China Guojin Strategy: Waiting for the Fog to Clear - China Assets Manufacturing Value Revaluation

Summary

1. The essence of the market decline: a rebound of the dollar, not a recession

This week, global asset classes generally came under pressure. On the surface, this reflects concerns over weakening demand, but the core issue is that the escalation of the US-Iran conflict has reversed the previous “weak dollar” narrative. Before the outbreak of the US-Iran conflict: the dollar was clearly weakening, capital was flowing out of dollar assets, US stocks underperformed global markets, and commodities with higher per-ton value led gains, showing high sensitivity to the dollar index (measured by beta of stock indices to the dollar). Countries/regions highly sensitive to the dollar from early this year until the conflict’s outbreak achieved higher gains; within US stocks, core tech stocks were overtaken by infrastructure and small/mid-cap companies, and the US financials’ centripetal trend experienced a significant reversal. After the conflict erupted, the dollar index surged, capital flowed back to the US, evidenced by: relative resilience of US stocks compared to global indices, and larger declines in markets highly sensitive to the dollar; in commodities, categories with higher per-ton value fell more, with industrial metals like copper and aluminum declining less than gold; combined with recent industry catalysts in AI benefiting US industries, Nasdaq began to outperform Russell 2000 again. Within A-shares, the performance of US tech-related computing power chains also improved. While concerns about stagflation and recession in the global economy are the superficial reasons, the redistribution pattern of dollar liquidity in financial assets behind the scenes may be a more influential driver of market performance.

2. Underlying logic: how macro fundamentals reflect the US and dollar’s control power

Post US-Iran conflict, among global economies, the US undoubtedly holds a relative advantage: driven by its service-oriented economy, its energy consumption per unit GDP is significantly lower than other countries, and with its own oil and gas resources, it is less affected; meanwhile, traditional energy-intensive manufacturing sectors—especially metals and chemicals—face greater shocks, with East Asian economies more impacted by shipping blockages. The underperformance of risk assets relative to the dollar and US assets reflects US control over the global order. So far, the situation appears manageable, with the Strait closure actually giving the US economy a relative advantage, reversing the trend of dollar liquidity spillover. From this perspective, whether the US-Iran conflict ends or not is only superficial; the real core is the change in control power. Looking ahead, questions include: Will the US lose control if it gets stuck in a prolonged attrition war with Iran? Will the long-term problem undermine US technological foundations (e.g., supply chains in Japan and Korea), leading to a new development? Or will emerging powers leverage industrial advantages to break through? In any case, the strong assets during the recent decline (US tech) may signal market bottoms; note that the relatively strong US stocks before Friday have already begun to decline.

3. Non-ferrous metals: pressures gradually easing

The non-ferrous metals sector faced multiple headwinds, besides the aforementioned dollar liquidity redistribution, changes in total monetary policy expectations are also key: currently, market pricing for Fed tightening is quite extreme, more pessimistic than the Fed’s own stance. The dot plot shows the Fed expects one rate cut in 2026; since late last year, the Fed has maintained a neutral stance, but market expectations for rate cuts have varied: before the US-Iran conflict, about 70% expected two or more cuts this year, a relatively optimistic outlook; after the conflict, the probability of a rate hike this year is 25%, no cut 64%, and only 7% for a cut. We believe the market’s rate cut expectations have shifted from overly optimistic to more pessimistic due to the conflict, reaching an extreme. Meanwhile, US inflation is unlikely to rise sharply: AI has suppressed wages in related sectors, limiting wage-driven inflation; energy’s weight in CPI and personal consumption has declined; and Fed Chair Powell stated that recent energy disruptions are one-off events, so inflation expectations remain low. The previous decline in non-ferrous metals may not be due to recession fears but rather the shrinking of dollar liquidity expectations and structural redistribution, with a potential reversal imminent.

4. Chinese assets: manufacturing value revaluation

Amid global energy security anxieties, China’s unique advantages are emerging: China leads in coal chemical and power equipment industries; its annual solar PV capacity (~500 GW) has energy efficiency equivalent to 1.8 billion barrels of oil, comparable to 24% of the Strait’s oil exports. Its complete energy system reduces external shocks and can supply global energy alternatives. Additionally, Chinese manufacturing giants are undervalued historically in PE and capacity value terms—PE ratios are at their lowest since 2018, and valuation of total market cap to capacity is also low, with sustained export growth underpinning revaluation. Meanwhile, domestic demand shows signs of endogenous recovery: retail sales growth stabilized in Jan-Feb, with notable performance in non-subsidized categories like tobacco, jewelry, and luxury goods, indicating consumption improvement is not solely policy-driven but also endogenous. Export remittances may be gradually shifting to domestic demand.

5. Waiting for the fog to clear

The narrative of physical asset resurgence remains intact; clearing the dollar fog reveals the true picture. Our recommendations: first, in a turbulent global landscape, energy security is crucial; this year, primary energy sources outperform secondary ones—crude oil, shipping, coal, copper, aluminum, gold, rubber; second, China’s manufacturing remains the global ballast—its physical flow is slower than financial assets, awaiting revaluation—power equipment, new energy, machinery, chemicals; third, with the reversal of suppression factors, seek structural consumption opportunities—tourism and scenic spots, flavoring and fermentation products, beer and spirits, pharmaceuticals, medical aesthetics.

Risk warnings: Domestic economic recovery below expectations; significant tightening of overseas monetary policy expectations.

Main Report

1. Reasons for market decline: seemingly due to weak demand, actually due to strong dollar

This week (March 16–20, 2026), signs of escalation in the US-Iran conflict emerged: Iran’s top security official Larijani was assassinated, Israeli airstrikes hit Iran’s South Pars gas field, multiple Middle Eastern energy facilities were attacked, and the US dispatched additional warships and troops to the Middle East. Currently, the Strait remains closed, and markets are increasingly aware that the conflict may shift from short-term to long-term, as implied volatility in crude oil futures begins to catch up with near-term implied volatility.

Due to the US-Iran conflict, markets have experienced a clear shift. Before the conflict, benefiting from the Fed’s rate cuts and a narrative of dollar distrust, the dollar weakened, capital flowed out of dollar assets, US stocks underperformed globally, and countries/regions highly sensitive to the dollar (measured by beta of stock indices to the dollar) gained more from the start of the year until the conflict’s outbreak. However, as the conflict intensified, oil prices rose steadily → US inflation fears increased → rate cut expectations reversed → dollar strengthened, US Treasury yields rose. The previous weak dollar narrative was overturned, capital flowed back into dollar assets, US stocks outperformed globally, and countries/regions sensitive to the dollar experienced larger declines after the conflict.

On the other hand, US stock styles also shifted: before the conflict, Russell 2000, more correlated with the US economic cycle, outperformed S&P 500 and Nasdaq; after the conflict, combined with recent AI industry catalysts, Nasdaq began to outperform. Sector performance globally followed a similar pattern: before, materials outperformed, but now technology sectors are gaining favor, with materials broadly declining.

Commodity-wise, a similar phenomenon is observed: since the US began its rate cut cycle in 2024, commodities with higher per-ton value have risen more—driven by commodity-finance attributes. Now, this pricing driven by financial attributes is reversing: higher per-ton commodities have fallen more. If demand weakness caused the decline, copper and aluminum should have fallen more than gold; but in reality, gold, benefiting from dollar spillover, declined the most, mainly due to dollar strength. The previous commodity rally driven by financial attributes is ending; future opportunities will depend more on demand-driven factors.

Thus, aside from crude oil, most asset classes declined this week. Our understanding is: While global stagflation and recession fears are superficial reasons, the underlying driver may be the redistribution of dollar liquidity in financial assets.

2. Reasons for market shifts: macro fundamentals reflecting US and dollar control

The recent strength of US stocks relative to other countries stems mainly from two factors: first, in the US-Iran conflict, Iran was hit harder, and the US faced no significant disadvantage; second, benefiting from its service-oriented economy, the US’s energy consumption per unit GDP is lower, and as a major oil producer, its energy impact is smaller, while East Asian economies are more affected by shipping blockages. The underperformance of risk assets relative to the dollar and US assets reflects US control over the global order. So far, the situation appears manageable, with the conflict’s surface status within US-Israel control; the closure of the Strait actually benefits the US economy, reversing dollar liquidity spillover.

The global style shift also relates to: sectors with higher energy consumption—mainly manufacturing—favor traditional energy use; sectors with lower energy use—mainly non-manufacturing—are preferred now. Notably, excluding structural shifts, the share of crude oil consumption relative to GDP has increased significantly. If oil prices rise further, this ratio could return to levels seen between 2005–2014, indicating rising energy importance in the global economy.

Looking ahead, questions include: Will the US lose control if it gets stuck in a prolonged conflict with Iran? Will the long-term issue undermine US technological foundations (e.g., supply chains in Japan and Korea), leading to new developments? Or will emerging powers leverage industrial advantages to break through? In any case, the strong assets during the recent decline (US tech) may signal market bottoms; note that the relatively strong US stocks before Friday have already begun to decline.

3. Non-ferrous metals: the most adverse phase may have passed

The non-ferrous metals sector faced multiple headwinds, besides dollar liquidity redistribution, changes in monetary policy expectations are also key: currently, market pricing for Fed rate hikes is quite extreme. The dot plot from March’s FOMC shows the Fed expects one rate cut in 2026, similar to December. Since late last year, the Fed has maintained a neutral stance, but market expectations for rate cuts have varied: before the conflict, about 70% expected two or more cuts this year, a relatively optimistic outlook; after the conflict, the probability of a rate hike is 25%, no change 64%, and only 7% for a cut. We believe the market’s rate cut expectations have shifted from overly optimistic to more pessimistic due to the conflict, reaching an extreme. Recently, concerns about Fed tightening pressures may be easing; the key now is whether US inflation will rise significantly.

Currently, US inflation may not rise sharply: (1) union coverage is at historic lows, weakening labor bargaining power, making wage-driven inflation like in the 1970s unlikely; AI has also suppressed wages in related sectors, further restraining service inflation. (2) The share of energy in personal consumption and CPI has declined, weakening oil’s impact on inflation. (3) Fed Chair Powell stated that recent energy disruptions are one-off events, so inflation expectations remain low. If US inflation does not rise significantly, the Fed’s rate cut cycle remains relatively certain.

4. Chinese assets: the value of manufacturing capacity is being re-evaluated

Amid global energy security concerns, China’s advantages are emerging: China leads in coal chemical and power equipment industries; its annual solar PV capacity (~500 GW) has energy efficiency equivalent to 1.8 billion barrels of oil, comparable to 24% of Strait’s oil exports. Its complete energy system reduces external shocks and can supply global energy alternatives. Also, after structural adjustments, China’s oil consumption as a share of GDP is significantly below global levels.

Meanwhile, the revaluation of China’s manufacturing capacity is just beginning. Comparing with overseas manufacturing giants, PE ratios of leading Chinese manufacturing firms are at their lowest since 2018, and valuation of total market cap to capacity is also low. Since 2022, overseas giants have been revalued due to AI industry cycles and geopolitical conflicts, while Chinese leading firms, burdened by domestic overcapacity, have seen valuations decline. High-growth segments are more resilient but still priced below overseas peers. Continuous export growth supports the revaluation foundation.

Additionally, China’s domestic demand shows signs of endogenous recovery: retail sales growth in Jan-Feb was 2.8% YoY, up from 0.9%, ending a 7-month decline; service retail and luxury goods performed well, indicating consumption is improving beyond policy stimulus. Non-subsidized categories like tobacco, jewelry, and apparel also performed strongly, suggesting internal demand recovery.

5. Waiting for the fog to lift

The narrative of physical asset resurgence remains valid; clearing the dollar fog reveals the true picture. Our recommendations: first, in a turbulent global environment, energy security is paramount; this year, primary energy sources outperform secondary ones—crude oil, shipping, coal, copper, aluminum, gold, rubber; second, China’s manufacturing capacity is a key asset—its physical flow is slower than financial assets, awaiting revaluation—power equipment, new energy, machinery, chemicals; third, with the reversal of suppression factors, seek structural consumption opportunities—tourism, scenic spots, flavoring and fermentation, beer and spirits, pharmaceuticals, medical aesthetics.

6. Risk warnings: Domestic economic recovery may underperform expectations; overseas monetary policy tightening could be more severe than anticipated, risking market declines.

(From Guojin Securities)