Comprehensive Analysis Report on 2026 China Capital Market Investment Strategy

As the first year of China’s 15th Five-Year Plan, the capital market in 2026 faces complex internal and external environments and policy changes. From the current market structure, several core variables are reshaping investment logic: First, the margin requirement for financing has returned to 100% after more than two years, marking the regulator’s launch of countercyclical adjustments to prevent market overheating risks [1]; Second, valuations of hot sectors such as AI have pulled back, and the market style has shifted from liquidity-driven to performance-driven; Third, the maturity of 50 trillion yuan in medium- and long-term fixed deposits has triggered a rebalancing of residents’ asset allocation; Fourth, the continuous entry of insurance funds into the market has become an important source of incremental capital. Against this background, the free cash flow strategy has received widespread attention from institutional investors due to its emphasis on enterprises’ endogenous value creation and profit quality, and has become an important investment methodology for the 2026 slow bull market.

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On January 14, 2026, with the approval of the China Securities Regulatory Commission (CSRC), the Shanghai, Shenzhen and Beijing Stock Exchanges issued a notice, raising the minimum margin requirement for investors when purchasing securities on margin from 80% to 100% [2]. This adjustment is the first increase since August 2023, marking a countercyclical adjustment measure taken by the regulator as it believes the market has shown signs of overheating. It is worth noting that this adjustment only applies to newly opened margin contracts, and existing margin contracts and their extensions before the implementation of the adjustment will still be implemented in accordance with the relevant regulations before the adjustment, which reflects the moderate and progressive nature of policy regulation.

From market data, the recent rapid rise in margin balance is the direct trigger for the policy adjustment. As of January 13, 2026, the balance of margin trading and short selling in A-shares has reached 2.68 trillion yuan, of which the margin balance has reached 2.67 trillion yuan [2]. In just 7 trading days since the start of 2026, the net margin purchase volume has exceeded 140 billion yuan, and the pace of leveraged capital entering the market has accelerated significantly. At the same time, the trading volume of A-shares has exceeded 3 trillion yuan for consecutive trading days, and even hit a record high of 3.99 trillion yuan on January 14, with market sentiment becoming overly exuberant.

Regarding the impact of this policy adjustment, market institutions generally believe that it is an institutional arrangement that is “neutral with a bullish tilt”. Deng Lijun, Chief Strategy Analyst at Huajin Securities, pointed out that the increase in the margin requirement for financing is more of a short-term moderate cooling measure to prevent and control high leverage risks in advance, indicating that the regulator’s cooling measure is moderate, and is mainly aimed at preventing and controlling high leverage risks in advance and promoting the long-term healthy and stable development of the capital market [3]. Kaiyuan Securities also analyzed that, on the one hand, the current maintenance margin ratio for margin trading and short selling in the market is about 288%, which means that the asset balance in the margin account is 2.9 times the margin balance, and the leverage of existing margin accounts is far from reaching the upper limit; on the other hand, the duration of margin business is generally 6 months, and can be extended multiple times in accordance with broker regulations, and is still calculated according to the old business rules, so the existing scale has sufficient margin support upon maturity, and the impact on the existing balance is minimal.

The core signal conveyed by this policy adjustment is that the regulator encourages rational investment based on fundamentals and warns against speculative behavior that overrelies on leverage. Investors should take this opportunity to re-examine whether the logic of their holdings is solid, and stay away from purely capital-driven speculation. For investors using margin tools, they must re-evaluate their position management and risk tolerance in accordance with the new regulations, and reserve a more sufficient safety margin when opening new positions. The long-term trend of the market ultimately depends on the quality of economic development and the profit quality of enterprises. Investors should focus on in-depth research on industrial trends and enterprise fundamentals, rather than the speed of short-term stock price fluctuations.

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The “Magnificent Seven” strategy that led the market in 2025 faces significant challenges in 2026. Taking the U.S. stock market as an example, the profit growth rate of the Magnificent Seven in 2026 is expected to be about 18%, the slowest since 2022, and its advantage is very weak compared with the expected 13% growth rate of the other 493 constituent stocks of the S&P 500 Index [4]. The market has increasingly questioned the return on the huge AI investments of tech giants, and investors are no longer satisfied with the empty promise of “getting rich quickly from AI”, but are looking for real monetary returns.

From the performance at the beginning of the year, the Magnificent Seven Index only rose by 0.5%, while the S&P 500 Index rose by 1.8% [4]. This differentiation trend indicates that the era of “buying blindly” by betting solely on tech giants has ended, and investors need to carefully select individual stocks. David Lefkowitz, Head of U.S. Equities at UBS Global Wealth Management, pointed out that the tech industry is no longer the only protagonist in the market, and the scope of corporate profit growth is expanding, and this trend will continue.

For the A-share market, the cooling of the AI market has also brought a shift in investment style. Yang Delong, Chief Economist at Qianhai Kaiyuan Fund, believes that based on past experience, the possibility of a sustained one-sided rise in the market is low, and a phased adjustment may occur after consecutive rallies, so current investors need to pay attention to risk control [1]. The strategic view of Guoxin Securities also believes that the recent market may be dominated by volatility to accumulate momentum and structural market trends.

In terms of specific allocation directions, institutions recommend focusing on two types of opportunities: first, tech sub-sectors supported by real performance, such as domestic substitution of semiconductors, implementation of AI applications, etc.; second, tech manufacturing sectors with relatively reasonable valuations in the early stage and less affected by market sentiment. Investors need to distinguish between “genuine growth” and “fake growth”, and focus on high-quality enterprises that can convert technological advantages into actual profitability.

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Free Cash Flow to the Firm (FCFF) is an important indicator for measuring the intrinsic value of an enterprise, representing the amount of cash that the company can freely dispose of each year. Its calculation formula is:

Among them, the meanings of each element are as follows: Earnings Before Interest and Taxes (EBIT) directly reflects the company’s profitability and is the cornerstone of free cash flow; although depreciation and amortization reduce book profits, they do not affect operating cash flow and are non-cash expenses; changes in net working capital reflect the cash input required by the company to maintain daily operations; capital expenditures are long-term investments made by the company for future development [5].

According to research by professional institutions, companies that meet the following two conditions can be regarded as high-quality enterprises that can generate stable free cash flow in the long term [5]:

: EBIT has increased year by year in the latest three years and is guaranteed to be greater than 0. Stable profit growth is the fundamental source of free cash flow; without profits, free cash flow is like water without a source.

: The average value of FCFF ÷ EBIT in the latest five years is greater than 50%, and this value is greater than 0 every year. This means that the company can not only make money, but also efficiently convert the earned money into free cash flow.

To further screen high-quality targets, the ROE indicator can also be used for verification: for companies in the stable expansion and fluctuating expansion stages, the annual ROE for three consecutive years is required to be greater than 10%; for companies in the stable maintenance and fluctuating maintenance stages, the annual ROE for three consecutive years is required to be greater than 8%.

Research shows that the free cash flow valuation method has a significant stock selection effect in the A-share market. After 2017, with the tightening of regulatory policies and the opening of the registration system, poorly performing micro-cap stocks no longer highlight shell value, and company fundamentals have regained pricing power. The long-short net value of the free cash flow factor has been rising all the way, with an annualized long-short return rate of 4.79% [6]. If fund managers have forward-looking expectations for the future free cash flow of stocks and buy currently undervalued stocks, they can bring obvious excess returns to the investment portfolio, with an expected annualized long-short return rate of up to 6.97%.

From the perspective of industry allocation, the free cash flow characteristics of different industries and companies vary greatly, and the influencing factors are also different, so it is not appropriate to use a one-size-fits-all approach based solely on the absolute level of FCFF. However, if the FCFF/EBIT indicator of an industry or company remains at a stable high level for a long time (such as greater than 50%), from the perspective of free cash flow, these industries and companies can generate stable free cash flow in the long term and create value for shareholders and creditors [7].

Research has found that profit growth and the stability of profitability are the basis for most industries and companies to obtain positive free cash flow, and attaching importance to profits is equally important as attaching importance to free cash flow. For industries and companies in the high capital expenditure stage, the EBIT efficiency brought by unit capital expenditure is a key indicator for measuring their free cash flow creation ability.

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The scale of maturing resident deposits in 2026 is unprecedented. According to research data from Huatai Securities, the scale of maturing time deposits with a term of more than 1 year in 2026 is about 50 trillion yuan, an increase of 10 trillion yuan compared with 2025 [8]. From the perspective of term structure, the maturing volume of 2-year and 3-year deposits is expected to exceed 20 trillion yuan each, and that of 5-year deposits is roughly 5 trillion to 6 trillion yuan. Among them, the interest rates of 2-year and 3-year deposits have declined the most (from 2.5%-3.0% previously to the current 1.2%-1.75%), corresponding to the strongest “deposit migration” effect. According to estimates by CICC, the maturing scale of all resident deposits and time deposits with a term of more than 1 year in 2026 will increase by 12% and 17% respectively compared with 2025, with a year-on-year increase of 8 trillion yuan and 10 trillion yuan.

Regarding the flow direction of the huge amount of maturing deposits, Liu Yu, Chief Economist at Huaxi Securities, pointed out that it needs to be viewed rationally. Investors who still deposit money in bank deposits currently have low risk appetite, and even if stock market volatility declines and a lower limit emerges, their risk tolerance is still limited. Deposits are more likely to flow into wealth management products, and then about 5% of the wealth management funds are allocated to the stock market. This transmission process makes it difficult to realize direct entry of deposits into the stock market [8].

Specifically, the allocation directions after deposit maturity include: first, repaying existing housing loans after deposit maturity; second, entering the stock market through various channels such as wealth management products, participating life insurance, “fixed income+” products, or even direct entry into the market, with the “equity content” of the first few methods being relatively low; third, switching to wealth management products, money market funds, etc., which will also drive the demand for bonds from wealth management products; fourth, accepting the new low-interest rate environment and continuing to renew deposits.

From historical experience, the acceleration of resident deposit migration often corresponds to the middle and late stages of a bull market. In 2009, the acceleration of resident deposit migration occurred in July, and the stock market peaked in August (with an interval of 1 month); in 2014, the acceleration of resident deposit migration occurred in December, and the stock market peaked in June 2015 (with an interval of 6 months). This means that deposit migration is often a result of the stock market rise rather than the cause.

Although the scale of 50 trillion yuan in maturing deposits is staggering, the actual scale flowing into the stock market may be relatively limited. Lin Yingqi, Banking Analyst at CICC, believes that compared with the “narrative” of the “record-breaking” maturing of 67 trillion yuan in deposits, the direction of 6 trillion yuan in “excess savings” may be more critical. Resident risk preference is stable, and due to liquidity management needs, the vast majority of deposits still remain in the banking system.

For the capital market, the more important impact is that as residents have more asset allocation options, a small part of deposits will inevitably be diverted. Although this proportion may be very low, the current total deposit volume is so huge that even a small part has a considerable absolute value. In the long run, the long process of deposits being gradually diverted to other wealth assets (securities, asset management products, insurance, etc.) may have already started.

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Since 2025, regulatory policies have continued to guide commercial insurance funds to enter the market. The State Administration of Financial Regulation has approved two insurance companies, China Life and New China Life, to initiate and establish securities investment funds through the pilot program of raising insurance funds, with a scale of 50 billion yuan, to invest in the stock market and hold for the long term. Up to now, there have been three batches of pilot programs for long-term investment of insurance funds, with a total pilot amount of 222 billion yuan. In addition, the regulator has continued to reduce the comprehensive cost of insurance funds entering the market through measures such as adjusting solvency regulatory rules (the risk factor for stock investment has been further reduced by 10%), adjusting the regulatory ratio requirements for equity assets, and expanding the scope of equity investment by insurance funds.

Based on different scenario assumptions, there are three possibilities for the incremental equity investment scale of insurance funds in 2026 and 2027 [9]:

: In accordance with the goal proposed by the CSRC that large state-owned insurance companies strive to invest 30% of their annual new premiums in A-shares starting from 2025, the new stock investment of insurance funds in 2026 and 2027 will be 987.8 billion yuan and 1,076.6 billion yuan respectively, and the proportion of equity assets will increase to 23.2% and 23.7% respectively.

: This is a neutral scenario assumption. The new equity investment of insurance funds in 2026 and 2027 will be 1,152.3 billion yuan and 1,455.3 billion yuan respectively, and the proportion of equity assets will increase to 23.6% and 24.6% respectively.

: This is a positive scenario assumption. The new equity investment of insurance funds in 2026 and 2027 will be 1,561.8 billion yuan and 1,772.1 billion yuan respectively, and the proportion of equity assets will increase to 24.6% and 26.6% respectively.

Considering the current interest rate environment, if interest rates remain low for a long time, insurance companies will need to reduce the allocation of fixed-income assets and increase the allocation proportion of equity assets accordingly for the purpose of stable operation, so Scenario 2 is more likely.

From the perspective of asset allocation recommendations, the main direction of insurance funds’ stock investment in the next two years will still be high-dividend stocks in the CSI 300 constituent stocks, such as bank stocks. At the same time, among the constituent stocks of the CSI Dividend Low Volatility 100 Index, stocks that are not constituent stocks of the CSI 300 Index and have a high free float market capitalization may also receive investment from insurance funds [9]. This highly matches the characteristics of insurance funds - pursuing stable returns, focusing on safety margins, and preferring high-quality enterprises with abundant cash flow.

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Looking forward to 2026, many institutions are optimistic about the continuation of the slow bull market structure of A-shares. China Merchants Securities pointed out that as the first year of China’s 15th Five-Year Plan and the U.S. midterm election year, a key policy resonance will be formed, driving the PPI upward, and A-shares will transition from “Bull Market Phase II” to “Bull Market Phase III” driven by profit improvement [10]. Against the background of good money-making effects in the past two years and the lack of medium and high return assets, the capital supply and demand of A-shares is expected to continue to maintain a large-scale net inflow, bringing liquidity support for the realization of a slow bull market.

Fundamentally, A-shares are expected to gradually transition from liquidity-driven to profit-driven “Bull Market Phase III” in 2026, with pro-cyclical sectors taking the lead. Before the PPI turns positive, the growth rate of growth stocks will still be relatively leading; after the PPI turns positive, a further rebound is expected to bring improvement in profit expectations, and small-cap stocks with greater elasticity, especially small-cap growth stocks, will be more dominant.

Based on the current market environment, institutions generally recommend adopting a barbell allocation structure of “technological innovation + dividend assets” [10]. The core logic of this strategy is that the main line of technological innovation centered on artificial intelligence and intelligent manufacturing, and the main line of shareholder return represented by high dividends and high free cash flow, are expected to become two parallel core directions, meeting the diversified allocation needs of growth-oriented and conservative investors respectively.

Key layouts in the technological innovation direction: fields representing future technological development such as artificial intelligence and its applications, commercial aerospace, controllable nuclear fusion, autonomous driving, as well as independent and controllable industrial chains such as domestic substitution of semiconductors and high-end equipment manufacturing.

Key focuses in the dividend assets direction: high-dividend bank stocks, infrastructure operators, consumer leaders with stable free cash flow, and cycle industry leaders benefiting from supply-side reforms.

In a slow bull market, the free cash flow strategy has the following practical values:

: Use the FCFF/EBIT indicator to screen high-quality enterprises that can stably generate free cash flow. These enterprises have stronger risk resistance and valuation support amid market fluctuations.

: Focus on industries where the free cash flow/EBIT indicator remains at a high level for a long time. These industries usually have good profit quality and competitive patterns.

: Use the FCFF/P (market capitalization/free cash flow) indicator to evaluate the relative valuation level of stocks and find high-quality targets undervalued by the market.

: Combine the enterprise life cycle and capital expenditure stage to dynamically adjust expectations for free cash flow, avoiding excessive demands on short-term cash flow performance of enterprises in the high capital expenditure stage.

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Investors need to pay attention to the following risks during the investment process in 2026:

: Changes in regulatory policies such as the increase in the margin requirement for financing may have phased impacts on market sentiment and capital liquidity.

: If economic recovery falls short of expectations, the improvement in corporate profits may be lower than expected, affecting the logic of market valuation expansion.

: External factors such as the policy direction of the Federal Reserve and changes in Sino-U.S. relations may affect market risk appetite.

: If the scale of deposit migration falls short of expectations, or the pace of insurance funds entering the market slows down, the market may face pressure from insufficient incremental capital.

In response to the above risks, it is recommended that investors take the following response measures:

: Conduct balanced allocation between technological innovation and dividend assets to avoid excessive exposure to a single style.

: Select enterprises with stable free cash flow and reasonable valuations as core holdings to improve the anti-drop ability of the portfolio.

: Dynamically adjust positions and structures according to market changes and fundamental conditions, rather than holding them unchanged for a long time.

: In the context of a slow bull market, adhere to the concept of long-term investment and avoid frequent trading due to short-term fluctuations.

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The Chinese capital market in 2026 is at an important turning point. The increase of the margin requirement for financing to 100% marks the regulator’s protective attitude towards the market. The cooling of the AI market has driven investment to return to fundamentals. The maturity of 50 trillion yuan in deposits and the entry of insurance funds into the market have brought incremental capital to the market, and the free cash flow strategy has provided investors with a scientific method for screening high-quality targets.

In the first year of the 15th Five-Year Plan, core elements such as continuous policy efforts, economic bottoming out and recovery, abundant liquidity, and improved external environment have jointly built the underlying logic for the long-term upward trend of equity assets. Investors should seize this historical opportunity, adhere to the barbell allocation structure of “technological innovation + dividend assets”, deeply explore high-quality enterprises with stable free cash flow, and achieve steady appreciation of assets in the context of a slow bull market.

The core value of the free cash flow strategy lies in that it helps investors see through the fog of financial statements and identify enterprises that can truly create value for shareholders. In an environment of increased market sentiment volatility and accelerated sector rotation, this strategy can provide investors with a stable anchor, avoiding being confused by short-term hot spots, and ultimately achieving long-term sustainable investment returns.

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[1] Securities Times - 《Margin Requirement for Financing Raised to 100% to Safeguard Long-Term Healthy Development of the Market》(https://www.stcn.com/article/detail/3593575.html)

[2] 21st Century Business Herald - 《Regulators Take Action to Prevent Market Overheating: Shanghai, Shenzhen and Beijing Stock Exchanges Raise Margin Requirement for Financing》(https://www.stcn.com/article/detail/3594291.html)

[3] Eastmoney.com - 《Margin Requirement for Financing Returns to 100%: What Signal Does It Send? What’s Next for A-Shares?》(https://fund.eastmoney.com/a/202601153619695344.html)

[4] Futu News - 《Is the Era of Blind Buying Over? The Clustering Strategy of the U.S. Stock Magnificent Seven Fails, Wall Street Says: “Buy Separately” in 2026》(https://news.futunn.com/post/67221427/)

[5] Sina Finance - 《How to Use Free Cash Flow to Select Stocks?》(https://finance.sina.com.cn/stock/zqgd/2025-03-06/doc-inentpfi0710985.shtml)

[6] Eastmoney.com - 《Value Investment Methodology Based on Enterprise Free Cash Flow》(https://pdf.dfcfw.com/pdf/H301_AP202306021588020232_1.pdf)

[7] Orient Securities - 《Industry Allocation and Stock Selection from the Perspective of Free Cash Flow》(https://pdf.dfcfw.com/pdf/H3_AP202101271454757030_1.pdf)

[8] Caiwen News - 《When Interest Rates “Break 2%” Meets Stock Market Trading Volume Exceeding 3 Trillion Yuan, Will 50 Trillion Yuan in Deposits Rush into the Market?》(https://www.caiwennews.com/article/1412914.shtml)

[9] Eastmoney.com - 《Capital Market Series (1): Outlook for Insurance Funds Entering the Market》(https://pdf.dfcfw.com/pdf/H301_AP202512221806013843_1.pdf)

[10] Eastmoney.com - 《Weekly Securities | Market Predictions and Strategic Opportunities for 2026 in the Eyes of Top 10 Institutions》(https://caifuhao.eastmoney.com/news/20260109164444026181190)