A recent report suggests that channels such as foreign exchange repatriation are expected to provide liquidity support for Chinese equities. Overseas foreign exchange settlement funds are becoming an incremental source of liquidity and are likely to resonate with the shift of household deposits and positive market "wealth effects." Beyond liquidity improvements, current valuations for Chinese stocks remain within a reasonable range. The equity risk premium for the CSI 300 is fluctuating roughly between 5% and 5.5%, with a historical percentile around 50%, indicating a mid-level position and suggesting market valuations are not significantly overstretched and remain relatively reasonable overall. The ongoing implementation of the AI technology revolution is providing new economic momentum and boosting risk appetite. Supported by these factors, the report posits that the Chinese stock market may maintain an upward trend in the second half of the year, recommending a continued overweight stance. However, considering that overseas stagflationary shocks have not yet subsided and market sentiment remains elevated, market volatility may also increase, suggesting adding to positions during dips.
Macro Liquidity as the Potential Deciding Factor for Global Assets
The AI revolution stands as one of the most significant investment themes in global markets for 2026, driving narratives from tech giants to resources and power sectors. With the AI revolution now a consensus and long-term asset trends established, the market performance over a six-month horizon heavily depends on whether assets with high expectations, high valuations, and high crowding can continue to receive liquidity support. Ample liquidity serves as the fuel for a bull market's continuation, while liquidity tightening acts as a trigger for significant risk. The first half of 2026 has fully validated this logic: tech stocks, gold, and base metals were consensus trades at the start of the year, but the "Warsh shock" in January and the US-Iran conflict in March unexpectedly disrupted market trends. While the external manifestations of these two shocks differed, their underlying logic was identical—both led to expectations of liquidity tightening, triggering substantial corrections in related assets. Looking ahead to the second half, the report believes liquidity may, to a greater extent, influence the upside potential and downside risks of global assets, focusing on the operational dynamics and asset implications of Chinese liquidity versus global liquidity.
Outlook for China's Macro Liquidity: New Structure and New Dynamics
Macro liquidity is a prevalent analytical framework for explaining and forecasting the performance of equities, bonds, and currencies. Credit indicators, such as the growth rate of aggregate financing to the real economy (AFRE) and the credit impulse, are often used as key variables to depict liquidity cycles. Entering 2026, while AFRE growth and credit impulse have continued to weaken, the stock market has trended upward with volatility, even experiencing a simultaneous rally in stocks, bonds, and the currency in April-May. This divergence between asset performance and credit indicators does not reflect a failure of macro liquidity analysis but rather indicates that recent macro liquidity has not been injected through credit expansion, rendering the signaling value of credit variables ineffective. The structure of macro liquidity has undergone significant changes, with foreign exchange-derived funds becoming a key incremental source, forming "high-powered liquidity." The report has refined the traditional liquidity framework by constructing a "foreign exchange impulse" indicator, finding it holds significant implications for stock, bond, and currency markets. The structural enhancement of China's export competitiveness and the reshaping of the global monetary order are driving cross-border capital repatriation, which, coupled with the shift of household deposits, provides long-term liquidity support for Chinese assets. This new structure also implies new constraints; as China's liquidity becomes more reliant on external liquidity and cross-border funds, the sensitivity of Chinese assets to the US dollar, US Treasury yields, and global risk appetite will correspondingly increase. Marginal changes in overseas liquidity may become a key influencing factor for the performance of Chinese assets in the second half of the year.
Outlook for Overseas Macro Liquidity: "False Risks" and "Real Opportunities"
The crux of overseas liquidity lies in Federal Reserve policy, US Treasury yields, and the US dollar's trajectory. Geopolitical risks, inflation risks, and policy risks form a transmission chain of "geopolitical conflict → rising oil prices → elevated inflation → central bank tightening," causing significant market anxiety. The report suggests these three risks may be "false risks" preceding the restart of easing trades, and overseas liquidity is unlikely to trend towards tightening in the second half. Given that the US-Iran dynamic is not an "asymmetric" game and the US midterm elections are approaching, the report expects the US-Iran situation to cool down, with the market gradually becoming desensitized to geopolitical risks. Although major global economies are experiencing "stagflation" challenges, this round of inflationary shock is markedly different from the 2022 Russia-Ukraine conflict and the "Great Inflation" of the 1970s, with oil price shocks less likely to create "second-round effects." The report forecasts a decline in global inflation starting in the second half, paving the way for overseas central banks to return to monetary easing. The report believes that the new Federal Reserve Chair, Warsh, may initially focus on interest rate cuts and financial deregulation, while tightening policies like "balance sheet reduction" (QT) may proceed slowly. The timing and magnitude of Fed rate cuts could exceed market expectations. Looking ahead to the second half, the report anticipates overseas liquidity may gradually emerge from the fog, creating new opportunities for global assets.
Asset Allocation Recommendations
Awaiting a resurgence in overseas liquidity, the market may gradually improve in the second half. Maintain an overweight position on Chinese equities and gold; hold a neutral position on US equities, US Treasuries, and commodities; and maintain an underweight position on Chinese bonds. Chinese stock valuations are at reasonable levels, the AI industry provides a clear thematic direction, and foreign exchange-derived liquidity coupled with the shift of household deposits forms a positive feedback loop, continuing to support market performance. It is recommended to maintain an overweight stance. Chinese bond yields are already at historical lows; while the risk of a sharp rise in rates is limited, the potential for returns is even more constrained, warranting an underweight position. The report has been consistently bullish on gold over the past three years and clearly highlighted adjustment risks for gold at the end of 2025. Following a significant correction in gold prices, the report is more optimistic about gold, recommending active positioning and adding on dips. Considering constraints such as high valuations, stagflationary shocks, and monetary order restructuring, the report views the risk-reward profile of US equities as less attractive compared to Chinese equities, recommending a neutral position. Balancing short-term stagflation challenges with potential easing trade opportunities in the second half, US Treasuries offer a relatively balanced risk-return profile, also warranting a neutral position. Commodities remain a good hedge against inflation and geopolitical tail risks, and a neutral position is recommended.
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