Fed Monetary Policy Divergence and Liquidity Tightening: In-depth Analysis of Their Sustained Impact on the A-share Market

Based on the latest data analysis, between October and December 2025, the performance of Chinese and U.S. stock markets showed significant divergence:

• S&P 500 rose 1.30% cumulatively
  , NASDAQ gained 1.38%, and DJI performed best with a 3.98% increase [0]
• U.S. stock market volatility was relatively mild, with an annualized volatility of approximately 13.02%
• The industrial sector led gains (+1.24%), while the technology sector came under pressure (-0.49%) [0]

• Shanghai Composite Index fell 1.62% cumulatively
  , and Tencent Holdings saw a deeper decline of -10.57% [0]
• Hong Kong stock market volatility was significantly higher than that of A-shares, with an annualized volatility of 24.42%
• This reflects external pressures and insufficient internal momentum faced by Chinese assets

The Fed announced a 25-basis-point rate cut and started balance sheet expansion in December, but this policy shift reflects an underlying liquidity crisis:

Currently, liquidity in the U.S. financial market is very tight, forcing the Fed to implement quantitative easing.

The U.S. is facing the

:

• Monetary policy independence
  : Maintaining economic growth through rate cuts
• Exchange rate stability
  : The U.S. dollar index has fallen below key support levels
• Debt sustainability
  : The deficit rate for fiscal year 2025 is expected to reach 3.8% [1]

This policy dilemma has led to long-term U.S. bond yields rising instead of falling, with the 30-year U.S. bond yield surging to a 16-year high, reflecting market concerns about fiscal sustainability and inflation out of control [2].

. A rare phenomenon of “simultaneous decline in stocks, bonds, and exchange rates” occurred in spring 2025. When investors began to question the institutional and geopolitical security of U.S. assets themselves, the traditional hedging mechanism for risk aversion failed overall [6].

China has chosen to maintain exchange rates and bear domestic demand pressure over the past few years, in sharp contrast to the U.S.:

• China
  : Chooses monetary policy independence and exchange rate stability, with strict regulation of free capital flows [7]
• U.S.
  : Chooses independence and liquidity, leading to sharp fluctuations in the U.S. dollar exchange rate

:

• Offshore RMB against the U.S. dollar rose from 7.18 to 7.12, appreciating by 0.85% in a single day [1]
• China’s foreign exchange reserves have grown for three consecutive months, increasing by $28.6 billion month-on-month to $3.24 trillion in November [1]
• The scale of Chinese government bonds held by overseas institutions increased by 15% month-on-month [1]

1. Valuation depression effect
   : The Hang Seng Index’s dynamic P/E ratio is only 12 times, and the weighted equity risk premium has climbed to 5.7%, forming a significant valuation depression among major global markets [4]

2. Narrowing interest rate spread
   : The 10-year Sino-U.S. interest rate spread has narrowed to 147 basis points, increasing the attractiveness of Chinese bonds [1]

3. Policy expectations
   : After the rate cut, the scale of cross-border capital inflows into China’s stock and bond markets increased by 12% month-on-month [1]

:

• Currently, A-shares are in a critical stage of valuation repair and structural remodeling
• Undervaluation, capital misalignment, and performance divergence constitute the core characteristics of the market [4]
• As of the end of 2025, the Hang Seng Index’s expected EPS growth rate for 2026 reaches 8% [4]

:

• The historical valuation ratio quantile between the Hang Seng Tech Index and the NASDAQ 100 Index is only about 30% [4]
• Hong Kong stocks gather a complete domestic AI industry chain, reserving space for valuation repair catalyzed by AI narratives [4]
• Record net inflows from southbound funds and the shift of foreign capital are jointly reshaping the capital pattern [4]

:

• The correlation between the Hang Seng Tech Index and the USD/JPY exchange rate has turned from negative to positive [4]
• The net profit of the technology sector is expected to achieve high growth in 2025, contrasting with traditional industries such as finance and real estate [4]
• As the elasticity of cyclical sectors like energy and industry is released, the standard deviation of industry profit growth rates is expected to converge [4]

1. Uncertainty in the policy window period
   : The year-end policy window period may cause A-shares to continue to fluctuate until early next year
2. Risk of Fed personnel changes
   : Personnel changes at the Fed may affect policy tendencies [4]
3. Geopolitical disturbances
   : Uncertainties in Sino-U.S. trade relations will still affect market sentiment

1. Acceleration of RMB internationalization
   : Deutsche Bank expects the RMB against the U.S. dollar to rise to 6.7 by the end of 2026 [3]
2. Incremental capital entering the market
   : Capital inflows into A-shares may reach 1.56 trillion yuan in 2026 [4]
3. Dividends from industrial upgrading
   : In-depth integration of technological innovation and industrial innovation will significantly enhance the role of innovation-driven growth [6]

:

• Technological innovation
  : Growth-oriented tracks with clear prospects such as AI, semiconductors, and new energy
• Consumption upgrading
  : Leading consumer enterprises benefiting from domestic demand recovery
• Financial reform
  : Financial institutions benefiting from capital market reforms
• Cyclical repair
  : Cyclical industries benefiting from economic recovery

Fed monetary policy divergence and liquidity tightening are reshaping the global asset allocation landscape. Against the backdrop of Sino-U.S. policy misalignment, changes in cross-border capital flows are bringing structural opportunities to China’s capital market.

Although A-shares and Hong Kong stocks still face volatility pressure in the short term,

. With the acceleration of RMB internationalization, continuous inflow of incremental capital, and release of industrial upgrading dividends, Chinese assets are expected to迎来 an important window period for valuation revaluation in 2026.

, seeking structural opportunities amid volatility, and achieving steady growth of long-term value.

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[0] Jinling API Data
[1] NetEase Finance - “What Transmissive Impact Will the Fed’s December Rate Cut Have on the Three Major Markets of Stocks, Exchange Rates, and Bonds” (https://www.163.com/dy/article/KGHBB0CF0511835S.html)
[2] Hong Kong 01 - “What Matters Is Not the Fed’s Rate Cut But Balance Sheet Expansion—Liquidity Is Urgent!” (https://global.hk01.com/国际分析/60302523/重要的不是联储局降息而是扩表-流动性告急-点经)
[3] Xinhuanet - “RMB Exchange Rate Breaks 7.05 Mark to Hit Near 14-Month High” (http://www.xinhuanet.com/fortune/20251216/d8ed6812607e4f89bd869e4abffe7d3a/c.html)
[4] East Money - “CITIC Securities Xu Guanghong: Valuation Repair and Structural Remodeling Resonate—Hong Kong Stocks Anchor Four Core Tracks in 2026” (https://finance.eastmoney.com/a/202512103586898038.html)
[5] Sina Finance - “China Merchants Securities A-share 2026 Investment Strategy Outlook: Global Resonance, Domestic Demand Return” (https://finance.sina.com.cn/stock/report/2025-12-14/doc-inhauuyz2663654.shtml)
[6] Sohu - “Global Safe Asset Landscape Restructuring and Strategic Opportunities for the RMB” (https://m.sohu.com/a/965090662_674079?scm=10001.325_13-325_13.0.0-0-0-0-0.5_32)
[7] Sina Finance - “U.S. Government Economic and Trade Policies Gradually Undermine the U.S. Dollar Standard International Monetary System” (https://finance.sina.com.cn/jjxw/2025-12-15/doc-inhawxxz1758286.shtml)