Current trading activity in the AI and technology sectors is approaching peak intensity. However, this intensity is underpinned by an equally pronounced divergence in macroeconomic fundamentals. Across the dimensions of investment, production, and profitability, a clear shift is evident domestically: new growth drivers are rising while traditional ones are waning, with conventional demand softening as AI-related sectors continue to expand. This divergence is not unique to China; it is also observable in the United States and South Korea, albeit with different characteristics. The U.S. serves as the epicenter for AI expenditure and demand, while South Korea capitalizes on hardware supply to generate substantial profits. The global wave of AI expansion is also significantly boosting the prosperity of China's AI-related products. Analysis suggests that while current AI and technology trading is intense, it has not yet reached an extreme level. Compared to four previous rounds of concentrated trading, the current phase is marked by a more distinct divergence in macroeconomic fundamentals. Given that a significant portion of China's current production, export strength, and trading fervor stems from spillover effects from overseas markets, short-term attention should focus on external developments. Key factors include the sustainability of overseas fundamental divergence, the realization of profit expectations, and whether corporate expansion continues to rely on internal funds rather than debt financing. In the long term, focus should shift to the further unleashing of AI-related capital expenditure in China, which is expected to increase its contribution to economic growth.
Current trading in AI and technology sectors is highly concentrated. Within the "investment-production-profitability" analytical framework, this concentration likely mirrors an extreme divergence in macroeconomic fundamentals. From an index performance perspective, whether looking at the CSI 300 and CSI 500, or the STAR 50 and ChiNext 50 indices, the information technology sector contributed more than half of the index gains in April. Examining the domestic economy through investment, production, and profitability reveals a clear divergence between new and old growth drivers. 1) In terms of investment, from January to April, the cumulative year-on-year growth rate for total fixed asset investment was -1.6%. In contrast, investment in high-tech industries grew against the trend by 6.1%, with investment in electronic circuit manufacturing, closely tied to the AI industry chain, surging by 44.3%. 2) Regarding production, from January to April, the cumulative year-on-year growth of value-added for industrial enterprises above a designated size was 5.6%. The computer, communication, and electronic equipment manufacturing sector, linked to the AI industry chain, saw cumulative growth of 14.0%. 3) In profitability, from January to April, profits of industrial enterprises above a designated size grew by 18.2%. Within this, the profit of the electronics industry, related to the AI chain, skyrocketed by 108%. Although its existing scale constitutes only about 10% of total industrial profits, its contribution to the incremental profit of the entire industrial sector reached 44%, representing three to four times its own size. Furthermore, from a listed company perspective, as of Q1 2026, the trailing twelve-month net profit for industries highly correlated with AI—such as communications, electronics, and non-ferrous metals—increased sharply by 60.9% compared to the end of 2023. In contrast, the non-financial sector saw a significant decline of 23.5 percentage points over the same period.
Beyond China, the United States and South Korea also exhibit divergence in macroeconomic growth, but with different compositions. The U.S. is the epicenter of expenditure and demand, while South Korea achieves large-scale profitability through hardware supply. 1) In the United States, the fundamental divergence is more concentrated on the investment side. In Q1 2026, the growth rates for AI-related and non-AI-related fixed asset investment were 25% and 4% respectively, contributing 5.7 and 3.0 percentage points to private non-residential investment growth. AI-related components contributed approximately 52% to real GDP growth year-to-date. However, profit realization remains concentrated upstream, and wealth effects are highly concentrated. Nevertheless, since the beginning of the year, as B2B business models have gradually proven viable, some leading application companies have begun to approach profitability. 2) In South Korea, leveraging its monopoly in high-bandwidth memory hardware supply chains, a K-shaped divergence is evident in production, exports, and profitability. As of the first quarter, the indices for AI-related and non-AI investment were around 130 and 92, respectively. The production capacity index for AI-related manufacturing has risen to 140, while the non-AI related index has largely stagnated around 91. In April, export growth in AI-related sectors (broad category) surged by 98.2%, boosting overall export growth by 40.8 percentage points for the month. In Q1, SK Hynix's operating profit increased by 405% year-on-year with a profit margin as high as 72%, while Samsung's operating profit soared by 756% year-on-year, with its quarterly profit exceeding its total profit for the entire year of 2025.
Analysis indicates that current AI and technology trading is near the 89th percentile of levels observed over the past 20 years but has not yet reached an extreme moment. The macroeconomic fundamental divergence underlying this intense trading phase is more pronounced. The intensity of concentrated trading is measured by the average difference between the monthly gains of the top five and bottom five CITIC primary industries, identifying four historical periods of extreme sector concentration. The most comparable period is perhaps the new energy rally of 2020-2021. At that time, new energy production and sales grew rapidly, with sectors like automobiles, and electrical equipment and new energy leading in growth rates for two consecutive years (97% and 33%), showcasing significant fundamental divergence. However, profit expectations were later disproven, and coupled with external liquidity tightening, the concentrated trading quickly unraveled. Looking ahead to the current cycle, on one hand, the intensity of AI and technology trading in China has reached the 89th percentile over nearly 20 years, yet it is not at an extreme point. On the other hand, a significant portion of China's current production and export strength, as well as trading fervor, stems from overseas spillover effects. At the macroeconomic level, dependence on external changes is greater. Key factors include: first, the overseas divergence persists; second, capital expenditure and profit expectations for related companies are being continuously revised upward and validated; third, these companies still primarily rely on internal funds for investment and have not yet shifted to large-scale debt financing.
Tracking Macroeconomic Performance: "Volume Decline, Price Increase" Drives Dual Acceleration in Profits and Revenue. In April, both the growth rates of industrial enterprise profits and operating revenue reached new highs. Structurally, state-owned and share-holding enterprises saw faster profit growth, while the profit growth rate of foreign-funded enterprises marginally declined. The divergence between "volume" and "price" in industrial enterprises did not hinder the overall upward trend in profit recovery. Improvements in "price" and "profit margins" supported the rise in profit growth, with the unexpected recovery in the Producer Price Index being a core reason. However, constrained by demand and investment, the weak recovery in "volume" acted as a drag. At the industry level, upstream profit growth increased substantially, downstream profit growth rebounded marginally, and the profit share of the midstream sector rose further. Industries such as "coal mining, non-ferrous metals, computer and communication equipment, and chemical raw materials" led the gains, with the coal industry showing significant marginal profit recovery. Looking forward, while a wait-and-see sentiment was prevalent earlier, corporate willingness to replenish inventories is now showing signs of increase. Subsequent attention should remain on changes in the external demand environment and the medium-to-long-term impact of rising raw material prices on corporate production expansion willingness and profits. The market focused on China's April 2026 industrial enterprise profit data this week. Next week, focus will shift to China's May PMI data.
Risk Factors: Policy implementation pace falling short of expectations, unexpected changes in economic operations, policy effectiveness falling short of expectations, and risks of geopolitical friction exceeding expectations.
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