December 8, 2025 09:24 AM GMT China Economics | Asia Pacific Morgan Stanley Asia Limited CEWC Preview: Cushion, Not Lift Harry.Zhao@morganstanley.com +852 2239-7229 • 2026 stance: Policy continuity of a small, reactive style over pivot. 5% GDP target is set to stay (to "mark a solid start for the 15th Five-Year Plan"), but the fiscal package is likely to be initially flat vs 2025 ("maintain" more proactive fiscal policy; "leverage both existing and new policies"), with the scope to add a ~0.5ppt-of-GDP top- ...

Profit Trends - From January to July 2025, industrial enterprises achieved a total profit of CNY 40,203.5 billion, a year-on-year decrease of 1.7%[1] - In July, profits decreased by 1.5% year-on-year, a significant improvement from the previous month's decline of 4.3%[1] - The profit margin for January to July was recorded at 5.15%, with a year-on-year decline of 0.25 percentage points, showing a narrowing drop compared to the previous month's 0.26 percentage points[1] Revenue and Production - Total operating revenue for the same period was CNY 78.07 trillion, reflecting a year-on-year growth of 2.3%[1] - The industrial added value in July grew by 5.7% year-on-year, despite a 1.1 percentage point decline in growth rate compared to previous months[1] - Export growth in July was 7.2%, surpassing the ten-year average of 3.6%[1] Cost and Inventory Management - The cost per CNY 100 of operating revenue was CNY 85.57, an increase of CNY 0.24 year-on-year, while expenses decreased by CNY 0.08 to CNY 8.38[1] - Finished goods inventory reached CNY 6.67 trillion, with a year-on-year growth of 2.4%, indicating a slowdown in nominal inventory growth[1] - The raw material inventory index fell to 47.7%, and the finished goods inventory index decreased to 47.4%, indicating a tightening balance in production and sales[1] Sector Performance - High-tech manufacturing saw a profit increase of 18.9% in July, with aerospace and semiconductor sectors leading with growth rates of 40.9% and rapid increases, respectively[2] - Consumer manufacturing sectors, including paper and textiles, showed negative growth, with the automotive manufacturing sector also experiencing a decline after a brief recovery in June[2] - The mining sector was the most significant drag on profits, with a notable decline in profit margins[1]

Profit Trends - From January to July 2025, industrial enterprises achieved a total profit of CNY 40,203.5 billion, a year-on-year decrease of 1.7%[1] - The operating revenue for the same period was CNY 78.07 trillion, reflecting a year-on-year growth of 2.3%[1] - In July, profits decreased by 1.5% year-on-year, a significant improvement from the previous month's decline of 4.3%[1] Production and Margins - Industrial production showed resilience with a 5.7% year-on-year increase in July's industrial added value, despite a 1.1 percentage point decline from the previous month[1] - The Producer Price Index (PPI) showed marginal improvement, with a year-on-year decline of 3.6% in July, the same as the previous month, but with a reduced month-on-month decline[1] - The profit margin for January to July was recorded at 5.15%, remaining stable compared to the previous value, with a year-on-year decline of 0.25 percentage points[1] Inventory and Costs - As of July, finished goods inventory reached CNY 6.67 trillion, with a year-on-year growth of 2.4%, indicating a slowdown in nominal inventory growth[1] - The cost per CNY 100 of operating revenue was CNY 85.57, an increase of CNY 0.24 year-on-year, while expenses decreased by CNY 0.08 to CNY 8.38[1] Sector Performance - High-tech manufacturing saw a profit increase of 18.9% in July, reversing a 0.9% decline in June, with aerospace manufacturing profits soaring by 40.9%[2] - Consumer manufacturing sectors, such as paper and textiles, experienced negative growth, with the automotive manufacturing sector also seeing a profit decline in July after a recovery in June[2] Future Outlook - Future profit trends will depend on the continuation of domestic demand expansion policies and the effectiveness of "anti-involution" measures in manufacturing[2] - The report highlights the importance of monitoring external demand and geopolitical risks, particularly in the context of US-China trade negotiations[2]

Core Viewpoint - The article discusses the recent market trends and signals from a significant political meeting, indicating a structural bull market with increasing divergence among stocks and sectors, alongside government policies aimed at stimulating the economy and capital markets [1][5]. Group 1: Market Trends - Major indices have been rising since June 23, with the Shanghai Composite Index reaching new highs for the year, while the Shenzhen Component and ChiNext indices have shown signs of decline, indicating increasing market divergence [1]. - Over 3,500 stocks have declined, with major players selling off 80 billion, highlighting a structural bull market where being on the wrong side can lead to losses [2]. Group 2: Government Policy Signals - A key meeting of the Central Political Bureau on July 30 emphasized the need for sustained macroeconomic policies, including more proactive fiscal measures and moderately loose monetary policies to enhance the effectiveness of these policies [3]. - The meeting called for effective release of domestic demand potential, focusing on boosting consumption and expanding effective investment [4]. Group 3: Focus Areas from the Meeting - The meeting highlighted the importance of technological self-reliance and industrial upgrades, with support for sectors like semiconductors and AI, which has led to increased capital inflow into these areas [7][8]. - Consumer spending was identified as a priority for expanding domestic demand, with policies aimed at increasing household income and supporting service sectors like tourism and childcare [10]. - The meeting addressed real estate risk management, advocating for the acquisition of existing properties for affordable housing, which may alleviate inventory pressures for real estate companies [12][13]. Group 4: Market Implications - The anticipated policies are expected to boost market confidence in economic stabilization, particularly benefiting sectors linked to infrastructure investment and consumer spending [5]. - The emphasis on preventing excessive competition may lead to resource concentration in leading companies with core technologies, potentially enhancing industry concentration [9]. - The article warns of high-level risks in the market, suggesting a shift in investment focus as high-performing stocks may face corrections, especially with upcoming mid-year reports [14].

Core Viewpoint - CITIC Securities conservatively estimates that the increase in pension expenditure will drive approximately 200 billion yuan in new consumption [1] Group 1: Pension Increase - According to the notice on adjusting the basic pension for retirees in 2025, pensions will be raised by 2%, marking the 21st consecutive year of increase [1] - The total pension expenditure in 2025 is projected to be 400 billion yuan higher than in 2024 [1] Group 2: Economic Impact - The stable growth of pensions is expected to activate the "silver economy" and drive domestic demand expansion and structural optimization [1] - The adjustment of pensions is increasingly playing a strong economic strategic role while ensuring basic livelihood security [1]

Core Viewpoint - The Chinese economy is steadily recovering, and industrial innovation breakthroughs are reshaping global perceptions of Chinese assets, with expectations for the A-share market to gradually rise as liquidity improves, focusing on four main investment themes: consumption, technology, industry, and dividends [1][3]. Group 1: Economic Outlook - The Chinese economy is expected to start stabilizing from 2025, with a continuous positive trend in recovery, enhancing the attractiveness of Chinese assets [3]. - The core driving force for China's economic development is shifting from factor input expansion to innovation-driven efficiency improvement, making the development of new productive forces a key focus for high-quality growth [3]. Group 2: Market Dynamics - Foreign investors are changing their attitudes towards Chinese assets, with a trend of increasing liquidity expected to push the A-share market higher [5]. - Since September 24, 2024, the People's Bank of China and financial regulators have introduced multiple capital market policies aimed at stabilizing the market and promoting long-term investment [5]. Group 3: Investment Strategies - Investment strategies should focus on four key sectors: 1. Consumption sector benefiting from domestic demand, particularly in services like tourism and healthcare, as well as new consumption trends [8]. 2. Technology sector with breakthroughs in areas such as innovative pharmaceuticals, new materials, semiconductor equipment, and core industrial software [8]. 3. Industry sector promoting manufacturing upgrades, with attention to new applications in smart robotics, artificial intelligence, and low-altitude economy [8]. 4. Dividend sector with defensive attributes, favoring high-dividend state-owned enterprises and public utility stocks for stable returns [8]. Group 4: Capital Market Reforms - Continuous capital market reforms are empowering the new stock market, with improvements in listing mechanisms and pricing efficiency expected to create new opportunities [9]. - In 2025, capital market reforms will focus on market construction and deepening opening-up, supporting quality enterprise IPOs and enhancing the quality of mergers and acquisitions [9].

Group 1: PMI Data Overview - The manufacturing PMI for April is 49%, a decrease of 1.5 percentage points from the previous month, indicating a contraction in the manufacturing sector[1] - The service sector PMI stands at 50.1%, down 0.2 percentage points month-on-month, while the construction PMI is at 51.9%, also down 1.5 percentage points[1] - The decline in manufacturing PMI is the largest among the three sectors, falling below the 50% threshold, signaling external demand's impact on the economy[1] Group 2: External Demand Impact - Concerns over tariffs have materialized, with the April manufacturing PMI drop exceeding the historical average decline of 0.7 percentage points[1] - The April manufacturing PMI's month-on-month decline of 1.5 percentage points is the third largest for this period in the last decade, following declines of 2.1 and 2.7 percentage points in April 2022 and 2023, respectively[1] - The manufacturing production index fell by 2.8 percentage points to 49.8%, while the new orders index decreased by 2.6 percentage points to 49.2%, primarily due to a drop in export orders[1] Group 3: Employment and Pricing Trends - The employment index in manufacturing decreased slightly by 0.3 percentage points to 47.9%, while the construction employment index fell significantly to 37.8%, the lowest on record[2] - The input price index for raw materials dropped by 2.8 percentage points to 47%, while the output price index fell by 3.1 percentage points to 44.8%, indicating greater pressure on output prices compared to input prices[2] - The textile and equipment manufacturing sectors, which are more reliant on external demand, experienced greater declines in PMI compared to high-tech manufacturing and consumer goods sectors[2] Group 4: Future Outlook and Policy Recommendations - The report suggests that external demand pressures may increase in May and June due to tariff changes and global manufacturing trends[1] - To counteract the impact of declining exports, boosting service demand is highlighted as a critical strategy, requiring more policy support to enhance overall economic activity[2] - Upcoming growth stabilization policies are expected to be implemented in the second quarter, focusing on expanding domestic demand, particularly in consumption, to mitigate export impacts[2]

Core Viewpoint - The recent implementation of "reciprocal tariffs" by the Trump administration, imposing a 34% tariff on Chinese imports, has prompted China to respond with similar measures, leading to significant market volatility and a potential shift in investment strategies [1][2][3]. Group 1: Market Reactions - The A-share market experienced significant fluctuations due to China's unexpected retaliatory measures and the negative sentiment from overseas markets, which were influenced by the escalating trade tensions [1][3]. - The adjustment in A-shares is seen as an overreaction to the U.S.-China tariff conflict, with the potential for a more stable outlook if the situation is managed effectively [3][4]. Group 2: Economic Implications - China's retaliatory tariffs could impact its exports and economic growth, with estimates suggesting a potential GDP impact of around 1% if U.S. tariffs increase to 54% [5]. - Despite short-term pressures, there is a long-term trend towards domestic substitution in key industries such as semiconductors and new energy vehicles, which may mitigate some negative effects [5]. Group 3: Investment Strategies - Current market declines are viewed as an opportunity for investors to increase stock allocations, particularly in cyclical sectors that are undervalued [2][6]. - The focus should be on enhancing domestic demand through fiscal and monetary policies, which could attract foreign investment back to China [7][8]. Group 4: Policy Recommendations - The government is encouraged to implement flexible monetary policies, increase fiscal deficits, and leverage infrastructure investments to stimulate economic recovery [7][8]. - Key areas for policy focus include infrastructure investment, real estate price stabilization, and gradual recovery of consumer spending [8][9].

Group 1 - The core viewpoint is that the recent implementation of "reciprocal tariffs" by the Trump administration, which includes a 34% tariff on Chinese imports effective April 9, has led to significant market volatility and a strong response from China, which announced a similar 34% tariff on U.S. goods starting April 10 [1][2] - The A-share market's significant fluctuations are attributed to China's unexpected countermeasures and the sharp decline in overseas markets, which has created a global panic [1][2] - The potential for a market rebound exists, as the current downturn may be overly pessimistic, especially considering the upcoming U.S. midterm elections in November 2024, which could pressure Trump to reconsider further tariff increases [2] Group 2 - Investors are advised to focus on cyclical sectors, such as infrastructure, real estate, and consumer recovery, due to their low valuations and smoother domestic demand expansion [2] - If China engages in counter-cyclical measures, such as leveraging in real estate and city investment, it could lead to a more certain improvement in fundamentals, attracting foreign capital back [2] - The core logic for this year emphasizes domestic demand expansion, which is seen as beneficial for stock assets, suggesting a preference for equities over bonds due to limited room for declines in ten-year treasury yields [2]