As China prepares for its fiscal and monetary policy adjustments in the upcoming year, the spotlight is on the decision to implement a more proactive fiscal stance coupled with moderately easing monetary policiesThis marks a significant shift, as it is the first time in nearly 14 years that the central government has explicitly outlined the need for moderate monetary easingSuch a move has profound implications for the A-share market and its investors, with potential to enhance the operational environment for listed companies and boost market liquidityMore importantly, it could result in the upward revaluation of Chinese equities, particularly in light of the current economic landscape.

The announcement of a moderately loose monetary policy is expected to provide a substantial boost to the intrinsic value of the A-share marketIf liquidity increases, the operating environment for listed companies will improve significantly

On the one hand, businesses could gain access to additional funding, allowing them to initiate new projects and expand operationsOn the other hand, corporate balance sheets, particularly accounts receivable and product inventories, are expected to see notable improvementsCombined with government-driven consumption incentives, the overall financial performance of listed companies in 2025 could improve substantially, making this a pivotal moment for the market.

Performance drives valuation, and as the performance of listed companies improves, stock prices are likely to rise, provided that price-to-earnings (P/E) ratios remain stableThis increase in stock prices will be a natural consequence of market forces, leading to a revaluation of market prices based on improved company fundamentalsWhile the benefits of monetary easing will vary across different sectors and companies, there is little doubt that overall market valuations will likely experience a significant upward adjustment

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For example, companies that manage to boost earnings or reduce losses will naturally see their stock prices reflect these improvements, which will, in turn, influence the broader market.

On the capital markets front, expectations surrounding potential monetary policy adjustments such as reserve requirement ratio (RRR) cuts and interest rate reductions could significantly increase the supply of money in the marketThese moves would be advantageous for liquidity across capital markets, providing additional fuel for institutional investors, retail investors, and other market participants to increase their investmentsThis influx of capital is likely to enhance A-share market liquidity, making it easier for investors to enter or exit the market.

Moreover, the profit effect from the stock market will likely stimulate new investors to enter the market, while encouraging existing investors to allocate more capital into equities

For major shareholders, the improved access to financing could reduce the pressure to sell stocks in the secondary market, potentially increasing the volume of shares being repurchased or heldThese changes will increase capital flows within the secondary market and, by extension, improve the overall valuation of the stock market, reinforcing the upward trajectory of A-shares.

From an investor’s perspective, it is crucial to understand that the impact of a moderately easing monetary policy will be most beneficial to blue-chip stocksHigh-quality companies with strong fundamentals may see their earnings grow significantly, as an increase in market liquidity provides more opportunities for expansionIn contrast, poorly performing companies may only experience marginal improvements—such as a reduction in losses or a shift from loss to small profitsThese discrepancies will be clearly reflected in stock prices

For instance, if a company’s earnings per share (EPS) increase from 1 yuan to 2 yuan, its stock price could theoretically doubleHowever, if a company’s EPS changes from a loss of 2 yuan to a loss of 1 yuan, the stock would still be considered a "loser," and the potential price increase would be far more limited.

As listed companies improve their earnings and market conditions continue to support profitability, investor confidence is likely to riseThis will result in a noticeable increase in market activity, particularly with core assets that are undervalued or exhibit solid performanceThese assets may experience a value reappraisal, possibly even enjoying a valuation premiumMany of these core assets are also key components of major indices, meaning that a steady rise in their valuations will directly contribute to an overall increase in the A-share market’s valuation.

The psychological impact of a moderately easing monetary policy should not be underestimated

It has the potential to significantly boost investor confidence, dispelling any lingering uncertaintiesWhen investors feel optimistic about the market’s future, they are more likely to take on additional risk, allowing funds to flow more freely into the stock marketThis, in turn, will lead to more efficient resource allocation, enhancing the market’s ability to identify and value high-potential companiesThe result is a more dynamic market where the most promising companies stand out, fostering a positive feedback loop that encourages both capital market development and the growth of the real economy.

In the coming months, A-shares are poised to enter a new phase driven by favorable policiesThis period promises both opportunities and challenges for investorsThose who can effectively align their strategies with the policy shifts will likely reap substantial rewards, while those who fail to understand the nuances of the evolving environment may struggle