We have observed three market liquidity characteristics recently in domestic and overseas markets.

**Characteristic One**: ETF fund flows show significant differentiation, with broad-based ETFs declining while industry/thematic ETFs increasing, and A-share ETFs declining while Hong Kong stock ETFs increasing. From the holding structure of various ETF holders and FOF clients, the aforementioned fund behavior reflects that institutional allocation funds still exhibit obvious high-selling-low-buying characteristics, while recent strong trending sectors are mainly driven by active stock-picking funds.

**Characteristic Two**: The market may be entering the final intensive subscription/redemption turnover stage for active public mutual fund products since 2021. With the rise of core assets heavily held by institutions, the aforementioned products are expected to gradually digest the pressure from redemptions. The corresponding institutional stocks may become the allocation focus in the next round of industrial trends and economic recovery. The strategy model of the past few years that emphasized small over large and avoided institutional holdings may no longer be valid, and returning to core assets is becoming reality.

**Characteristic Three**: Overseas high debt financing rates and central banks' passive rate-cutting pressure coexist. European and American countries are forced to enter rate-cutting cycles under high debt financing rate environments. The pressure on Chinese manufacturing in global competition is easing. Under the anti-involution trend, China's manufacturing industry transforming market share advantages into pricing power and further into long-term profit margin recovery is one of the most important fundamental threads that can be foreseen in the medium to long term. The attractiveness of RMB assets continues to improve.

In terms of allocation strategy, we recommend downplaying market volatility, adjusting position structure, and continuing to focus on structural opportunities in consumer electronics, resources, innovative drugs, chemicals, and gaming.

**Characteristic One: ETF Fund Flows Show Significant Differentiation, Broad-based Declining While Industry/Thematic Increasing, A-shares Declining While Hong Kong Stocks Increasing**

1) The ETF market shows characteristics of net outflows from A-share broad-based ETFs and net inflows into Hong Kong stock ETFs. Since July, A-share broad-based ETFs have cumulatively experienced net outflows of 203.8 billion yuan, while industry and thematic ETFs have cumulatively seen net inflows of 114.2 billion yuan. Meanwhile, Hong Kong stock-related ETFs have cumulatively received net inflows of 143.1 billion yuan (of which non-QDII ETFs received net inflows of 104.8 billion yuan). We estimate that about 50% of holders of dividend + cyclical + manufacturing-related industry and thematic ETFs are institutional holders. Assuming that recent net outflows from broad-based ETFs mainly come from institutions (actually, institutional holders account for over 90% of such ETFs), then institutional funds reduced A-share ETF allocations by approximately 146.7 billion yuan (203.8 - 114.2 × 50%), which is roughly equivalent to the inflows into Hong Kong stock-related ETFs (143.1 billion yuan). This generally reflects that institutional allocation of ETFs has obvious "reduce A-shares, increase Hong Kong stocks" characteristics, meaning many institutional allocation funds chose to sell high and buy low during the recent market uptrend. During the same period, southbound funds cumulatively recorded net purchases of 252.5 billion yuan. Excluding 104.8 billion yuan of Hong Kong stock-related ETF net buying, actual southbound funds actively allocating to individual stocks reached 147.7 billion yuan, accounting for about 58.5% of southbound net purchases.

2) Net inflows into industry/thematic ETFs increased significantly, with cyclical ETFs and dividend ETFs being most prominent. Statistics on cumulative net subscriptions of various industry/thematic ETFs since the beginning of the year show that as of September 5, 2025, the top three in terms of annual cumulative net subscriptions are cyclical (+44.5 billion yuan), manufacturing (+38.1 billion yuan), and non-banking (+28.5 billion yuan), while technology (+25.9 billion yuan) ranks only fourth. Technology ETFs experienced relatively significant net redemptions in mid-to-late August and since September. From the holder structure perspective, the institutional holding ratios for dividend, cyclical, technology, non-banking, consumer, and pharmaceutical sectors are 48%, 47%, 27%, 27%, 26%, and 18% respectively, indicating that the main incremental force this year still comes from institutional funds rather than retail investors. Since July, technology ETF net inflows (+1.6 billion yuan) have also lagged, performing only better than pharmaceuticals (-4.8 billion yuan), while the largest net inflows were in cyclical (+42.9 billion yuan) and manufacturing (+12.8 billion yuan). Therefore, combining the holder structure and fund flow conditions of ETFs/FOFs, ChiNext and technology ETFs with high individual investor holdings have not experienced sustained significant large-scale net inflows, and FOF allocation to ETFs remains quite limited (overall only about 7 billion yuan in scale). We believe the driving force behind technology stocks was mainly active stock-picking funds rather than ETF-form basket purchases.

**Characteristic Two: Market Entering the Final Intensive Subscription/Redemption Turnover Stage for Active Public Mutual Fund Products Since 2021**

As of September 5, based on unit net asset value calculations (adjusted for reinvestment, considering dividend reinvestment), the combined scale of active public mutual funds issued in 2020-2021 with unit net values below the break-even line is 660 billion yuan, accounting for 52.0% of all active public mutual funds issued during that period. Among these, products near the break-even line (unit net values between 0.9-1.1 yuan) have a scale of 316.7 billion yuan, accounting for 25.0% of all active public mutual funds issued during that period. We calculated the share changes in the first quarter when unit net values turned from loss to profit for active public mutual funds issued in 2020-2021. These funds saw quarterly share declines of only 0.85%, while products with unit net values rising from below 0.9 yuan to above 1.1 yuan in a single quarter experienced share declines of 13.24%, with overall redemption pressure being relatively controllable. From the holding structure perspective, for products issued in 2020-2021 with current net values between 0.9-1.1 yuan, the top three heavily weighted industries are electronics, pharmaceuticals, and media (mainly due to Tencent Holdings' influence), with heavy holdings concentrated in Tencent Holdings, Xiaomi Group, Alibaba, CATL, and other core assets. We expect that as these core assets rise, the aforementioned products will gradually digest the pressure from redemptions. The corresponding institutional stocks may become the allocation focus in the next round of industrial trends and economic recovery. The strategy model of recent years that emphasized small over large and avoided institutional holdings may no longer be valid, and returning to core assets is becoming reality.

**Characteristic Three: Overseas High Debt Financing Rates and Central Banks' Passive Rate-Cutting Pressure Coexist, Continued Enhancement of RMB Asset Relative Attractiveness**

1) High debt financing rates in European and American countries continue to crowd out private sector investment. Government bond yields in major developed countries have continued to rise this year, including countries like Germany that have always maintained strict fiscal discipline. Recently, government bond yields have also continued to rise, with long-term government bonds in the US, UK, Japan, and other countries experiencing sustained selling. Although many countries are trying to increase government budgets and drive investment, manufacturing PMI has shown no improvement. Manufacturing PMIs in Germany, France, the UK, and the US have generally remained below the boom-bust line this year, with some improvement in August, recording 49.8, 50.4, 47.0, and 48.7 respectively, representing month-over-month changes of +0.7, +2.2, -1.0, and +0.7 percentage points compared to July. Clearly, government sector investment has crowded out private sector investment, while the lack of overall economic growth momentum has further intensified concerns about fiscal sustainability, leading to continued increases in debt financing costs, further suppressing private sector investment. This may constrain capacity expansion in overseas areas including critical minerals and energy infrastructure, while also creating hidden dangers for the sustainability of investment in emerging fields such as data centers and biomedical R&D. For example, the impact of Chinese innovative drug R&D on overseas competitors is largely related to the increased capital costs in related overseas fields. Even in hot areas like AI data centers, sustained high credit costs may become a hidden danger. Currently, the ratio of capital expenditure to operating cash flow for major North American cloud service providers continues to rise, with Amazon reaching 85%, and Microsoft and Google approaching 50%. However, debt financing costs have significantly increased compared to previous years. In late April, Google issued 6.75 billion euros in bonds and 5 billion US dollars in bonds, with the combined scale setting a new historical record for single issuance, but the 10-year US dollar bond coupon rate was as high as 4.5%, while its 10-year US dollar bonds issued in 2020 had a coupon rate of only 1.1%.

2) Overseas central banks are forced to enter rate-cutting cycles amid economic weakness, with financial liquidity remaining abundant. The proportion of months when manufacturing PMI was below the boom-bust line since 2020 in major countries shows Germany and France both above 60%, while Italy, the US, and the UK are also above 50%. Germany's longest consecutive months below the boom-bust line even reached 38 months. Even the US has recently shown obvious signs of labor market weakness. According to data released by the US Bureau of Labor Statistics, US seasonally adjusted non-farm employment in August recorded 22,000 people, far below market expectations of 75,000. The three-month moving average of non-farm employment data is also basically at the lowest level in the non-recession range (according to NBER definition) in nearly 10 years, indicating significant cooling in the labor market. After the non-farm data release, the probability of the Federal Reserve cutting rates by 50bps in September has also increased significantly.

3) Pressure on Chinese manufacturing in global competition is easing, with long-term capital return rate improvement potential. Under the current global high financing rate environment, the competitive pressure on Chinese manufacturing in global market share is easing rather than increasing. China's low capital costs (especially debt financing costs) have become a global capital cost depression. This will bring advantages in many industries, such as data center construction, innovative drug R&D, and new energy power station construction. Faced with high interest rate environments, overseas private sectors will ultimately tend to slow down investment and transformation, which means that for industrial capital goods industries where China holds high production shares, there are conditions to create excess profits in overseas markets for a considerable time in the future through market share advantages, transforming share advantages into pricing power and further into long-term profit margin recovery, thereby building innovation-driven competitive barriers. This is one of the most important fundamental threads that can be foreseen in the medium to long term. In an environment where global high debt financing rates, overseas central banks facing passive rate-cutting pressure, and China's long-term capital return rate improvement under the "anti-involution" background coexist, global funds increasing allocation to Chinese equity and fixed income assets seems to be a necessary choice. Additionally, compared to recent years, China's position in the geopolitical environment has also significantly improved, which may be further strengthened under expectations of the September 3 parade and potential future US-China trade agreements.

**Downplay Market Volatility, Adjust Position Structure, Continue Focusing on Consumer Electronics, Resources, Innovative Drugs, Chemicals, and Gaming**

Understanding some of the domestic and global liquidity characteristics described in this article, we have reason to be more calm about short-term market volatility, using structural adjustments rather than position adjustments to respond to volatility. We still recommend focusing on industries with real profit realization or strong industrial trends, with key attention to consumer electronics, resources, innovative drugs, chemicals, and gaming. For consumer electronics, focus on revaluation opportunities for Apple supply chain after Apple's autumn launch event on September 9, and closely watch the potential broader opportunities in edge devices, computing chips, and communication modules that may arise from the expansion of edge AI logic from late this year to next year. If expressed through ETFs, we find that VR ETFs have higher Apple supply chain components in their sample stocks (consumer electronics ETFs still have relatively high computing components). For other recommended industries, resources, innovative drugs, and gaming can be expressed through non-ferrous metals ETFs and rare metals ETFs (focusing on rare earths and energy metals), Hang Seng Innovative Drug ETF (focusing on large pharmaceutical companies rather than small-cap speculation), and gaming ETFs respectively. Meanwhile, we emphasize attention to industries where supply is domestic, demand growth is external, and China already has or hopes to have sustained pricing power, recommending attention to rare earths, cobalt, tungsten, phosphorus chemicals, pesticides, fluorine chemicals, photovoltaic inverters, and other directions. If expressed through ETFs, consider chemicals ETFs. Finally, for the recently adjusted military industry sector, we believe that the volume increase in military trade exports is the core breakthrough for profit margins and growth. The market must see more practical verification. The September 3 parade is not the realization of catalytic events, but precisely the beginning of the long-term logic for the military industry sector, requiring patience.

**Risk Factors**

Intensification of US-China friction in technology, trade, and financial fields; domestic policy strength, implementation effects, or economic recovery falling short of expectations; unexpected tightening of domestic and overseas macroeconomic liquidity; further escalation of conflicts in Russia-Ukraine and Middle East regions; real estate inventory digestion in China falling short of expectations.