Li Xunlei: Do not have any illusions about the U.S., China will continue to cut interest rates this year, optimistic about gold, there are two opportunities in the stock market

On the afternoon of June 25, Li Xunlei, Chief Economist of Zhongtai International, made an outlook on China's economic and policy trends for the second half of the year at the Ping An Fund mid-term strategy meeting.

Li Xunlei has been engaged in macroeconomic, financial, and capital market research for over thirty years and is one of the earliest experts in securities market research in China, recognized as the founder of the sell-side research system in the Chinese securities industry.

The investment notebook representative summarized the key points as follows:

1. I think we should not have any illusions about the United States, believing that we might return to good relations or that a close cooperative relationship can be re-established between China and the U.S. I think the possibility of this is quite low.

2. The competition with the United States is not only in the field of tariff trade but may also extend to technology and finance. Our preparations are relatively sufficient.

3. In the second half of the year, some new incremental policies should be introduced. These incremental policies will involve both consumption promotion and investment, taking a multi-pronged approach.

4. The target fiscal deficit rate mentioned in this year's government work report is around 4%, and it may be further increased, or special long-term government bonds may be issued to continue increasing issuance. The possibility of increasing by 500 billion or 1 trillion is still there.

5. The long-term trend of interest rate decline has not changed, and interest rate cuts will continue.

6. Regarding the Chinese bond market, there are not many opportunities this year, as bond yields decreased significantly last year, but looking ahead, there are still investment opportunities.

7. In the A-share market, I think the main investment opportunities lie in technological advancements, particularly in artificial intelligence, which is driving a new round of technological revolution, bringing a series of opportunities. For example, in areas such as chips, robotics, and AI applications, the impact is profound and long-term.

There are two thematic investment opportunities...

1. I am optimistic about the long-term trend of gold. From an asset allocation perspective, gold has significantly outperformed prices and the real estate market in the past, with its increase almost consistent with the S&P 500's increase excluding dividends.

Li Xunlei believes that although China faces dual pressures from a deteriorating external environment and obstacles to internal circulation, the resilience of the Chinese economy is strong. Fiscal and monetary policies will continue to be accommodative, and incremental policies will be introduced in the second half of the year. There is still room for increasing the deficit and borrowing, and foreign capital's proportion in A-shares is still relatively low, leaving significant inflow space. The development space of the capital market is quite large.

The following is the essence compiled by the investment notebook representative (WeChat ID: touzizuoyeben), shared with everyone:

Do not have illusions about the U.S., the possibility of returning to good relations is low

What we are currently undergoing is multiple negotiations between China and the U.S., which overall brings many uncertainties.

From a long-term perspective, the U.S. also faces inflationary pressures and debt risks, but how this will ultimately play out is still uncertain.

After all, the U.S. remains a global economic superpower, with strong military and political influence, so I cannot assert that the U.S. economy will decline sharply Overall, it has brought negative effects to the world, worsening China's external environment.

That is to say, our country is also facing dual pressures from a deteriorating external environment and obstacles to internal circulation.

First, looking at Trump's cabinet members, the forces to contain China are still relatively strong, so I think we should not have any illusions about the United States, believing that we might return to good relations or that a close cooperative relationship can be re-established between China and the U.S. I think the possibility of that is quite low.

Therefore, we must adhere to our principles and not back down, and we should persuade others with reason. Of course, his policies do have variability, the so-called Trump "TACO deal," and I believe there is still some variability.

Thus, the contest with the United States is not only in the realm of tariff trade but may also extend to technology and finance. In this regard, China has been preparing since the onset of the China-U.S. trade disputes in 2018, so our preparations are relatively sufficient.

This year's export growth may experience negative growth

Negotiations between China and the U.S. are ongoing, but regardless of whether they succeed or not, I believe the negative impact on the Chinese economy still exists.

In the second half of this year, our foreign trade pressure will significantly increase. I estimate that the export growth for the entire year may experience negative growth, which will also drag down GDP to some extent.

The decline in exports is direct, and there are also indirect effects, such as the increase in our banks' non-performing loan ratios, and some small and medium-sized export enterprises will face certain survival pressures. This will also promote the rise in banks' non-performing loan ratios.

New incremental policies will be introduced in the second half of the year, there is a possibility of issuing 5 trillion/10 trillion long-term special government bonds

At the same time, employment pressure is also an issue. We actually mentioned the employment pressure problem last year. This year, I think with the decline in foreign trade growth, employment related to foreign trade will also be affected.

The so-called "new three items" related to foreign trade will see a decline in investment growth in the manufacturing sector. Under the existing pressure of overcapacity, a further decline in export growth will exacerbate the overcapacity issue. We need to pay attention to the problem of insufficient effective demand that we may face.

Although our Central Economic Work Conference and government work report have proposed to vigorously promote consumption, consumption itself is a slow variable; it will not happen overnight and will not yield immediate results.

In this regard, we may face a long-term task of boosting consumption. To enhance consumption, we still need to increase residents' income. Increasing residents' income may also require a relatively long time.

In this regard, I think China's economic structure needs to shift from the past investment-driven model to a consumption-driven model, which will take a considerable amount of time.

How to raise residents' income levels may require a multi-faceted approach. It is not only about directly increasing residents' income but also about increasing employment and improving social security levels.

The pressure we face is actually due to the overall high level of macro leverage. Although we are currently a developing country, our macro leverage level is already leading globally The so-called macro leverage ratio refers to the proportion of the debt balance of the household sector, government sector, and corporate sector to GDP.

In this regard, on one hand, it is necessary to optimize the structure of fiscal expenditure, and on the other hand, to further strengthen macroeconomic regulation and control, releasing more proactive policies, including fiscal policy and monetary policy.

Therefore, I think there will still be some new incremental policies introduced in the second half of the year. These incremental policies will involve both promoting consumption and investment, taking a multi-pronged approach.

The target fiscal deficit rate mentioned in this year's government work report is around 4%, and it may be further increased, or special long-term government bonds may be issued to continue increasing issuance.

Special long-term government bonds do not directly reflect in the fiscal deficit rate; the fiscal deficit rate may remain stable, but special long-term government bonds will further increase the quota, either by increasing by 500 billion or by 1 trillion, I think this possibility still exists.

The downward trend in interest rates remains unchanged, and interest rate cuts will continue

In terms of monetary policy, there is currently downward pressure on prices, and the government work report also proposed to allow prices to rise reasonably. To achieve price recovery, I believe there is still room for interest rate cuts, so the reduction in interest rates is a long-term driving force.

Our real interest rate level has not significantly decreased compared to 20 years ago, but economic growth has significantly declined. Therefore, there is still room for gradually lowering the reserve requirement ratio and interest rates, making monetary policy more accommodative, creating a good environment for the capital market and the real economy.

Currently, the RMB exchange rate against the US dollar is showing an upward trend. Due to Trump's tariff increases, there is uncertainty in the United States. Since the beginning of this year, the pressure on US Treasury bonds has increased, as inflation in the US has led to rising US Treasury yields. This year, about 9 trillion US dollars of US Treasury bonds are set to mature, necessitating borrowing new to pay old.

Although the cost of old financing is relatively low, borrowing new will increase costs. This raises concerns about the creditworthiness of US Treasury bonds, and the US dollar is also under pressure.

Therefore, taking advantage of the current increased pressure on the depreciation of the US dollar, the pace of RMB internationalization can be accelerated. This will also facilitate China in speeding up its opening-up process, attracting more foreign investment into the domestic real economy and even the capital market.

Thus, the pace of reform and opening up in this regard can also be further accelerated, and there is still considerable room for development in the capital market. Currently, the proportion of foreign investment in the A-share market is still relatively low, peaking at nearly 4% of the A-share market value.

Currently, it is only about 2.36%, and I think it can be further increased. The long-term downward trend in interest rates has not changed, and interest rate cuts will continue. I believe this is also beneficial for the capital market. In this context, I think there are still many investment opportunities.

Opportunities in the bond market this year are limited, while there are two opportunities in the A-share market

Regarding the Chinese bond market, there are limited opportunities this year, as bond yields decreased significantly last year, but in the long term, interest rates will continue to decline. Therefore, the opportunities in the bond market, in the long run, are still relatively abundant.

For the A-share market, I think the investment opportunities mainly lie in technological advancements, with progress and application in artificial intelligence driving a new round of technological revolution, bringing a series of opportunities. For example, in areas such as chips, robotics, and artificial intelligence applications, the impact is profound and long-term So we need to stand at the forefront of the Fourth Industrial Revolution—centered around artificial intelligence, including innovative drugs, robotics applications, technology, and various other aspects, which I believe will lead to industrial upgrades and progress.

Our thematic investment opportunities include, first, the vast space for domestic substitution under the requirements for supply chain security. Due to the sanctions imposed by the United States on China, we need to be independent and autonomous, driving the development of related industries through domestic substitution, such as in the electronics, computer, and communications sectors, where there are comprehensive opportunities for domestic substitution.

Another theme I think we should focus on is the large consumption sector, as the past investment-led model is difficult to sustain. China is significantly different from other countries; over the past thirty years, the contribution of investment to GDP in China has been around 40%, approximately 42%, while the global average is only 20%. As the growth rate of investment declines, the growth rate of consumption must rise to achieve stable growth targets. Therefore, I believe the large consumption sector, especially new consumption, is more promising.

At the same time, against the backdrop of an aging population, there are also many opportunities in the pharmaceutical and biotechnology industries. Recently, the government proposed "two new" initiatives, namely large-scale equipment updates and the replacement of old consumer goods with new ones, to promote consumption domestically. Therefore, I believe there are still many opportunities in these government-led consumption areas.

On the other hand, traditional industries need to be updated and iterated, and there will still be many opportunities for mergers and acquisitions. With economic development, differentiation will become increasingly evident. Looking at the seven giants in the United States, the reason they have been able to develop and grow so quickly is mainly through large-scale mergers and acquisitions. For example, Apple, Microsoft, Google, Amazon, NVIDIA, Facebook, and Tesla have all had merger and acquisition counts in the triple digits. We have not done much in this area; we should make better use of the capital market platform, increase the intensity of mergers and acquisitions, and enable companies to strengthen and grow rapidly. Therefore, I believe there are still many opportunities for mergers and acquisitions in the capital market in the future, which are worth participating in and seizing.

Optimistic About Long-term Gold Trends

Finally, let's talk about precious metals. From a risk-averse perspective, gold has performed relatively strongly over the past decade, mainly due to increasing global uncertainty and rampant monetary supply, along with ongoing military conflicts.

Gold possesses both precious metal attributes and currency attributes, providing value preservation and risk-averse functions. Therefore, I remain optimistic about the long-term trend of gold.

From an asset allocation perspective, gold has significantly outperformed inflation and the real estate market in the past, with its increase almost in line with the S&P 500's increase excluding dividends.

Summary

I believe the global economy will enter a phase of low growth and high volatility in the future, while China's economic resilience remains relatively strong.

In the second half of this year, new incremental policies for the Chinese economy are expected to be introduced. For economic growth, we still need to achieve a growth target of 5% this year. The proactive and accommodative fiscal and monetary policies will continue.

Regarding major asset allocation, I still remain optimistic about the bond market, as the downward trend in interest rates is a long-term trend. Although there are not many opportunities in the government bond market this year due to the significant decline in government bond yields last year, there are still investment opportunities looking ahead The stock market is more driven by structural opportunities, which come from the high-quality growth of the Chinese economy, the industrial transformation and upgrading brought about by technological development, and the differentiation of enterprises. A few companies can strengthen and grow, emerging industries rise, and there are more opportunities. On the other hand, against the backdrop of increasing global economic conflicts and low growth with high volatility, gold still plays a significant role as a safe-haven and value-preserving tool, so I remain optimistic about the long-term investment value of gold.

Source: Investment Workbook Pro Author: Wang Li

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