A comprehensive analysis from CICC suggests that while the manufacturing sector has seen significant capacity rationalization across numerous industries, a sustained recovery hinges on revitalized domestic demand. The report indicates that new-economy sectors remain a critical pillar of growth, with the second quarter of 2026 showing a clear progression in the upstream raw material capacity cycle.
From a capacity cycle perspective, the primary investment opportunities are identified in several key areas. These include specific segments of the oil and gas sector, such as oilfield services, oil transportation, and refining; chemical sub-sectors like agricultural chemicals and chemical products; as well as medical services, batteries, construction machinery, industrial metals, small metals, communication equipment, and agriculture-related industries like farming and feed. The AI supply chain and power grid equipment, which are currently experiencing high prosperity, are also highlighted, even though they may not strictly follow the traditional capacity cycle framework.
Tracking the industry capacity cycle trends, A-share non-financial capital expenditure continued its positive growth trajectory. From the second quarter of 2026, non-financial companies saw a sequential improvement in capex growth, with the year-on-year growth rate for the first half of 2026 reaching 3.8%, a slight increase from the 3.6% recorded in the first quarter. This positive trend was observed across both traditional and emerging industries. A leading indicator, the ratio of financing cash flow to revenue, has been stabilizing since the first quarter of 2025 and continued its modest recovery in the second quarter of 2026, suggesting that the rebound in capital expenditure is likely to be supported in the coming periods.
Structurally, capital expenditure in emerging industries saw a robust year-on-year increase of 5.7% in the first half of 2026, accelerating from the previous quarter's growth. Traditional industries, which saw their capex turn positive in the first quarter of 2026, further improved to a 2.2% growth rate in the second quarter. Notably, the AI industry chain demonstrated exceptional performance, with a striking 33.7% growth in capital expenditure during the first half of 2026. This analysis leverages mid-2026 financial reports to map the capacity cycle positions of various major and sub-sectors, aiming to uncover prospective investment opportunities.
The overall process of capacity reduction across industries continues to advance. The proportion of secondary industries with capex growth exceeding 10% rose from 19.2% at the end of 2025 to 33.6% by the first half of 2026. Concurrently, the share of industries with a capex-to-depreciation ratio below 1.5 increased from 58.0% at the end of 2025 to 66% in the second quarter of 2026. Furthermore, the percentage of industries with negative growth in construction in progress climbed to 71.3%, suggesting that the number of sectors approaching an inflection in their capacity cycle is likely to increase.
The typical capacity cycle can be segmented into six distinct phases: 1) supply-demand imbalance, marked by slowing demand and a pullback in investment; 2) early capacity reduction, characterized by a noticeable contraction in supply and negative capex growth; 3) deepening capacity reduction, where the effects of reduced investment begin to show in construction activity, though operational metrics remain weak; 4) full clearance, where the capex-to-depreciation ratio approaches 1, though the duration of this phase can vary and be prolonged if demand does not improve; 5) stabilization and recovery, signifying the start of a new cycle with a return to positive capex growth and improved operational metrics; and 6) expansion, featuring substantial growth in investment and robust operational performance. Special attention is given to industries in phases four and five, which are considered prime candidates for significant asset price appreciation. It is important to note that this analytical framework is most applicable to manufacturing and certain non-manufacturing sectors related to fixed asset investment, while industries with sustained high demand growth may not experience distinct capacity cycles.
Applying this six-phase framework to sub-industries, the supply side is assessed using metrics like capex growth, the capex-to-depreciation ratio, and construction-in-progress growth, while the demand side is gauged through financial and high-frequency prosperity indicators. In the energy and raw materials sector, several sub-fields have advanced in their cycle, though the sector overall continues its repair process. The stabilization and recovery phase now includes small metals and industrial metals, which had already entered it, and has been joined by oilfield services, agricultural chemicals, and fiberglass, aided by overseas supply uncertainties and demand from emerging industries. The full clearance phase now encompasses coke, chemical fibers, and chemical products, in addition to special steel, with these industries having experienced prolonged negative growth in capex and construction, leaving some still awaiting a return to positive investment and improved profitability. Meanwhile, chemical raw materials, plastics, rubber, non-metallic materials, steelmaking raw materials, and new metal materials remain in the deepening capacity reduction phase. Ordinary steel and cement, constrained by weak real estate demand, are not yet in a typical full clearance stage. The precious metals sector has largely entered the expansion phase, but its asset performance is significantly influenced by external factors. Coal mining is still in the early stages of capacity reduction, with its asset prices highly sensitive to oil price movements.
The high-end manufacturing sector's capacity cycle positions show many sub-sectors in the latter half of the cycle, broadly similar to the previous quarter. Energy metals, batteries, consumer electronics, medical services, and communication equipment are in the stabilization and recovery phase, driven by strong demand from AI-led emerging industries, though cash flows and inventory turnover still require improvement. Auto parts, specialized equipment, computer equipment, aerospace equipment, and special electronics remain in the full clearance phase, with their capex-to-depreciation ratios below 1.5, but demand-side recovery is still pending. Sectors previously facing supply-demand imbalances, such as photovoltaic equipment, wind power equipment, biological products, medical devices, and aviation equipment, are in the deepening capacity reduction phase, with capex contraction gradually transmitting to construction activity. The components sector has seen its capital expenditure return to high levels, nearing an expansion phase. Passenger vehicles, having experienced excessive prior investment, are now in an early capacity reduction stage, with a negative turn in capex growth that has yet to affect construction in progress.
In the traditional manufacturing sector, many industries have reached the middle-to-late stages of capacity adjustment, with deep capacity clearance, but fewer have achieved stabilization due to weak domestic demand. Optical and electronic components and construction machinery entered the stabilization and recovery phase in the second quarter, benefiting from robust overseas demand. The full clearance phase includes commercial vehicles, white goods, apparel and textiles, and food processing. The marine equipment sector is exhibiting high prosperity in the expansion phase, with rapid capex growth and healthy demand and performance indicators. General equipment, textile manufacturing, alcoholic beverages, and decorative building materials are in the deepening capacity reduction phase, while small appliances and household goods are in the supply-demand imbalance and early capacity reduction stages.
The capacity cycle framework applies to only a few non-manufacturing sectors. Among them, the farming industry has seen its capex growth turn positive, with the capex-to-depreciation ratio below 1 and stabilizing inventory turnover. However, weak performance metrics such as gross margins and profit growth suggest investors may want to wait for a more favorable entry point.
Emerging industries continue to be the main engine for capital expenditure in the A-share market. Their capex grew 5.7% year-on-year in the first half of 2026, vastly outpacing the 2.2% growth in traditional industries. A clear divergence is evident between the AI industry chain and other areas. Driven by robust domestic and international AI infrastructure demand, capital expenditure in the second quarter of 2026 grew significantly for sectors like tech chips and storage (13.9%), CPO (112.2%), PCB (131.9%), and liquid-cooled servers (22.1%). Other closely watched emerging fields like robotics saw a 13.2% year-on-year increase in capex, whereas satellite internet and energy storage experienced contraction.
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