As we stride into 2025, the Chinese A-share market continues to exhibit fluctuations, with the Shanghai Composite Index oscillating around the 3,200-point markBy January 21st, the performance of major indices reflected a downward trend, with the Shanghai Composite Index, Shenzhen Component Index, and CSI 300 Index recording declines of 3.26%, 1.05%, and 2.6% respectively since the beginning of the yearAmidst this market correction, various funds are increasingly channeling their investments into Exchange-Traded Funds (ETFs).

Recent statistics indicate that over 37 billion yuan has flowed into stock-based ETFs in January alone, leading up to the 20th of the monthThis investment trend highlights a strong interest in broad-based ETFs, such as the CSI 300 and CSI A500, which have notably attracted capital inflowsAdditionally, sectors focusing on robotics, semiconductors, and artificial intelligence are flourishing, underscoring a shift towards high-tech investmentsMoreover, new ETFs launched this January have captured the interest of institutional investors as well.

According to Meng Lei, an analyst with UBS Securities specializing in Chinese stock strategy, the influx of long-term investors such as insurance funds and institutional capital is a gradual yet mutual attraction to the marketImprovements in corporate governance and fundamental changes have made it increasingly favorable for long-term capital to be invested.

Examining where this investment capital is directed reveals that, as of January 20th, 37.269 billion yuan net inflow has been recorded in the stock-based ETF space since the beginning of this year, with broad-based ETFs being the primary beneficiariesNotably, ETFs tracking the CSI 300 index have seen over 20.9 billion yuan net inflow during this period.

The CSI A500 index ETF, which was a high performer in Q4 of 2024, initially garnered massive attentionHowever, as time passes and the number of available products increases, the net inflow into the CSI A500 ETF has started to decline, with some products even witnessing a reversal, showcasing that market enthusiasm may be waning

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Thus far in January, 8.234 billion yuan has entered the CSI A500 ETF sector, a stark contrast to the net inflows in November and December 2024, which were 76.177 billion yuan and 34.036 billion yuan respectivelyMoreover, seven specific products, including the Southern CSI A500 ETF and Huaxin CSI A500 ETF, have faced exits exceeding 100 million yuan.

Despite these challenges, with a consistent influx of new funds, the total scale of the 26 listed CSI A500 ETFs now reaches 263.216 billion yuan, with nearly half of the products exceeding 10 billion yuan in scaleThis sector now stands as the second-largest broad-based ETF category, following the CSI 300 ETFs, distinguished by having the most products exceeding the billion-yuan benchmark.

Similarly, ETFs tracking the CSI 500 and CSI 1000 indices have witnessed substantial inflows, with net amounts of 2.297 billion yuan and 1.778 billion yuan respectivelyThe total scales of these two categories have also crossed the 100 billion yuan threshold, reaching 140.066 billion yuan and 116.967 billion yuan correspondingly.

In sector-themed products, significant capital is being directed towards robotics, semiconductors, and artificial intelligence, which have emerged as favored areas since the beginning of the yearProducts such as Huaxia CSI Robotics ETF, E-Fund CSI Artificial Intelligence ETF, and Penghua National Semiconductor ETF have recorded net inflows exceeding 400 million yuan eachConversely, sectors like liquor, consumer goods, and brokerage have seen notable capital outflows, with ETFs in these categories witnessing withdrawals exceeding 600 million yuan.

As trends recalibrate, the trading activity in stock-based ETFs is also witnessing a declineOn January 21st, the daily trading volume for stock-based ETFs stood at 78.906 billion yuan, reflecting nearly a 40% drop from the beginning of the month when it was 127.635 billion yuan on January 2ndThe average daily trading amount for the month reached 93.227 billion yuan, slightly lower than December's average of 98 billion yuan.

As new market ETFs continue to capture attention, over twenty new products have been launched recently

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Some of these offerings have sparked a scramble for investment from institutions, particularly from securities firms, insurance entities, and state-owned capitalsA notable example includes the CICC CSI A500 ETF, which established itself on January 14th, attracting 1.991 billion yuan, with all ten of its major stakeholders being institutional investors, including CICC, Guotai Junan Securities, and Xinhua Life Insurance.

Similar trends can be seen in other offerings, such as the GF Shanghai Stock Exchange Sci-Tech Innovation Board Artificial Intelligence ETF, which launched on January 15th, attracting significant interest from five securities firms and two private equity players, leading to over 2% shareholding amounts among key stakeholdersLikewise, the Rongtong CSI A500 ETF established on January 16th has representatives from nine different institutions appearing among its top ten shareholders.

Recent insights from several fund companies indicate that institutional investors are also pivotal in the capital configuration of the recently raised fundsAn individual from a mid-sized fund company noted that ETFs have become indispensable in institutional asset allocation, showcasing a pivot from actively managed equity products towards index configurations.

Meng Lei from UBS further elaborated on this trend, explaining that over the past two years, long-term capital, particularly from insurance companies, has consistently flowed into the marketThe data illustrates that as the Shanghai Composite Index lingers below the 3,000-point level, the CSI 300 ETF has shown a significant increase in share value, indicating that long-term investors are willing to leverage ETFs for capital market involvement when prices dip, hoping to secure better long-term returns.

In his analysis, Meng reflects on the current positioning of the Shanghai Composite Index, which fluctuates between 3,100 and 3,200 points, suggesting that the prevailing risks could be mitigated by patient investors

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He states that comprehensive capital sourcing from pension funds, social security funds, and insurance investments can collectively offer substantial support.

So why are broad-based ETFs garnering such strong support from investors? Yin Hao, a fund manager from Bosera Asset Management, articulated at a recent investment strategy conference that broad-based ETFs serve as a reliable foundation or ballast for A-share investmentsHe highlighted the strong demand from institutional investors for such products.

Yin elaborates that ETFs, particularly broad-based ones, offer a diversified portfolio with more balanced industry distributionThese products maintain a high level of discipline—following established stock selection criteria without significant alterations, resulting in clear risk-return characteristics.

He also notes that broad-based indices tend to captivate capital interest during volatile market conditions or at the onset of an upward trend, given that no single sector seems robust enough to drive a rallyAt present, the value proposition associated with broadly allocated indices relative to bonds holds greater allure.

Input from the Morgan Stanley investment team suggests that 2025 may continue the re-stimulation narrative seen in the latter half of the previous year, with ongoing demand-side stimulus expected to bolster the recovery of residents' income and the real estate market, potentially leading to an overall improvement in earnings within the A-share market, albeit with limited elasticity.

In discussing the opportunities within specific sectors, AI is highlighted as a point of focusThe previous year showcased Chinese tech firms relentlessly racing to catch up with their overseas counterparts in AI developmentsWith advancements in significant AI models nearing international standards, rapid innovation alongside continued decreases in related costs creates a robust foundation for practical applications, making 2025 a potentially pivotal year for AI applications.

From the third quarter of 2024, there has been an uptick in technology stocks, showing that they may perform notably well

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