The month of October did not traditionally hold any particular significance in the stock market calendarHowever, for the Chinese A-shares in 2020, this month could be seen as a critical juncture, a point of sensitivity where underlying economic currents began to surfaceThis period witnessed the repercussions of drastic monetary easing executed in the first half of the year, which had resulted in a surge of liquidity but began to show signs of 'hemorrhaging.' As funds dwindled, the implications for market players grew sharper.

To provide context, global central banks reacted to the pandemic by flooding the economy with liquidity, aiming to cushion the impact on growthFor a time, this liquidity rush led to inflated stock market valuations, but such artificial conditions are inherently unsustainableChina, as one of the first countries to not only control the virus but also resume economic activities, began reversing its overly accommodative monetary policy as the economy stabilized

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This transition was expected and, indeed, essential for returning to a more normalized economic state.

Since July, market interest rates have been on the riseAnalysis of interbank lending rates over the past six months reveals that the levels experienced a historic low between April and June, and the subsequent ascendancy began in July, reaching heights reminiscent of 2019 by SeptemberThe shift was palpable as the financial ecosystem transitioned from an environment of excessive liquidity to one that ballooned into a more sustainable norm.

Moreover, a significant influx of cheap credit during the first half of the year found its way into various sectors, including the stock market and real estateThe resulting conditions fostered a temporary bull marketHowever, as the second half commenced, a series of stimulus policies began to unwind, leading to volatility and systematic corrections in stock prices

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The ambition of retesting the 3458 peak of the year seemed to drift further out of reach.

Similarly, real estate regulations tightenedMeasures deployed by multiple cities, such as purchase limits, added pressure that became evident in dwindling property values observed in places like Tianjin, where prices had recently dippedThe financing capabilities of real estate firms contracted, witnessing a substantial 25% decreaseConsequently, the inability to secure funding meant these firms likely would reduce investments, contributing to an overall decline in national financing and investment levels, which in turn diverted potential liquidity away from the stock market.

Post the National Day holiday, should there be no resurgence of COVID-19 outbreaks across the nation, a more aggressive return to work and production could emerge, drawing liquidity back towards the real economy, sparking fresh discussions about potential growth avenues

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Yet, on one hand, the reduction in fund supply stood in stark contrast to the surging capital demands within the stock market.

Now emerging on the horizon, two so-called "blood-sucking" unicorns, Ant Group and JD Technology, are set to debut on the A-share market in October, stirring anticipation and anxiety alikeThe stark financing figures projected for these two enterprises may not seem overwhelming on the surface—approximately 88 billion USD for Ant Group and 20 billion USD for JD Technology, well within market thresholdsHowever, it is important to note that their entry into the market could create substantial competition for liquidity.

Ant Group’s valuation is expected to approach 30 trillion yuan, with JD Technology exceeding 500 billionAs these titans occupy market share and absorb trading capital, the collective liquidity within A-shares, currently averaging under 700 billion, is at risk of leaner conditions

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A decline in stock prices for either of these newly listed companies could trigger a ripple effect, inciting broader corrections in indices across China's stock markets.

This emerging situation implies a growing imbalance between diminishing supply and increasing demand for capital in the stock marketplace, hinting at a potential decline in overall market valuationSuch dynamics can also render investors vulnerable to shifts in market sentiment, effectively serving as catalysts for trend alterations.

The onset of October brings with it the onset of winter in parts of Europe, raising concerns over the possibility of a second wave of the virusHistorical patterns suggest that a resurgence could ensue, and with the United States, already at elevated market levels, potentially marking the onset of a correction phase, global markets, including those in Europe and Asia, may find themselves affected in succession.

In response to external pressures, short-to-mid-term investors within the A-shares could adopt a more cautious posture, potentially opting to withdraw from active trading, as sentiment turns sour leading to short-term market disadvantages.

Furthermore, the already tenuous geopolitical climate between the United States and China may fuel heightened tensions, as each side strives to emphasize their respective importance in the global landscape

This contest could pave the way for a slew of policies targeting technological enterprises in China and curbing trade surpluses, further complicating the economic picture.

The interplay of multifaceted factors could propel the stock market back under pressure, creating uncertainty amongst analysts and investors alikeThe critical question remains: how substantial could the potential market correction be this time around?

In considering the implications, the combined market capitalization of the Shanghai and Shenzhen exchanges currently sits at an impressive 73 trillion yuanWith Ant Group's IPO, this total could spike upwards, leading to an estimated 76 trillion yuanWith the impacts of the COVID-19 pandemic on the Sino economy, estimates for the total GDP are hovering around 100 trillion yuanPrevious ratios of market capitalizations relative to GDP suggest a median range between 65% and 75% under normal monetary conditions.

Considering a pessimistic outlook, should asset securitization ratios dip to around 65%, we might see a contraction in market valuation from 76 trillion yuan down to approximately 65 trillion, corresponding to a 14% decline, suggesting the A-share index could retreat towards an approximate 3000-point level.

On the brighter side, should the market manage to stabilize close to a 75 trillion yuan valuation, a likely trading range could float around the 3300-point mark