After ten years of consolidation, A shares will finally usher in a new round of bull market cycle after a triple blow

Dear readers:

We have previously shared our views on BTC's new asset attributes and after reaching a new high. At this time when the competitive landscape between China and the United States is undergoing drastic changes, we believe it is necessary to share our views on RMB assets.

Our core view is that we are about to enter the largest joint fiscal and monetary easing cycle between China and the United States since 2008. The main theme of this easing will be the synchronized recovery of the Chinese and American economies and the most intense competition in currency and international influence.

Among them, RMB assets, especially A-shares, will face a triple blow from capital, policy, and fundamental factors. After more than a decade of market fluctuations, A-shares now offer a similar price-performance ratio to Bitcoin at $28,000. For a long time to come, the main point of competition between China and the United States will be the proportion of international currency used, which will also be the main theme of the future global trend.

As of this writing, the total market capitalization of the RMB equity market (including H shares) is approximately 120 trillion RMB, while the total market capitalization of the US stock market is approximately 50 trillion USD. While the difference in size may be smaller than initially thought, there is still a significant disparity when comparing the combined economic size of China and the US (in terms of GDP, the US is approximately 1.5 times that of China). At this point, we observe the following facts:

1. Politically, the United States is shifting towards a purely populist right, and its global strategy will further shrink. Its existing core influence in areas such as NATO and the Asia-Pacific region is bound to weaken further. The decline of America's global influence is evident in the Middle East and the Russo-Ukrainian war. The downward trend in the influence of the US dollar since the Iraq War may enter a new, accelerated downward cycle. Meanwhile, domestic divisions and struggles have entered a new state of unrest.
2. From a monetary perspective, China has entered a deleveraging cycle since 2015, amidst a period of sustained dollar easing and a surge in US equity assets. This has created significant room for long-term monetary and fiscal policy development. Meanwhile, the issue of US debt has become increasingly prominent, becoming the most significant asset issue for the next decade. Following an all-in approach to technological innovation, the US will gradually need to sacrifice its global influence for monetary and fiscal space in the short term.
3. From the trend level, RMB assets have seen clear bottom signals in the past two months in terms of net liquidity (represented by M2), fundamentals (represented by CPI and housing prices), and policies (political meetings since September).

We believe that during this easing cycle, there may be clear turning points in the aforementioned political, monetary and fundamental aspects. The gap between Chinese and US equity assets and liquidity that has accumulated over more than a decade may usher in a new trend of convergence and reduction. Increasing exposure to the RMB system can enhance our company's ability to cope with the impact of external events and provide a margin of error for our vision of becoming a long-term family office for high-net-worth LPs.

Our understanding of the A-share market and our trading strategies

Understanding of the A-share market and Chinese assets

The A-share market is a typical purely RMB policy-driven market. Since 2015, it has experienced a 10-year cycle of deleveraging and clearing overcapacity, superimposed with a 7-year cycle of decoupling between Chinese and foreign capital starting in 2018. It can be said that the A-share market has been extremely liquidated for a full 10 years, and China's economic growth rate has also begun to accelerate since 2015.

At this moment, we believe that the huge opportunities facing A-shares, or Chinese assets in general, mainly come from the following facts and inferences from the policy, fundamental and capital perspectives :

In fact , our understanding is:

1. From a policy perspective, China's deficit ratio (the ratio of fiscal deficit to GDP) has been consistently set at a narrow 3% deficit ratio, based on GDP total and growth rate, since 2008. This is significantly lower than the deficit and debt pressures of other major economies, including the United States (around 7%, with several years exceeding 10%) and Japan (consistently around 6%, with recent levels around 8%).
2. From the perspective of economic fundamentals, China has the world's only complete industrialized production system and the cheapest and most sound power system and resources;
3. From the perspective of A-share capital and positioning, the capital market has long been marginalized in terms of political positioning. The speech in September 2024 was the first time since taking office that clear requirements were made for the capital market;
4. From the perspective of national strength development, China's near-sea and near-air military and global influence have undergone tremendous changes compared to 10 years ago.
5. The difference in economic growth rates since 2015 and the difference in stock market trends between China and the United States since 2022 ultimately stem from a mismatch in monetary cycles. The core problem of China's short-term economy lies in the deflation of CPI.

At the inferential level, we believe that within the general assumptions:

1. China can print 50-200 trillion yuan in the next 10 years (simply considering the deficit ratio moving closer to that of the United States and Japan. In fact, the Ministry of Finance has recently made it clear that it will relax the narrow deficit ratio);
2. The Chinese government's governing capacity can guarantee the occurrence of at least one or two industrial cycles in China;
3. China's global influence will fluctuate upward before the proxy war/warfare format changes dramatically. The two current local wars will accelerate this trend.
4. In the medium term, the possibility of a local direct hot war between China and the United States is almost zero.
5. In the short term, there is little chance of failure in reversing the CPI. Based on a) and b), local government debt and real estate issues are not the main contradictions and are easy to resolve. China's social culture and people's characteristics (easy to inspire and eager for money) determine that building social confidence will not be difficult.

In summary, we believe we will witness a simultaneous economic boom in both China and the US before a heated war breaks out. China's capital market is facing a triple blow from policy, fundamentals, and funding, a situation not dissimilar to that facing Bitcoin in 2023. The biggest difference is that A-shares have already been consolidating for 10-15 years.

The A-share market has completed its first liquidity recovery at the index level. Future trends are expected to follow the same economic dynamics: commodities/high-end consumption -> industry trends/domestic unified market consumption -> industry trends. We anticipate that the potential for core stocks to trade within each industry trend and sector rally will range from 3-5 times, while the potential for reversal/high-growth stocks will be around 10 times. In principle, the current A-share index gaps are 2889-2863 and 3017-3000 (using the Shanghai Composite Index as an example). As of the date of this report, the Shanghai Composite Index is trading around 3400 points.