The Chinese economy saw a disappointing growth rate in the second quarter, which has led to significant declines in both A-shares and Hong Kong stocksThis disappointing performance has fueled the chorus of pessimism among market participantsIn my view, the market is undergoing a short-term contraction in volume, and the risk of declines in previously popular stocks is increasing.

Only unexpected economic growth will yield unexpected investment returns

Regarding the recently released economic growth data, the Chinese authorities maintain that it holds significant value, whereas investors from northbound capital lines consider it far below expectations

By Thursday, the Shanghai Composite Index and Hong Kong’s Chinese Enterprises Index fell by 2.11% and 2.97% respectively in just one week, hovering below their annual averagesIn contrast, the S&P 500 saw an increase of 1.34% by Wednesday, hitting new highs for the yearThis underperformance in the Chinese stock market compared to its American counterpart is not due to a decline in comparative economic advantages, but rather a deterioration in expectations.

Typically, superior performance in macroeconomic indicators and corporate profit growth is required to attract institutional liquidity premiumsSince the outbreak of COVID-19 in 2020, China’s GDP growth peaked in the first quarter of 2021 at an astonishing average of 11.8% due to robust stimulus policies

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However, the GDP annual growth rates dropped to just 0.4% and 6.3% in the second quarters of 2022 and 2023, creating an average of 3.35%—the lowest since 1990. As investors have witnessed a series of market-supporting policies over the past three years, there are rising concerns about diminishing returns on these stimulus measures.

Speculators who bet on a strong rebound in China's economy are beginning to pull outLast week, net inflows from northbound funds amounted to 34.246 billion yuan, with net outflows on Tuesday, Wednesday, and Thursday recording -6.304 billion, -2.546 billion, and 2.431 billion yuan respectivelyThis situation highlights the freezing market sentiment and the rapid in-and-out movement of capital.

In stark contrast, market expectations for the United States’ second-quarter growth appear extremely optimistic

The Atlanta Federal Reserve projected it at about 2.4%, which when combined with last year’s 1.8%, results in a two-year average of 2.1%. Prominent long-term bull investor Jeremy Siegel passionately declared, “The U.Sis currently experiencing a Goldilocks economy.”

The weight of tech blue chips in U.Sstocks is exceedingly high

In the first half of the year, Wall Street was concerned about a potential recession in the U.Seconomy, leading to a trend where investors were selling stocks to buy bondsHowever, recent trends show short sellers covering their positions, resulting in a dramatic surge in U.S

stocksStatistics from Goldman Sachs indicate that the nominal value of short covering in U.Smacro products (indices + ETFs) last week was the largest since November 2020. Additionally, data from Bank of America revealed that inflows into global equities in June reached 45 billion dollars, the highest since last March.

In a market characterized by momentum trading, sticking with winners has proven to be an essential strategy over the past 13 years in the U.Sstock marketCurrently, the U.Sis in an accelerating phase of a 13-year blue-chip bull market, with bullish tendencies increasingly prevalentIn contrast, A-shares remain caught in a prolonged downward valuation market phase reminiscent of the bear market that began in 2007, where the losers are paralyzed by a fear of losses, resulting in pervasive negative sentiment.

As of Wednesday, the MSCI AC World Index has recorded a year-to-date increase of 15.92% and an annualized return of 6.5% over the past decade

Excluding U.Sstocks, those figures drop to 12.19% and 2.37% respectivelyMeanwhile, the MSCI U.SIndex, MSCI China Index, and China A-share Index have seen an increase of 19.44%, a decrease of 4.98%, and a decrease of 6.81% year-to-date, with annualized returns over the past decade being 10.42%, 0.93%, and 4.07% respectivelyThis reveals a stark "winner takes all" picture in the U.Smarket, reminiscent of the Japanese stock market's dominance in the 1980s.

With the tech giants performing exceptionally well, the Nasdaq 100 will undergo a special rebalancing on July 24, with the weight of the seven major stocks—Microsoft, Apple, Google, NVIDIA, Amazon, Tesla, and Meta Platforms—set to decrease from a combined weight of 55% as of July 7 to 44%. This move aims to apply the brakes to the current bull market, both to guide index funds and other long positions to reduce their holdings in these tech giants and to preemptively mitigate the impact of a potential decline in these heavyweight stocks, especially given that the average static PE ratio for these giants stands at an alarming 112.5 times.

The peak of the U.S

stock market presents challenges for the Shanghai Composite

What explains the continuous miracles of the U.Sstock market while the Shanghai Composite is unable to surpass the 2007 peak of 6124 points? For the past 16 years, even amidst global discussions of “China's GDP surpassing that of the United States,” the A-share market has not benefited from the liquidity premium enjoyed worldwideIn 2023, the U.Smasterfully showcased the extreme effects of excessive monetary issuance and high valuations among tech blue chips, even managing a swap advantage between liquidity premium and monopolistic market positions.

As new capital influxes into the U.S

stock market, A-shares are noticeably desertedOn Thursday, Shanghai’s market turnover was a mere 281.2 billion yuan, the second-lowest of the year, just above January 18's 266.1 billion yuanWith the market engaging in a game of existing assets, liquidity dominates stock market pricingThe daily turnover cap in the Shanghai market exceeds 500 billion yuan during peak periods and falls below 300 billion during downturnsCurrently, A-shares enter a liquidity discount zone characterized by minimal trading volumes, heightening the risk of mean reversion for previously popular stocks.

Among the 230 concepts in the A-share market, the leading AI concept, CPO, has experienced a year-to-date surge of 68.51%, but it fell by 3.68% on Thursday, resulting in a 15.7% decline from last month’s peak closing price

Presently, the CPO concept boasts a static PE ratio of 42.63 times with a circulating market capitalization of 1.1905 trillion yuan, representing 1.68% of the total circulating market capitalization of all A-sharesSo far this month, its trading volume hits 612.7 billion yuan, accounting for 5.19% of all A-share transactions, enjoying the liquidity premium derived from a crowded tradeHistorical comparisons to previous popular stocks such as Ji'an Medical and China COSCO Shipping, which have recently reported price-to-book ratios of 0.84 and 0.78 respectively, reveals how the latter stocks peaked with respective gains of 820% and 1600%, but now reflect declines of 44.1% and 61.7% from their peaks, leaving those who chased prices in difficult positions.

(The views presented in this article are solely those of the author and do not necessarily reflect the views of this publication