This analysis addresses four key investor concerns: 1) How to assess China's stagflation risks, update inflation forecasts amid rising oil prices, and identify the upper limits of inflation risks. 2) From a global perspective, how to evaluate the performance of Chinese A-shares under Iran's geopolitical impact and assess their allocation value through internal stock-bond comparisons. 3) How to judge changes in the global market share of midstream manufacturing and the specific impact of oil prices on China's manufacturing exports. 4) An updated perspective on gold.
Stagflation Risk: Unlikely to Reach a Policy Tipping Point (1) Defining the Policy Tipping Point As previously discussed, the threshold for China's inflation level to hinder liquidity and force monetary policy adjustments can be summarized as the "236" rule: Core CPI year-on-year exceeding 2%, CPI year-on-year exceeding 3%, and PPI year-on-year exceeding 6%. If any two of these three conditions are met, the central bank is highly likely to raise interest rates, a pattern that has held for over two decades. Therefore, the focus is on whether rising inflation will reach this tipping point, triggering monetary tightening and a shift in market trading patterns.
(2) Would Extreme Scenarios Breach the Tipping Point? First, CPI is unlikely to reach the tipping point even under extreme conditions. Strong assumptions are made: oil prices remain at $120 per barrel from April to year-end; pork prices rise by approximately 30%; despite a 50 billion yuan reduction in subsidies for core durable goods compared to last year, their prices continue to rise; gold jewelry price increases match last year's 70% high growth rate; and competitive service sector prices return to pre-pandemic levels. Under this extreme scenario of simultaneous increases in pork, oil, durables, gold jewelry, and service prices, the full-year average CPI would be around 2%, with the highest single-month reading only reaching 2.5%-3%. Thus, even under strong assumptions, CPI is unlikely to breach the critical 3% threshold.
Second, PPI is also unlikely to reach the tipping point under extreme conditions. Similarly strong assumptions are made: oil prices stay at $120 per barrel from April to year-end; construction material prices in the real estate industry chain rise by 10%; midstream manufacturing maintains the strong sequential growth rate of 0.4% seen in January-February; non-ferrous metal prices do not fall for the year; coal prices increase by 10%-15% driven by rising oil prices; and sequential growth rates for downstream consumer goods match the peak levels of 2021. Under this scenario, the full-year average PPI would be around 3%-3.5%, with the highest single-month reading only reaching 5%-6%, making it highly unlikely to surpass the 6% threshold.
In summary, even under extreme multi-dimensional assumptions with no negative feedback on demand, price levels are not expected to exceed the policy comfort zone.
(3) Distinguishing "Good PPI" from "Bad PPI" Rising PPI is an objective phenomenon. The market generally views demand-driven PPI increases as "good" and supply-driven increases as "bad." However, objectively distinguishing between the two is challenging. As an alternative, the profit margins of industrial enterprises and the gross profit margins across upstream, midstream, and downstream sectors should be closely monitored. Regardless of PPI trends, if rising PPI leads to an improvement in overall and sectoral gross profit margins and sales profit margins for industrial enterprises, it constitutes "good inflation." This is particularly significant after three years of low price growth in a deflationary environment, as PPI-driven profit margin recovery sends a strong positive signal for the macroeconomy. Conversely, if rising PPI is accompanied by declining profit margins and sales profit margins for industrial enterprises, indicating increased revenue without increased profits, it represents "bad inflation."
Historically, this characteristic was evident during two typical stagflation-like periods in China. These periods did not involve negative GDP growth but rather slowing growth. The first was in 2018, following price increases from late 2016 to 2017, when the cycle entered its tail end, showing a stagflation-like pattern: PPI continued to rise, but enterprise gross profit margins and profit margins began to decline simultaneously. The second was from late 2021 to early 2022, when widespread power rationing led to broad price increases. Again, at the cycle's tail end, revenue increased without profit growth; PPI rose further from high levels, but enterprise gross profit margins and profit margins continued to decline. This is the core criterion for distinguishing between good and bad inflation.
In conclusion, the current economy is in the early stages of a weak recovery, with price bases at low levels. Price increases at this stage, as long as they lead to stabilized or improved enterprise gross profit margins and profit margins, represent positive price recovery. It is also worth noting that over the past four years, economic transformation has accelerated, fundamentally changing the proportions of old and new economies in GDP, the structure of consumer goods versus intermediate/capital goods in exports, and the share of volatile items/essential consumption in the consumption structure. In this context, it is advisable to moderately reduce the weight of aggregate data like GDP in assessments and increase the weight of mid-level indicators such as profit margins and gross profit margins.
A-Shares: Likely to Maintain Resilience Amid Geopolitical Shocks The impact on the equity market is assessed from two dimensions: a horizontal global comparison to evaluate the performance of A-shares under the Iran shock, and an internal stock-bond comparison to assess their allocation value.
(1) External Perspective: A-Shares' Resilience Ranks in the Global Top Tier The impact of the Iran event on global markets operates on two levels: the "virtual shockwave," reflected in stock index declines, and the "real shockwave," seen in diesel price increases. From both dimensions, China's market resilience ranks in the global top tier.
First, regarding financial market declines: By the end of the Qingming holiday, global stock indices could be divided into three tiers. The first tier, represented by China and the US, saw main index declines of about 5-6 percentage points. The second tier, European markets like MSCI Europe, experienced declines of 8-10 percentage points. The third tier, including South Korea and Japan, saw declines of 13-20 percentage points. In terms of resistance to decline during this shock, China and the US led, with Chinese indices falling only about 1 percentage point more than US indices.
Second, regarding fundamental impact: Based on diesel price increases, the global landscape also divides into three tiers. The first tier, represented by the Philippines and Australia, characterized by high external energy dependency and long transport distances from the Middle East, saw diesel price increases of 80%-100%. The second tier, including the US, Singapore, and the UK, saw increases of 50%-60%. The third tier, represented by China, Poland, and Canada, saw increases of 30%-40%. India, which implemented strong administrative price controls and high subsidies to lock in prices, is a special case and暂且不表.
Overall, China's comprehensive resilience ranks among the top two major powers, which is highly valuable. The global safety premium of major power assets is gradually established through stability demonstrated during significant events. Chinese assets have shown this characteristic during last year's tariff shocks and this year's Iran situation, and their global allocation safety premium and major power premium will continue to emerge. Events involving Iran and Venezuela also confirm that currently, only China and the US possess full safety premiums among major powers.
(2) Internal Perspective: Stocks Remain Favorable from a Stock-Bond Comparison Perspective A key concern is whether the recent adjustment has "damaged" stocks. The assessment is clear: from both trend and comparative perspectives, stocks are not damaged. Comparing stock and bond assets, the difference in Sharpe ratios, tracked since last June, remains at the 76%-77% percentile level of the past decade. This means that on a risk-adjusted basis, equity assets still offer significant yield advantages over bond assets. Furthermore, although stock index volatility increased over the past month, the downside volatility of the Shanghai Composite Index, after rising, only matches that of the China Bond Total Wealth Index. Given that equities are inherently risk assets, their volatility being on par with risk-free bonds further highlights their allocation value.
Therefore, considering both global comparisons and internal cross-asset comparisons, the core assessment is maintained: Chinese stocks exhibit strong resilience, and the adjustment since March has not altered their core allocation value. The concurrent growth in individual investor account openings also confirms market confidence in equity assets. The view that "stocks offer better value than bonds, maintaining a neutral to cautious stance on bonds" is upheld, and the strategic allocation trend for stocks is not over.
Midstream Market Share: Potential Increase Amid High Oil Prices Regarding the assessment of midstream market share under high oil prices, a core viewpoint is proposed: high oil prices essentially represent a clearing out of tail-end manufacturing capacity globally. For major powers with manufacturing advantages, this presents a clear opportunity to increase global market share. Even if high oil prices elevate global stagflation risks and suppress overall global demand, China can offset the impact of declining demand through market share gains, while most other countries face a double blow of reduced total demand and market share. Therefore, midstream manufacturing is likely to experience a strategic window for market share expansion during periods of high oil price volatility. This is examined from both normative and empirical perspectives.
(1) Normative Perspective: Midstream Share Often Rises for Manufacturing Powers During Oil Price Surges First, historical patterns show that during past oil price surge cycles over decades, the global manufacturing powers of those times achieved counter-trend increases in their midstream manufacturing global market share. The most typical case is the 1970s global stagflation period, which facilitated the rise of Japanese manufacturing, with significant expansion in the export share of Japanese automobiles, electrical machinery, and other products.
Second, from the perspective of capacity clearing space, the logic also holds. The core prerequisite for market share increase is the existence of a sufficiently large scale of manufacturing capacity globally that is more energy-dependent than China's; otherwise, the room for share gain from tail-end clearance would be very limited. Current data shows that China's reliance on crude oil imports per unit of manufacturing value-added is 8.6%. Globally, the combined manufacturing output of countries with higher crude oil import dependency than China accounts for 30% of global manufacturing output, significantly higher than China's 28% share. This indicates ample room for market share gains from tail-end capacity clearance, providing solid support for this logic.
(2) Empirical Perspective: Historical Data Shows Positive Correlation Between Oil Price Increases and Share Gains An examination of China's export data over the past two to three decades reveals that in years with rising average oil prices, the global export share of China's midstream manufacturing increased, with larger oil price increases correlating with greater share gains. In years of oil price increases, the export share of intermediate goods also rose simultaneously, a pattern showing strong significance in scatter plots.
The core reason behind this phenomenon is the extremely low correlation between China's electricity prices and crude oil prices, determined by the country's primary energy structure. In contrast, electricity prices in Europe and America are highly linked to oil prices; oil price fluctuations directly cause significant electricity price volatility. China's more stable electricity pricing system provides a stable relative cost moat for midstream manufacturing, which is the core support enabling Chinese manufacturing share to increase counter-cyclically during high oil price cycles.
In summary, high oil prices are expected to promote the clearance of global tail-end manufacturing capacity, benefiting the increase in global market share for China's midstream manufacturing. Even if the Iran situation prolongs, keeping oil prices high and suppressing global aggregate demand, China will be one of the few countries capable of offsetting demand decline through market share gains. Manufacturing景气度 is expected to remain stable,甚至具备进一步提价的空间.
Gold: Strategic Bullish View Maintained A strategically bullish view on gold for the coming decade was proposed at the end of 2023, and this core assessment remains unchanged. The recent gold correction本质上 stems from trading behavior where investors, amid global liquidity shocks and rapidly converging rate hike expectations due to the Iran situation, resort to selling profitable assets first. In an environment where major global assets face liquidity impacts, gold, as a top-tier asset with the highest floating profits over the past two years and excellent liquidity, became a short-term "ATM" for profit-taking. This is a correction driven by short-term trading factors and does not impact the core underlying logic for being bullish on gold.
The core logic for gold's bullish outlook can be summarized in three points: first, the restructuring of the global order; second, the radicalization at the inflection point of empire; and third, hedging in an ambiguous world. The escalation of the Iran event further strengthens these three core logics, hence the medium to long-term upward trend for gold remains unchanged. It is also noted that gold, as a non-yielding asset, has high volatility and a relatively weak holding experience; institutional and individual investors should adjust their allocation ratios according to their risk tolerance and prepare for volatility.
The three core logics for being bullish on gold are elaborated below:
First, the restructuring of the global order. The current turmoil, uncertainty, and unpredictability in the global geopolitical landscape are intensifying, accelerating the process of global order restructuring. This is the most fundamental support for gold's long-term value.
Second, the radicalization at the inflection point of empire. Historical cycles show that when a core global order power reaches an inflection point in its power, it often adopts radical realist, even adventurist and opportunistic behaviors, attempting to delay the inflection point and maintain its hegemonic peak. However, such adventurism has strong backlash; a single failure can significantly damage hegemonic strength, and multiple冒险 attempts may instead accelerate the arrival of the inflection point—an inescapable historical cycle律. From Venezuela to Iran, a clear trend of US adventurism is evident, a trend that will continue to strengthen gold's safe-haven value.
Third, hedging in an ambiguous world. Gold is the only major global asset in an absolutely neutral position: it has extremely low correlation with assets in developed open financial markets represented by the US, and also very low correlation with实体制造 and commodity-related assets represented by China. Including gold in an investment portfolio can significantly optimize the portfolio's risk-return frontier. In today's uncertain, ambiguous world, this hedging value deserves attention.
In conclusion, under the current background, the three logics for being bullish on gold have not diminished but strengthened. The strategic bullish view on gold is maintained.
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