Daniel Zhang: Winning is not losing after a long battle

I. Four Key Concerns for the Spring Festival and Their Investment Significance

(1) A New Round of Tariffs Between China and the U.S.

On February 2, Trump announced a 10% tariff increase on China, reigniting the China-U.S. tariff dispute. Since the first round of trade conflicts in 2018, both domestically and internationally, it has been widely believed that China is at a disadvantage in technology, economy, and finance, leading to a series of pessimistic interpretations. However, my view is that "not losing after a long battle is a win," meaning that in a special strategic game, the disadvantaged side, after rounds of competition, remains at the table, and the technological gap has not been contained but continues to break through, which is a form of phased victory.

During the first round of China-U.S. tariff friction in 2018, there were significant concerns about the future of Chinese technology, especially in the semiconductor field. However, after several years, China's semiconductor industry, including in the military sector, is still advancing rapidly and has not been completely contained. Now we are facing Trump 2.0, which is the second large-scale tariff shock. If we are still at the table in one or two years, not losing after a long battle can be discussed, and discussions can change the expectations of the outcome. In summary, not losing after a long battle is a win.

(2) DeepSeek Exceeds Expectations

During the holiday, DeepSeek gained attention, achieving near o1 performance with lower inference costs, greatly exceeding market expectations. At the industry level, there is a focus on the reconstruction of investment logic in the AI industry. However, from a macro perspective, we believe the greatest significance of DeepSeek is that it corrects the market's linear projection of the U.S. AI's cliff-like lead. This means that the competition between China and the U.S. in cutting-edge technology remains intense, indicating that the reconstruction and transition of the global order will continue, rather than a rapid one-sided shift. This unresolved tension is expected to drive gold prices further upward.

(3) Economic Turning Point Requires Patience

From the Spring Festival consumption data, the total volume is high, but the trend of quantity being better than price continues. Coupled with the January PMI data before the festival, where manufacturing, construction, and services are all weaker than seasonal trends, the fundamental turning point still requires waiting. This also adds a stronger hue to the China-U.S. competition.

(4) Global Gold Prices Reach New Highs

During the holiday, gold prices reached new highs again. We have always believed that the most important logic for gold currently is not the Federal Reserve's monetary policy, inflation, and other macro "small logics." We have used the main quantitative models of the World Gold Council for calculations, and the current major macro variables (including gold supply and demand, inflation, monetary policy, central bank purchases, etc.) cannot explain why gold prices frequently exceed expectations.

We believe that the important factor driving the continuous rise in gold prices is the reconstruction of the global order. We proposed a strategic bullish outlook on gold in 2023 (see "Gold: A Century, A Decade, Next Year") and still maintain this view. The underlying logic is that if the global order is highly stable, a wise move is to hold the credit currency of the order-exporting country and integrate into that order, rather than holding gold. Conversely, when the global order is being reconstructed, the old order is gradually weakening, and the new order is rising, with the competition between both sides still unclear, gold is often the better choice. This rule has been validated in the past 200 years of major power transitions, including the transitions between the Netherlands and Britain, and between Britain and the United States. Therefore, currently, the reconstruction of the global order is the main pricing logic for gold, and we still hold a strategic bullish outlook on gold for the next decade (starting from 2023), and physical gold bars are even better.

II. Current Macroeconomic Logic from Three Perspectives

(A) Perspective of Great Power Competition: The Key Lies in the Household Sector

In the past 2-3 years, the global trading logic has been to go long on high inflation in the United States and short on low inflation in China. When will this logic reverse? I believe we need to focus on two aspects: first, profitability; second, valuation.

Regarding profitability, the key lies in the household sectors of China and the U.S. Recently, both the U.S. stock and housing markets have been rising, leading to an expansion of household balance sheets, which is also the source of resilience in the U.S. economy. In contrast, China's housing prices are weak, the stock market is volatile, and households are experiencing net losses in wealth, which puts pressure on consumer spending. Therefore, the state of the household sectors in both countries profoundly affects economic and profitability trends, and a shift in profitability requires a change in household wealth status.

As for valuation, the principle of "not losing in a prolonged battle is winning" also applies. Valuation and trading sentiment will be linked to "national strength premium." In technological and military competition, China does not need to surpass the U.S. in all areas; it only needs to maintain strategic follow-up and avoid excessive lag in specific fields. By staying in the game, it can effectively deter its opponents, which is, in fact, a form of victory. Against this backdrop, other countries around the world should reassess their cooperative relationships with China, and overseas capital should also reevaluate the allocation value of Chinese assets. This may become an important consideration in the coming years.

(B) Supply and Demand Perspective: The Key Lies in the Demand Side

After September 2024, the trading logic in the capital markets will mainly revolve around shorting the export chain and going long on the policy chain, but recently there has been a dilemma, appearing somewhat confused. Market sentiment has shifted from exuberance to contemplation. From our current standpoint, our view is to believe in the policy direction from the top down while remaining cautious in verifying the pace. This is because the policy direction has already begun trading since September-October last year, and in terms of verification pace, we need to be careful and objectively address market changes.

2025 will still be important in terms of price versus volume. The economic growth target is likely to be set at 5%, and there should be no doubt about achieving this target; the key is how to achieve the 5%, which determines how prices will evolve. If the production side grows at 5%, but the demand side—investment, consumption, and fiscal expenditure—cannot achieve a growth rate above 5% in areas exceeding 30 trillion, it means that the issue of oversupply still exists, and prices will remain under pressure. Conversely, if the supply side grows slightly slower, but certain areas of the demand side grow above 5%, then the price environment may improve, and nominal GDP and profit centers will also rise accordingly.

Therefore, the key lies in which of the three major areas on the demand side can achieve growth above 5%:

1) Regarding fiscal expenditure, considering a budget deficit rate of 4%, special bonds of 4.4 trillion, and special treasury bonds of around 2 trillion, the broad fiscal expenditure can reach a level of 38 trillion, and achieving a growth rate of 4.5% is already challenging (mainly due to constraints from land sale revenues). To break through a growth rate of 5%, additional funding sources are needed, such as the central bank's profit remittance exceeding 500 billion, etc2) Regarding investment, observe fixed asset investment, which amounts to 50 trillion, with real estate and non-real estate split 80/20. Among the 40 trillion in non-real estate, the investment in major projects is in the tens of trillions, so the growth rate of major project investment has a significant impact on overall investment. From the current information, it may be difficult to see a significant increase. First, the Central Commission for Discipline Inspection has deployed anti-corruption work in 10 major areas, including bidding processes and other fields related to major project investment, which may create certain constraints. Second, observing local two sessions, the growth rate of major projects announced in various regions shows no significant increase compared to last year, so achieving over 5% growth in the investment sector may also be challenging.

3) Consumption, under the backdrop of weak endogenous momentum, mainly considers external policy stimulation. Referring to the 2024 consumer goods renewal policy, the leverage ratio is around 2 times, and this figure is likely to decrease in 2025. Assuming the leverage ratio remains at 2 times in 2025, whether the retail sales growth can exceed 5% depends on fiscal strength. If fiscal support is 300 billion, then retail sales growth may be around 4%. If it is 500 billion, then retail sales growth may reach around 5%.

In summary, regarding the price recovery in 2025 (i.e., the reversal of profits), we currently believe we still need to wait. From the leading indicator we constructed, the deposit scissors gap between enterprises and residents, we do not see a clear upward turning point at present.

(3) External risk perspective: A different path may be explored

Regarding the tariff risks that the market is most worried about, we believe they can be slightly downplayed. First, the empty export chain has already self-evolved over the past three months. Second, Trump's actions are unpredictable (only Trump knows his own rhythm). Therefore, we can take the opposite approach and look for categories that have micro-resilience regardless of how China-US relations evolve. We screened through nearly ten thousand categories in China-US trade using four major criteria:

Criterion 1: Strong price advantage, meaning that even with a 60% tariff increase, Chinese goods are still cheaper than overseas prices.

Criterion 2: Strong supply advantage, meaning that China has a significant supply advantage in a certain industry, making it difficult to obtain equivalent scale supplies from overseas. Under this industry structure, Chinese manufacturers can pass the tariff pressure onto the demand side. The specific screening criteria are twofold: first, China's supply accounts for over 30% of the global total; second, the supply of this product is highly concentrated, with CR3 exceeding 60%.

Criterion 3: Sufficient market diversification, meaning that the US is not the main end market for this product (it may be sold to Asia, Africa, Latin America, etc.), and the impact of US tariffs on this product is minimal. The specific screening criterion is that the proportion of goods exported from China to the US does not exceed 5% of the total export volume of that product, and the US's imports of that product do not exceed 8% of the global total imports of that product.

Criterion 4: Products that received tariff exemptions during the 2018-2019 trade conflict.

Based on the above criteria, we can filter out products from nearly ten thousand that meet 4, 3, or 2 criteria. These categories are worth paying attention to, and we welcome everyone to read the report "Finding the 'Stable Stars' of Export Products."**

3. Summary of Views

Based on the above analysis, we believe that the strategic height of China's capital market is composed of three major inflection points:

1) Short-term inflection point of the US-China profit fundamentals—looking at "the state of the household balance sheets." This refers to when the wealth of Chinese households stops declining (which determines the start of economic cycle recovery) and when the wealth of American households stops growing (once this happens, the tight labor market and wage growth will collapse). Both China and the US are actively taking policy measures in response, which is also an important reason for our decision-makers to "stabilize the real estate and stock markets."

Currently, domestic data verification is still in a vacuum period. From the current signals: the issuance of fiscal bonds in January-February is relatively slow, there are constraints on the income side from land sales, there is no significant increase on the investment side, and the improvement in retail sales is mainly driven by subsidy policies, with no certain force exceeding 5% to provide balanced support for the economy. Therefore, we tend to believe that the overall stock market may present a slightly volatile trend, with a stabilizing fund providing a bottom. Structurally, the artificial intelligence and technology domestic substitution chain boosted by DeepSeek is expected to develop an independent market, and categories in the export chain that are insensitive to tariffs are worth paying attention to, while bonds still lean towards a bullish mindset.

2) Mid-term valuation inflection point—"national strength premium." In the strategic game of major powers, technology is at the core of the core, determining the level of military, industrial, and financial development. DeepSeek has corrected the US-dominated rhythm and the linear expectation of the US's cliff-like lead in AI. As the side considered to be "weaker" in technology, the period of unilateral dominance by the US is coming to an end. We can endure this, and a prolonged struggle without losing leads to a situation where we can negotiate; not losing and being able to negotiate signifies a "win" in a specific phase. This will change the expectations of the endgame scenario, thereby affecting global capital flows and long-term strategic allocation bets. This process essentially determines the "national strength premium" that influences mid-term valuations. Once a consensus is formed on the revaluation of the national strength premium, many macro dilemmas currently under static extrapolation may open up new situations.

3) The landing of long-term order changes. Currently, the old order is gradually weakening, while the new order is still difficult to establish peacefully. It is precisely at this moment of "you punch, I kick" where the outcome is still undecided that the ten-year strategy is bullish on gold, as referenced in the report "Gold: A Century, A Decade, Next Year."

Author of this article: Zhang Yu S0360518090001, original source: Yi Yu Zhong De,Original Title: "Daniel Zhang: Winning is not losing after a long battle - Daniel Zhang's Monthly Meeting Minutes No. 105"

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