprudential management and the function of maintaining financial stability. It vowed to firmly maintain stable operation of financial markets including the stock, bond, and foreign exchange markets, and studied the establishment of a liquidity support mechanism for non-bank financial institutions under specific scenarios.

Boshi Fund’s analysis holds that this meeting by the central bank released a clear “support the market” signal. The statement “firmly maintain stable operation of stock, bond, and FX markets” will help stabilize market expectations. Studying the establishment of a liquidity support mechanism means the central bank is improving its institutional “toolbox” for preventing systemic risks.

On March 19, the China Securities Regulatory Commission held a symposium on the “14th Five-Year Plan for the Year 15” (meaning the “15th Five-Year” period, 2026–2030) for capital market planning with investment institutions. It conducted in-depth exchanges with representatives from national social security funds, insurance asset management, public funds, private funds, and bank wealth management, among others, discussing topics such as deepening reforms on the investment side, improving the inclusiveness and adaptability of the system, and enhancing the intrinsic stability of the capital market.

Boshi Fund said the symposium reflects regulators’ high level of attention to “investment-side reform.” Policies going forward may focus on optimizing the investor base and improving mechanisms for long-term capital staying invested and investing for the long term. Strengthening expectations for long-term capital to enter the market will help improve the structure of market investors and reduce market volatility.

At the crossroads at the 4,000-point level, discussions about the nature of the adjustment are still ongoing. But a relatively consistent consensus is forming: external shocks from geopolitical conflicts are unlikely to change the medium- and long-term trend for A-shares led by fundamentals and policy. In the short term, pullbacks provide more opportunities for structural positioning and rebalancing.

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