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 major asset classes generally came under pressure. On the surface, it appears to be concerns over weakening demand, but the core contradiction lies in the escalation of the US-Iran conflict reversing 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, highly sensitive to the dollar index (measured by beta of stock indices to the dollar index). Countries/regions with higher sensitivity to the dollar index achieved higher gains earlier this year before the conflict. Internally within US stocks, core tech stocks were also overtaken by infrastructure and small/mid-cap stocks, and the US financials experienced a significant reversal of their centripetal trend. After the conflict erupted, the dollar index surged, capital flowed back to the US, reflected in: from global stock indices, US stocks showed resilience, while markets highly sensitive to the dollar fell more; from commodities, categories with higher per-ton value declined more, with industrial metals like copper and aluminum falling less than gold. Coupled with recent industry catalysts in the US AI sector, 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 market driver.

2. Underlying logic: the reflection of US and dollar control through fundamental differences

After the US-Iran conflict erupted, among global economies, the US undoubtedly holds a relative advantage: driven by a service-oriented economy, the energy consumption per unit of GDP is significantly lower than other countries, and with its own oil and gas resources, the US was less affected; meanwhile, traditional energy-intensive manufacturing sectors—especially metals and chemicals—faced 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 dominance over the global order. So far, the situation appears manageable within US-Israel scope, and the closure of the strait actually benefits the US economy relative to the global, reversing the spillover of dollar liquidity. From this perspective, whether the conflict ends or not is just superficial; the 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 over Iran? Will prolonged issues undermine the physical foundations of US technology (e.g., supply chains in Japan and Korea), leading to a new development? Or will new forces leverage industrial advantages to break through? In any case, the strong assets during the 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: the dot plot shows the Fed maintaining a single rate cut in 2026, but market expectations have shifted to no cut or even rate hikes. This expectation gap has room for correction. Meanwhile, US inflation is unlikely to rise sharply: AI has suppressed wages in related sectors, limiting wage-driven inflation spirals; energy’s weight in personal consumption and CPI has decreased significantly; and long-term inflation expectations remain stable. The previous decline in non-ferrous metals may not be due to recession but rather the contraction of dollar liquidity expectations and redistribution, with a potential reversal imminent.

4. Chinese assets: revaluation of manufacturing value

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) equates to energy efficiency of about 18 million barrels of oil, while the Strait of Hormuz exports about 730 million barrels annually—China’s PV capacity is equivalent to 24% of that. China’s energy system robustness reduces external shocks and can provide 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 total market value relative to capacity is also undervalued, with ongoing export growth supporting revaluation. Domestic demand shows signs of endogenous recovery: retail sales growth in Jan-Feb stabilized at 2.8% YoY, up from 0.9%, ending a 7-month decline; non-subsidized categories like tobacco, jewelry, and apparel performed well, indicating consumption recovery is not solely policy-driven. Export settlement may be gradually shifting to domestic demand.

5. Waiting for the fog to clear

The narrative of physical asset rise is not over; clearing the dollar fog reveals the true picture. Recommendations: first, energy security is crucial amid global turmoil; this year, primary energy sources outperform secondary ones—focus on crude oil, oil shipping, coal, copper, aluminum, gold, rubber; second, China’s manufacturing remains the global ballast—though physical flows are slower than financial flows, a revaluation is coming—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 warning: domestic economic recovery below expectations; significant tightening of overseas monetary policy expectations.

Main Report

1. Reasons for market decline: seemingly demand weakness, actually dollar strength

From March 16 to 20, signs of escalation in the US-Iran conflict emerged: assassination of Iran’s top security official Larijani, Israeli airstrikes on Iran’s South Pars gas field, attacks on energy facilities across the Middle East, US deploying additional warships and troops to the region. Currently, the Strait of Hormuz 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 US rate cut cycle and distrust in the dollar, the dollar weakened, capital flowed out of dollar assets, US stocks underperformed globally, and countries/regions highly sensitive to the dollar index (measured by beta) achieved higher gains early this year. But as the conflict intensified, oil prices rose, US inflation fears grew, rate cut expectations reversed, and the dollar strengthened with rising US bond yields. The previous narrative of a weak dollar was reversed; capital flowed back into dollar assets, US stocks outperformed globally, and highly dollar-sensitive markets declined more after the conflict.

Meanwhile, US stock styles 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-wise, outside energy, materials outperformed before, but now tech dominates, with material sectors globally declining.

Commodity-wise, a similar pattern: since the US began rate cuts in 2024, commodities with higher per-ton value rose more—driven by financial attributes. Now, this pricing driven by financial attributes is reversing; higher per-ton commodities like gold have fallen the most, mainly due to dollar strengthening. The previous rise driven by financial attributes is ending; future opportunities will depend more on demand fundamentals.

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

2. Reasons for market shifts: fundamental differences 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 suffered greater damage, and the US faced no significant disadvantage; second, benefiting from a service-heavy economy, the US consumes less energy per unit GDP, and as a large oil producer, the US was less impacted by energy shocks, whereas East Asian economies faced more shipping disruptions. The underperformance of risk assets relative to the dollar and US assets reflects US dominance over the global order. So far, the situation appears manageable within US-Israel scope, and the closure of the strait benefits the US economy relative to the global, reversing dollar liquidity spillover.

The global style shift also relates to: sectors with higher energy consumption—mainly manufacturing—are more affected, while non-manufacturing sectors consume less energy. Excluding structural shifts, the share of oil consumption in GDP has increased significantly; if oil prices rise further, this ratio could return to 2005–2014 levels, indicating rising energy importance in the global economy.

Looking ahead, questions include: Will the US lose control if it gets stuck in a prolonged Iran conflict? Will prolonged issues undermine the physical foundations of US tech (e.g., supply chains in Japan and Korea), leading to new developments? Or will new forces leverage industrial advantages to break through? In any case, the strong assets during the 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 be over

The non-ferrous metals sector faced multiple headwinds: besides dollar liquidity redistribution, changes in total monetary policy expectations are key. Currently, market pricing for Fed rate hikes is quite extreme: the dot plot shows the Fed maintaining one rate cut in 2026, but market expectations have shifted to no cut or even rate hikes. This gap has room for correction. 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 decreased; and Fed Chair Powell stated that recent energy supply disruptions are one-off events, emphasizing inflation expectations remain low. The previous decline in metals may not be due to recession but the contraction of dollar liquidity expectations and redistribution, with a potential reversal imminent.

4. Chinese assets: manufacturing capacity revaluation

Amid global energy security concerns, China’s advantages are emerging: leading in coal chemical and power equipment industries; annual solar PV capacity (~500 GW) equates to energy efficiency of about 18 million barrels of oil, while the Strait of Hormuz exports about 730 million barrels annually—China’s PV capacity is 24% of that. China’s energy system robustness reduces external shocks and can provide global energy alternatives. Additionally, China’s energy consumption relative to GDP is significantly lower than global averages after structural adjustments.

Meanwhile, the valuation of China’s manufacturing capacity is just beginning to revalue: compared to overseas giants, Chinese leading manufacturing firms’ PE ratios are at their lowest since 2018, and total market value relative to capacity is undervalued, supported by ongoing export growth. Domestic demand also shows signs of endogenous recovery: retail sales in Jan-Feb grew 2.8% YoY, ending a 7-month decline; non-subsidized categories like tobacco, jewelry, and apparel performed well, indicating consumption recovery is not solely policy-driven.

5. Waiting for the fog to clear

The narrative of physical asset rise is ongoing; clearing the dollar fog reveals the true picture. Recommendations: first, energy security is crucial amid global turmoil; this year, primary energy sources outperform secondary ones—crude oil, oil shipping, coal, copper, aluminum, gold, rubber; second, China’s manufacturing remains the global ballast—though physical flows are slower than financial flows, a revaluation is imminent—power equipment, new energy, machinery, chemicals; third, with the reversal of suppression factors, seek structural consumption opportunities—tourism and scenic spots, flavoring and fermentation, beer and spirits, pharmaceuticals, medical aesthetics.

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

Main Report

1. Causes of market decline: seemingly demand weakness, actually dollar strength

From March 16 to 20, signs of escalation in the US-Iran conflict appeared: assassination of Iran’s top security official Larijani, Israeli airstrikes on Iran’s South Pars gas field, attacks on energy facilities across the Middle East, US deploying additional warships and troops. Currently, the Strait of Hormuz 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 experienced a clear shift. Before the conflict, benefiting from the US rate cut cycle and distrust in the dollar, the dollar weakened, capital flowed out of dollar assets, US stocks underperformed globally, and countries/regions highly sensitive to the dollar index (measured by beta) achieved higher gains early this year. But as the conflict intensified, oil prices rose, US inflation fears grew, rate cut expectations reversed, and the dollar strengthened with rising US bond yields. The previous narrative of a weak dollar was reversed; capital flowed back into dollar assets, US stocks outperformed globally, and highly dollar-sensitive markets declined more after the conflict.

Meanwhile, US stock styles 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-wise, outside energy, materials outperformed before, but now tech dominates, with material sectors globally declining.

Commodity-wise, a similar pattern: since the US began rate cuts in 2024, commodities with higher per-ton value rose more—driven by financial attributes. Now, this pricing driven by financial attributes is reversing; higher per-ton commodities like gold have fallen the most, mainly due to dollar strengthening. The previous rise driven by financial attributes is ending; future opportunities will depend more on demand fundamentals.

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

2. Reasons for market shifts: fundamental differences 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 suffered greater damage, and the US faced no significant disadvantage; second, benefiting from a service-heavy economy, the US consumes less energy per unit GDP, and as a large oil producer, the US was less impacted by energy shocks, whereas East Asian economies faced more shipping disruptions. The underperformance of risk assets relative to the dollar and US assets reflects US dominance over the global order. So far, the situation appears manageable within US-Israel scope, and the closure of the strait benefits the US economy relative to the global, reversing dollar liquidity spillover.

The global style shift also relates to: sectors with higher energy consumption—mainly manufacturing—are more affected, while non-manufacturing sectors consume less energy. Excluding structural shifts, the share of oil consumption in GDP has increased significantly; if oil prices rise further, this ratio could return to 2005–2014 levels, indicating rising energy importance in the global economy.

Looking ahead, questions include: Will the US lose control if it gets stuck in a prolonged Iran conflict? Will prolonged issues undermine the physical foundations of US tech (e.g., supply chains in Japan and Korea), leading to new developments? Or will new forces leverage industrial advantages to break through? In any case, the strong assets during the 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 be over

The non-ferrous metals sector faced multiple headwinds: besides dollar liquidity redistribution, changes in total monetary policy expectations are key. Currently, market pricing for Fed rate hikes is quite extreme: the dot plot shows the Fed maintaining one rate cut in 2026, but market expectations have shifted to no cut or even rate hikes. This gap has room for correction. 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 decreased; and Fed Chair Powell stated that recent energy supply disruptions are one-off events, emphasizing inflation expectations remain low. The previous decline in metals may not be due to recession but the contraction of dollar liquidity expectations and redistribution, with a potential reversal imminent.

4. Chinese assets: manufacturing capacity revaluation

Amid global energy security concerns, China’s advantages are emerging: leading in coal chemical and power equipment industries; annual solar PV capacity (~500 GW) equates to energy efficiency of about 18 million barrels of oil, while the Strait of Hormuz exports about 730 million barrels annually—China’s PV capacity is 24% of that. China’s energy system robustness reduces external shocks and can provide global energy alternatives. Additionally, China’s energy consumption relative to GDP is significantly lower than global averages after structural adjustments.

Meanwhile, the valuation of China’s manufacturing capacity is just beginning to revalue: compared to overseas giants, Chinese leading manufacturing firms’ PE ratios are at their lowest since 2018, and total market value relative to capacity is undervalued, supported by ongoing export growth. Domestic demand also shows signs of endogenous recovery: retail sales in Jan-Feb grew 2.8% YoY, ending a 7-month decline; non-subsidized categories like tobacco, jewelry, and apparel performed well, indicating consumption recovery is not solely policy-driven.

5. Waiting for the fog to clear

The narrative of physical asset rise is ongoing; clearing the dollar fog reveals the true picture. Recommendations: first, energy security is crucial amid global turmoil; this year, primary energy sources outperform secondary ones—crude oil, oil shipping, coal, copper, aluminum, gold, rubber; second, China’s manufacturing remains the global ballast—though physical flows are slower than financial flows, a revaluation is imminent—power equipment, new energy, machinery, chemicals; third, with the reversal of suppression factors, seek structural consumption opportunities—tourism and scenic spots, flavoring and fermentation, beer and spirits, pharmaceuticals, medical aesthetics.

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