In recent months, investors in the Chinese market have been grappling with a phenomenon known as the "stock-bond double whammy." Especially since August, the A-share market has experienced a swift downturn, accompanied by rising yields in the bond marketThis situation was particularly evident when the Shanghai Composite Index fell below the critical 3000-point thresholdSectors such as coal, which benefit from price increases, and industries like automotive and electronics, that enjoyed unexpected sales surges, have been exceptions amidst widespread declines across other sectorsConversely, government bond yields, which had previously been on a downward trajectory, have recently seen a notable spike.

A historical analysis reveals that since 2010, the occurrences of "stock-bond double whammies" in China can be attributed to two primary driversThe first is a trading logic influenced by a quasi-stagnation economic environmentThe second concerns a tightening liquidity scenarioAccording to data on GDP and inflation growth rates, China has gone through several distinctly quasi-stagnation phases—namely from early 2010 to mid-2011, mid-2018 to early 2020, and late 2020 to early 2022. Throughout those periods, there have been multiple instances of stock-bond double whammiesFurthermore, significant tightening of macro liquidity, unexpected twists in capital movements, and various shifts in market liquidity conditions have also paved the way for these simultaneous declines in both stocks and bonds.

Currently, however, China's economic fundamentals are improving, and inflation remains relatively lowThe primary cause of the recent stock-bond double whammy is the marginal shifts in liquidity conditionsSince September, there has been a marked increase in the issuance of local government bonds, compounded by a notable supply of national bonds

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As we approached the end of the quarter, liquidity conditions have tightened, evidenced by the significant rise in overnight borrowing rates, such as DR007 and R007. In the equities market, liquidity has been gradually diminishingInstances like the poor performance of publicly offered funds, continued low levels of insurance capital in private placements, and the outflow of foreign investment have all contributed to this issueThe average monthly trading volume in the A-share market has plummeted from 21.7 trillion yuan in April to about 12.1 trillion yuan in October, with the turnover rate similarly declining from 23.3% to 15.3%.

Looking back, there have been 12 significant episodes of stock-bond double whammies since 2010, which typically last for around two to three monthsOn average, A-shares have witnessed a retracement of approximately 8% during these intervals, while bond market yields have risen by about 18 basis points.

The various root causes of these occurrences shed light on different signals for breaking the deadlockIn environments characterized by quasi-stagnation, stock-bond double whammies tend to conclude with the easing of inflation and a subsequent response from monetary policyIn past episodes of double whammies, the end typically unfolded following peak inflation periodsIn instances from the third quarters of 2011, 2018, and early 2022, all saw turns coinciding with the inflation peak; after requisite monetary easing, bond market yields began to decline once againDespite residual inflationary pressures in March 2022, the Covid-19 pandemic led to a pronounced downward push on economic performance, intensifying stagnation concerns, which drove liquidity conditions back towards easing and shifted the bond market mood positively.

In times of liquidity impact resulting in stock-bond double whammies, history shows that once liquidity stress lessens, stock markets tend to initiate recovery first

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Following a temporary decrease in bond market prices, a "bullish rebound" is often seen where both stocks and bonds riseHistorical liquidity easing instances, such as those in early 2016 and the end of 2022, have featured policy shifts intending for relief.

The current landscape has parallels with the third quarter of 2022's stock-bond double whammy, where market sentiment continued to dwindle due to economic worries; however, improvements driven by relaxation of pandemic control measures led to an initial rebound in the A-share marketSimilar to that period, revisions of projected economic growth for China from international perspectives combined with rapid increases in US bond yields triggered substantial foreign capital outflowsThe Chinese market witnessed continued dismal fund issuance alongside stagnation in funds allocated by financial institutions and private equityYet, following the adjustments to pandemic measures at the end of October 2022, market sentiment turned around notably, with the Shanghai Composite Index rebounding swiftly from a low of 2893 points, posting a remarkable increase of 15%.

At present, signs of proactive policy measures are being released, which could potentially bolster risk appetite among investors and facilitate a rebound in the A-share marketFirstly, inventory levels are currently at an all-time low, coupled with a decrease in real interest rates indicating increasingly clear signs of economic stabilizationThe third quarter GDP exceeded expectations, and improved profits within September further substantiated this developmentSecondly, since early October, the sustained rise in asphalt production rates signifies renewed efforts aimed at stimulating growth, and the issuance of 1 trillion yuan in national bonds on October 24 has sent a strong positive signal to the marketAdditionally, policies—like the "three arrows" adjustments regarding IPO rhythm, restrictions on share sales, and the lowering of financing margin—have progressively alleviated liquidity stress perturbed by market forces

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