Core Insights - China's overall debt risk is manageable, but new challenges are emerging, including rising debt levels and macro leverage ratios, slowing nominal economic growth, and mismatches in debt-asset timelines [2][6] Debt Scale and Macro Leverage - As of Q3 2025, China's total debt in the non-financial sector is approaching 420 trillion yuan, accounting for 302.3% of GDP, a significant increase of 161.9 percentage points from 140.4% in Q3 2008, with an average annual growth rate of 9.5% [3] - Global macro leverage has also risen from 179.2% to 241.2% during the same period, with developed economies seeing an increase from 224.6% to 266.3% [3] Sectoral Analysis of Debt - Non-financial enterprises and local government sectors account for 70% of China's debt, with local government debt being a significant structural risk due to rapid expansion and reliance on financing platforms [4] - Local government explicit debt stands at 53.7 trillion yuan (approximately 38.7% of GDP), but including financing platform liabilities significantly increases the total debt burden [4] Local Government Debt Risks - Local government debt risks are concentrated in regions with rapid debt growth, sluggish fiscal revenue, and high dependence on financing platforms [5] - There is a notable regional disparity in local government debt, with coastal and core urban areas having manageable risks, while central and western regions face increasing debt pressures due to economic challenges [5] Challenges Facing Debt Management - The traditional model of "using growth to manage debt" is under pressure as nominal GDP growth slows, complicating debt governance [6][7] - The decline in land sales revenue, which has dropped by over 30% in some areas, undermines the previous model of "using land to generate revenue and service debt," indicating a structural challenge rather than a cyclical one [7] - Changes in financial risk preferences are tightening the constraints on debt adjustments, making it harder for local governments to refinance and increasing liquidity risks [7]

Core Viewpoint - China's debt risk is overall controllable, but new challenges such as rising debt scale and macro leverage ratio, slowing nominal economic growth, land finance transformation, changes in financial risk preferences, and mismatched debt-asset durations need attention [2][3]. Debt Scale and Macro Leverage - Since the 2008 global financial crisis, China's debt scale has continuously expanded, with the macro leverage ratio rising significantly. As of Q3 2025, the total debt of non-financial sectors in China approached 420 trillion yuan, accounting for 302.3% of GDP, a substantial increase of 161.9 percentage points from 140.4% in Q3 2008, with an average annual growth rate of 9.5 percentage points [5]. - In comparison, global macro leverage increased from 179.2% to 241.2% during the same period, with an average annual growth rate of 3.6 percentage points [5]. Sectoral Analysis of Debt - Non-financial enterprises and local governments are the main carriers of debt expansion in China, accounting for 70% of the total debt stock as of Q3 2025 [6]. - Local government explicit debt was 53.7 trillion yuan (approximately 38.7% of GDP), but including interest-bearing liabilities of financing platforms significantly increases the broad local government debt scale [7]. Structural Debt Risks - Local government debt risks are concentrated in regions with rapid debt expansion, sluggish fiscal revenue growth, and high reliance on financing platforms. While overall local government debt has asset and institutional support, structural issues are prominent [8]. - There is a clear regional differentiation in local debt, with coastal and core urban areas having larger debt but stronger economic foundations, while central and western regions face rising debt rates and repayment pressures due to slower fiscal revenue growth [8]. New Challenges for Debt "Gray Rhino" - The debt "gray rhino" issue has persisted for a long time, with rising debt scale and macro leverage not evolving into systemic risks due to sustained economic growth and favorable fiscal policies. However, the macro environment is changing, presenting new challenges [10]. - The nominal growth center is shifting downward, reducing the space for "growth-based debt" strategies. The potential for rapid expansion of nominal GDP is diminishing, complicating traditional debt management approaches [10][11]. - The land finance model is becoming unsustainable, with land transfer revenues declining significantly, affecting local governments' ability to service debt. This shift is not merely cyclical but structural, influenced by demographic changes and housing demand saturation [11]. - Financial institutions are becoming more cautious in risk pricing for local governments and financing platforms, leading to tighter debt adjustment processes and increased liquidity risks [11].

1. Report Industry Investment Rating The report does not explicitly mention the overall industry investment rating. 2. Core Viewpoints - The analysts are optimistic about the equity market in February with a balanced style, while the bond market has an increased risk of adjustment [2][7]. - The marginal expansion of the real - sector balance sheet in February is highly certain, and the probability of a significant tightening of the capital market is low [2]. - In the context of the marginal convergence of the national balance sheet, the top - down subjective allocation strategy focusing on position selection and style analysis will gain more attention and favor from the market [22]. 3. Summary by Directory 3.1 National Asset - Liability Sheet Analysis - **Liability Side**: In December 2025, the real - sector liability growth rate was 8.4% (previous value 8.6%). It is expected to drop to around 8.3% in January 2026, rebound slightly in February, and decline in March. The capital market tightened marginally last week. There is a risk of significant tightening in February, but the probability is not high [2][17]. - **Fiscal Policy**: The net increase of government bonds last week was 235.3 billion yuan (higher than the planned 141.3 billion yuan), and the planned net increase next week is 721.4 billion yuan. The government liability growth rate at the end of December 2025 was 12.4% (previous value 13.1%), expected to rebound to around 12.6% in January 2026 and likely decline in February [3][18]. - **Monetary Policy**: Last week, the average weekly trading volume of funds decreased, the price increased, and the term spread narrowed. The one - year Treasury bond yield ended at 1.30% on the weekend. It is estimated that the lower limit of the one - year Treasury bond yield is about 1.3%, with a central value around 1.4%, and there may be a 10 - basis - point interest rate cut in 2026. The term spread between the ten - year and one - year Treasury bonds narrowed to 51 basis points [3][18]. - **Asset Side**: The physical quantity data in December 2025 continued to run smoothly compared to November. The full - year real economic growth target in 2025 was around 5%, and the nominal economic growth target was around 4.9%. It needs further observation whether 5% will be the central target for China's nominal economic growth in the next 1 - 2 years [4][19]. 3.2 Stock - Bond Cost - effectiveness and Stock - Bond Style - Since 2011, China has been in a downward cycle of potential economic growth, which may have ended in Q4 2024, followed by a low - level narrow - range oscillation in the profit cycle. The government put forward three policy goals in 2016: stabilizing the macro - leverage ratio, financial institutions benefiting the real economy, and "housing is for living in, not for speculation." Currently, the convergence of the liability side has not ended, but the space is limited [6][20]. - Last week, the capital market tightened marginally, the overall equity market declined, but value stocks strengthened. The long - end bond yield decreased slightly, and the short - end increased. The stock - bond cost - effectiveness slightly favored bonds. The ten - year Treasury bond yield decreased by 2 basis points to 1.81%, the one - year increased by 2 basis points to 1.30%, and the 30 - year remained stable at 2.29% [7][21]. - In February, the analysts are optimistic about the equity market with a balanced style and believe that the bond market has little investment value. They recommend a 50% position in the Shanghai Composite 50 Index and a 50% position in the China Securities 1000 Index [7][22]. 3.3 Industry Recommendation 3.3.1 Industry Performance Review - This week, the A - share market declined with increased trading volume. The Shanghai Composite Index fell 0.44%, the Shenzhen Component Index fell 1.62%, and the ChiNext Index fell 0.09%. Among the Shenwan primary industries, petroleum and petrochemicals, communication, coal, non - ferrous metals, and agriculture, forestry, animal husbandry, and fishery had the largest increases, while national defense and military industry, power equipment, automobiles, computers, and comprehensive industries had the largest declines [30]. 3.3.2 Industry Crowding - out and Trading Volume - As of January 30, the top five crowded industries were electronics, non - ferrous metals, power equipment, machinery, and communication, with crowding - out degrees of 15.9%, 10.3%, 9%, 6.4%, and 6.2% respectively. The bottom five were comprehensive, beauty care, social services, environmental protection, and steel, with 0.1%, 0.2%, 0.7%, 0.8%, and 0.9% respectively [31]. - This week, the top five industries with increased crowding - out were non - ferrous metals, agriculture, forestry, animal husbandry, and fishery, food and beverage, media, and communication. The top five with decreased crowding - out were power equipment, national defense and military industry, electronics, automobiles, and machinery [31]. - As of January 30, non - ferrous metals, petroleum and petrochemicals, communication, national defense and military industry, and electronics had relatively high crowding - out quantiles since 2018, while pharmaceutical biology, transportation, light industry manufacturing, beauty care, and non - bank finance had relatively low quantiles [31]. - The average daily trading volume of the entire A - share market this week was 3.06 trillion yuan, up from 2.8 trillion yuan last week. Petroleum and petrochemicals, agriculture, forestry, animal husbandry, and fishery, coal, non - ferrous metals, and non - bank finance had the highest year - on - year growth rates in trading volume, while national defense and military industry, automobiles, household appliances, commercial retail, and power equipment had the largest declines [33]. 3.3.3 Industry Valuation and Earnings - This week, among the Shenwan primary industries, the PE(TTM) of petroleum and petrochemicals, communication, coal, non - ferrous metals, and food and beverage had the largest increases, while national defense and military industry, power equipment, computers, automobiles, and comprehensive industries had the largest declines [37]. - As of January 30, 2026, industries with high full - year 2024 earnings forecasts and relatively low current valuations compared to history include banks, insurance, power, public utilities, transportation, pharmaceutical biology, beauty care, new energy, and consumer electronics [38]. 3.3.4 Industry Prosperity - **External Demand**: It showed mixed trends. The global manufacturing PMI dropped from 50.5 in December to 50.4, and most of the disclosed PMI data of economies in January increased. The CCFI index fell 2.74% week - on - week. Port cargo throughput declined. South Korea's export growth rate rose to 13.4% in December and 33.9% in January. Vietnam's export growth rate rose from 15.8% in November to 23.9% in December [42]. - **Domestic Demand**: The second - hand housing price increased last week, and quantity indicators showed mixed trends. Highway truck traffic declined. The capacity utilization rate of ten industries declined from September to October 2025, increased from November to December, and slightly declined in January. Automobile sales were weaker than the historical seasonality, new - home sales remained at the historical low, and second - hand home sales were stronger than the historical seasonality [42]. 3.3.5 Public Fund Market Review - In the fourth week of January (January 26 - 30), most active public equity funds underperformed the CSI 300. The 10%, 20%, 30%, and 50% quantiles of weekly returns were 2.3%, 1.1%, 0.4%, and - 0.6% respectively, while the CSI 300 rose 0.08% [59]. - As of January 30, the net asset value of active public equity funds was estimated to be 4.04 trillion yuan, up from 3.66 trillion yuan in Q4 2024 [59]. 3.3.6 Industry Recommendation - In the de - leveraging cycle, the stock - bond cost - effectiveness favors equities to a limited extent, and value stocks are more likely to be dominant. The recommended A + H dividend portfolio includes 13 stocks, and the A - share portfolio includes 20 stocks, mainly in industries such as banking, telecommunications, petroleum and petrochemicals, and transportation [62].

Core Viewpoint - The macro leverage ratio in China is projected to rise to 302.4% by the end of 2025, indicating a significant increase in debt levels relative to nominal GDP, necessitating structural optimization of leverage to support economic growth effectively [1][2]. Summary by Sections Macro Leverage Ratio Trends - The macro leverage ratio increased by 0.1 percentage points from 302.3% at the end of Q3 2025 to 302.4% at the end of Q4 2025. For the entire year, it rose by 11.7 percentage points, driven by low debt growth in the household and corporate sectors, while government debt expanded significantly [2]. - By the end of 2025, the debt balances of non-financial enterprises, households, and government sectors grew by 7.8%, 0.5%, and 17.0% respectively, leading to a total debt balance increase of 8.2%, while nominal GDP only grew by 4.0% [2]. Sectoral Contributions to Leverage Ratio - The rise in the macro leverage ratio was primarily driven by the corporate and government sectors, while the household sector continued to reduce its leverage. Factors such as the adjustment in the real estate market and slow income growth led households to decrease debt and increase savings [3]. - Government investment projects and a recovering corporate financing demand, supported by proactive fiscal policies, contributed to the increase in debt levels in the corporate and government sectors [3]. Future Outlook and Policy Recommendations - The monetary policy in 2026 is expected to maintain a moderately loose stance, which may lead to continued growth in corporate and government debt, putting upward pressure on the macro leverage ratio. However, this could be offset by an increase in nominal GDP growth [4]. - Recommendations for optimizing leverage structure include supporting financing for private SMEs and technology firms, while controlling the debt expansion of state-owned enterprises. This approach aims to stabilize the leverage ratio in the household sector and promote sustainable economic growth [5][6]. - The government is encouraged to increase fiscal spending in social welfare areas, which could enhance consumer spending potential. For instance, a 1% interest subsidy on household loans could reduce interest burdens significantly and stimulate consumption growth [6].

Core Viewpoint - The macro leverage ratio in China has reached 302.4% in Q4 2025, driven by a passive increase due to declining nominal GDP growth, with household and corporate debt growth remaining low [3][4][11]. Economic Overview - The macro leverage ratio increased by 0.1 percentage points in Q4 2025, marking a total annual rise of 11.8 percentage points, with nominal GDP growth slowing to 4.0%, the lowest since the reform and opening up period [4][11]. - The actual GDP growth for 2025 was 5.0%, indicating that the increase in leverage was primarily due to the decline in nominal GDP rather than rapid credit expansion [4][11]. Sector Analysis - Household leverage decreased by 2.0 percentage points, while non-financial corporate leverage rose by 6.2 percentage points, and government leverage increased by 7.6 percentage points [5][10]. - The household debt growth rate was only 0.5%, the lowest on record, with mortgage growth at -1.5%, continuing a trend of negative growth for 11 consecutive quarters [7][9]. Consumer Behavior - High real mortgage rates have led to increased early repayments, contributing to a reduction in mortgage balances [8][9]. - Consumer loan growth dropped to 0.2%, the lowest ever, due to stagnant income growth, with median disposable income growth at 4.5%, also a historical low [9][12]. Government Policy Recommendations - The report suggests accelerating income growth plans for urban and rural residents and stabilizing state-owned enterprise leverage while supporting private enterprises to increase leverage [12][13]. - It emphasizes the need for government investment in human capital and social welfare sectors to stimulate consumption and improve the macro leverage ratio [12][13].

Core Viewpoint - The macro leverage ratio in China is projected to rise to 302.4% by the end of 2025, driven by a decline in nominal GDP growth and a significant reduction in household debt growth, particularly in mortgage and consumer loans [2][3] Macro Leverage Ratio - The macro leverage ratio increased by 0.1 percentage points in Q4 2025, reaching 302.4%, with an annual increase of 11.7 percentage points, marking a significant rise compared to previous years [3] - The nominal GDP growth rate is expected to slow to 4.0% in 2025, the lowest since the reform and opening up period, leading to a passive increase in the macro leverage ratio [3] Household Debt and Consumer Loans - Household debt growth is at a historical low of 0.5%, with mortgage growth expected to decline by 1.5%, marking 11 consecutive quarters of negative growth [5][6] - Consumer loan growth has plummeted to 0.2%, the lowest on record, due to sluggish income growth among residents [7] Sectoral Analysis - The household leverage ratio decreased by 2.0 percentage points, while non-financial corporate leverage increased by 6.2 percentage points, and government leverage rose by 7.6 percentage points [4] - The report indicates a trend of deleveraging in the household sector, while corporate debt levels continue to rise [4] Government Debt and Fiscal Policy - The government sector is expected to continue increasing leverage to invest in human capital, with a focus on stabilizing economic growth and improving the efficiency of debt usage [8][9] - Recommendations include increasing fiscal spending in social sectors such as education and healthcare, and providing interest subsidies on household loans to stimulate consumption [10]

1. Report Industry Investment Rating No relevant content provided. 2. Core Viewpoints of the Report - The report is optimistic about the equity market before the end of February, and focuses on whether the current growth - dominant style can gradually shift to a balanced or even value - dominant style. If this scenario occurs, the risk of bond market adjustment in February will increase [2][9][22]. - In the context of the marginal convergence of the national balance sheet, the top - down subjective allocation strategy focusing on position selection and style judgment will receive more attention and favor from the market [9][22]. - In the de - leveraging cycle, the margin of the stock - bond ratio in favor of equities is limited, and the probability of value being relatively dominant in style is higher [10][58]. 3. Summary by Directory 3.1 National Balance Sheet Analysis 3.1.1 Liability Side - In December 2025, the liability growth rate of the real sector was 8.4%, down from the previous value of 8.6%, in line with expectations. It is expected to continue to decline to around 8.3% in January 2026. The local bond issuance rhythm seems to have accelerated this week. If it continues in February, it may drive a slight rebound in the liability growth rate of the real sector, but the probability of further relaxation of the capital market in February is limited [2][17]. - The central bank's fourth - quarter meeting in 2025 indicated that the general direction of stabilizing the macro - leverage ratio remains unchanged, and it is waiting for the quantitative fiscal targets to be given at the Two Sessions in 2026 [2][17]. 3.1.2 Fiscal Policy - Last week, the net increase of government bonds (including national and local bonds) was 62.14 billion yuan, higher than the planned 50.75 billion yuan. Next week, the planned net increase is 14.13 billion yuan. The government liability growth rate at the end of December 2025 was 12.4%, down from the previous value of 13.1%. It is expected to rebound to around 12.5% in January 2026 and likely decline again in February [3][18]. 3.1.3 Monetary Policy - Last week, the capital trading volume decreased, the capital price decreased, and the term spread narrowed on a weekly average basis. After excluding seasonal effects, the capital market slightly tightened. The one - year Treasury bond yield oscillated upward, closing at 1.28% at the weekend. It is estimated that the lower limit of the one - year Treasury bond yield is about 1.3%, and the central value is around 1.4%. It is expected to cut interest rates by 10 basis points in 2026. The term spread between the ten - year and one - year Treasury bonds narrowed to 55 basis points. The bond market shows that the capital market has basically reached the limit of relaxation [3][18]. 3.1.4 Asset Side - In December 2025, the physical quantity data continued to run smoothly compared with November. It is necessary to focus on whether the economy can continue to stabilize or even improve marginally. The Two Sessions set the annual real economic growth target for 2025 at around 5%. Based on the deficit and deficit rate (4%), the annual nominal economic growth target is 4.9%. It is necessary to further observe whether a nominal economic growth rate of around 5% will become the central target for China's nominal economic growth in the next 1 - 2 years [4][19]. 3.2 Stock - Bond Cost - Effectiveness and Stock - Bond Style - Since 2011, China has entered a downward cycle of potential economic growth, which seems to have ended in the fourth quarter of 2024. Subsequently, China's profit cycle has entered a state of low - level narrow - range oscillation. The Chinese government put forward three policy goals in 2016: stabilizing the macro - leverage ratio, making the financial sector benefit the real economy, and ensuring that houses are for living in, not for speculation. Currently, the convergence of the liability side has not ended, but the space is limited [7][20]. - Overseas, China and the United States are in a state of equal - strength competition. If the valuation of the technology fields where the United States was previously leading undergoes a systematic re - evaluation, global funds may flow from the United States to China. Attention should be paid to whether the RMB exchange rate begins to gradually enter an appreciation channel. The risk preference may also enter a range - bound state following the profit [7][20][21]. - Last week, the capital market slightly tightened. The equity market rose as a whole, but value stocks continued to weaken, with the growth style remaining dominant. In terms of bond yields, the long - end declined slightly, and the short - end rose. The stock - bond cost - effectiveness slightly favored equities. The ten - year Treasury bond yield decreased by 1 basis point to 1.83%, the one - year Treasury bond yield increased by 4 basis points to 1.28%, the term spread narrowed to 55 basis points, and the 30 - year Treasury bond yield decreased by 2 basis points to 2.29%. The full - position equity strategy with equal allocation of growth and value performed well, and the broad - based rotation strategy outperformed the CSI 300 index by 1.29 pct last week. Since its establishment in July 2024, the broad - based rotation strategy has underperformed the CSI 300 index by - 1.49 pct, with a maximum drawdown of 12.1% (compared with 15.7% for the CSI 300 index) [8][21]. - This week, the Shanghai 50 Index (60% position) and the CSI 1000 Index (40% position) are recommended. The broad - based index recommendation is a top - down subjective allocation strategy focusing on position selection and style judgment, which can accommodate a large amount of funds, has small fluctuations, and good liquidity [9][22]. 3.3 Industry Recommendation 3.3.1 Industry Performance Review - This week, the A - share market rose with shrinking trading volume. The Shanghai Composite Index rose 0.84%, the Shenzhen Component Index rose 1.1%, and the ChiNext Index fell 0.3%. Among the Shenwan primary industries, building materials, petroleum and petrochemicals, steel, basic chemicals, and non - ferrous metals had the largest increases, with weekly increases of 9.2%, 7.7%, 7.3%, 7.3%, and 6% respectively. Banks, communications, non - bank finance, food and beverages, and pharmaceuticals had the largest declines, with weekly declines of - 2.7%, - 2.1%, - 1.5%, - 1.4%, and - 0.4% respectively [28]. 3.3.2 Industry Crowding and Trading Volume - As of January 23, the top five industries in terms of crowding were electronics, power equipment, machinery, non - ferrous metals, and computers, with crowding degrees of 17.7%, 11.7%, 7.3%, 7.3%, and 6.7% respectively. The bottom five were beauty care, comprehensive, coal, social services, and textile and apparel, with crowding degrees of 0.2%, 0.2%, 0.4%, 0.6%, and 0.6% respectively. - This week, the top five industries with the largest increase in crowding were national defense and military industry, basic chemicals, power equipment, non - ferrous metals, and machinery, with increases of 1.4%, 1%, 0.8%, 0.7%, and 0.5% respectively. The top five with the largest decline were electronics, computers, communications, pharmaceuticals, and social services, with changes in crowding degrees of - 2%, - 1.8%, - 0.7%, - 0.3%, and - 0.2% respectively. - As of January 23, the crowding degrees of national defense and military industry, power equipment, electronics, non - ferrous metals, and machinery were at the 98.7%, 93.7%, 92.8%, 89.5%, and 86.9% quantiles since 2018 respectively, which were relatively high. Transportation, food and beverages, agriculture, forestry and animal husbandry, beauty care, and pharmaceuticals were at the 0.4%, 0.7%, 2.4%, 2.6%, and 2.9% quantiles respectively, which were relatively low. - This week, the average daily trading volume of the entire A - share market was 2.8 trillion yuan, up from 3.47 trillion yuan last week. Basic chemicals, real estate, public utilities, building materials, and steel had the highest year - on - year growth rates in trading volume, with changes of 7.5%, 7.3%, 4.4%, 3.5%, and 3.2% respectively. Media, computers, non - bank finance, social services, and commercial retail had the largest declines in trading volume, with changes of - 45.9%, - 44.6%, - 44.2%, - 38.5%, and - 37.3% respectively [29][32]. 3.3.3 Industry Valuation and Earnings - This week, among the Shenwan primary industries, building materials, petroleum and petrochemicals, steel, basic chemicals, and non - ferrous metals had the largest increases in PE(TTM), with changes of 9.3%, 7.7%, 7.4%, 7.4%, and 6.1% respectively. Banks, communications, food and beverages, non - bank finance, and pharmaceuticals had the largest declines, with valuation changes of - 2.8%, - 2.1%, - 1.4%, - 1.4%, and - 0.5% respectively. - In terms of valuation - earnings matching, as of January 23, 2026, industries with relatively high full - year 2024 earnings forecasts and relatively low current valuations compared to history include banks, insurance, coal, public utilities, transportation, pharmaceuticals, beauty care, new energy, and consumer electronics [35][36]. 3.3.4 Industry Prosperity - In terms of external demand, there were mixed trends. In December, the global manufacturing PMI decreased from 50.5 to 50.4, and the PMIs of major economies showed mixed trends. The CCFI index decreased by 0.09% week - on - week in the latest week. Port cargo throughput declined. South Korea's export growth rate rose to 13.4% in December and to 14.9% in the first 20 days of January. Vietnam's export growth rate rose from 15.8% in November to 23.9% in December. - In terms of domestic demand, the second - hand housing price rose in the latest week, and the quantity indicators showed mixed trends. The traffic volume of trucks on expressways increased. The capacity utilization rate of ten industries fitting continued to decline from September to October 2025, continued to rise from November to December, and slightly declined in January. Automobile trading volume was relatively weak compared to historical seasonality, new - home sales remained at a historical low, and second - hand home sales were relatively weak compared to historical seasonality. As of January 18, the national urban second - hand housing listing price index rose 0.27% compared to last week. As of January 2, the producer price index rose 0.3% week - on - week [39]. 3.3.5 Public Offering Market Review - In the third week of January (January 19 - 23), most active public offering equity funds outperformed the CSI 300. The weekly growth rates of the 10%, 20%, 30%, and 50% quantiles were 4.7%, 3.5%, 2.7%, and 1.5% respectively, while the CSI 300 declined 0.6% weekly. - According to the latest net value and share estimates, as of January 23, the net asset value of active public offering equity funds was 4.06 trillion yuan, up from 3.66 trillion yuan in Q4 2024 [55]. 3.3.6 Industry Recommendation - In the de - leveraging cycle, the margin of the stock - bond ratio in favor of equities is limited, and the probability of value being relatively dominant in style is higher. Red - chip stocks are generally expected to have three characteristics: no balance - sheet expansion, good earnings, and survival. Combining these three characteristics with the under - allocation in the public offering's fourth - quarter report, the recommended A + H red - chip portfolio includes 13 A + H stocks, and the A - share portfolio includes 20 A - share stocks, mainly concentrated in industries such as banks, telecommunications, petroleum and petrochemicals, and transportation. Some industries with a large number of stocks, such as banks, have been appropriately streamlined [10][58].

Core Viewpoint - The Producer Price Index (PPI) in China has shown a prolonged period of decline, with a year-on-year decrease of 1.9% reported for December 2025, marking 39 consecutive months of decline since October 2021. This trend raises questions about the underlying reasons for the stagnation in PPI despite significant GDP growth of 250% over the past 15 years [1][2][5]. Group 1: PPI Trends and Historical Context - The PPI has been in negative territory for 111 months from 2012 to 2025, indicating a long-term weakness in price levels despite substantial economic growth [1][2]. - The PPI index, set at 100 in December 2010, remained unchanged by December 2025, suggesting that the index has not increased over the past 15 years [1][5]. - Historical data shows that PPI experienced significant fluctuations, particularly influenced by production material prices, which have seen a cumulative increase of zero over the past 15 years [5][6]. Group 2: Economic Factors Influencing PPI - The 2008 financial crisis led to a surge in PPI due to government investment in infrastructure, but this effect was temporary, and PPI turned negative after March 2012 due to limited demand from final consumption [2][3]. - The divergence between Chinese and U.S. PPI post-2012 can be attributed to rapid capacity expansion in China, leading to a significant drop in export ratios relative to total industrial output [9][10]. - The prices of production materials, particularly in the upstream mining sector, have been volatile, heavily influenced by fluctuations in coal and oil prices [17][20]. Group 3: Demand and Supply Dynamics - The transmission of price changes from upstream to downstream sectors has been hindered by weak demand, particularly in the context of a competitive downstream market where prices are more sensitive to market conditions [23][24]. - Export dynamics play a crucial role in influencing midstream product prices, with a significant portion of revenue from industries like electronics and transportation being dependent on exports [27][28]. - The overall weak demand, especially in real estate, has contributed to a persistent decline in PPI, as seen in the correlation between real estate investment trends and PPI movements [38][39]. Group 4: Recommendations for Economic Adjustment - To address the long-term weakness in PPI, it is essential to adjust the supply-demand relationship, particularly by expanding effective demand through increased income for lower and middle-income groups [45][56]. - Stabilizing the real estate market is highlighted as a critical measure to boost consumption and alleviate overcapacity issues, with a focus on maintaining housing prices to prevent further declines [45][56]. - The government is encouraged to optimize fiscal spending to enhance residents' income, thereby supporting consumption and improving overall economic conditions [56].

Core Viewpoint - The Producer Price Index (PPI) in China has shown a continuous decline, with a year-on-year decrease of 1.9% reported for December 2025, marking 39 consecutive months of decline since October 2021. This trend raises questions about the underlying reasons for the prolonged weakness in PPI despite significant GDP growth over the same period [1][52]. Group 1: PPI Trends and Historical Context - The PPI has been in negative territory for 111 months from 2012 to 2025, indicating that two-thirds of this period has been characterized by negative growth [1][52]. - From 2010 to 2025, China's GDP increased by 250%, yet the PPI index remained unchanged, suggesting a disconnect between economic growth and producer prices [1][53]. - The decline in PPI began after a significant investment stimulus in response to the 2008 financial crisis, which initially boosted PPI and CPI but later led to a prolonged period of negative PPI starting in March 2012 [2][53]. Group 2: Factors Influencing PPI - The PPI's long-term decline is primarily influenced by the prices of production materials, which have shown significant volatility but an overall cumulative increase of zero over the past 15 years [4][56]. - The prices of living materials have fluctuated less, with a cumulative increase of 4.4%, indicating a divergence in price trends between production and living materials [4][56]. - The divergence between Chinese and U.S. PPI post-2012 is attributed to rapid capacity expansion in China, leading to a significant drop in the export share of total industrial output [8][60]. Group 3: Demand and Supply Dynamics - Weak demand, particularly in the real estate sector, has been a critical factor in the inability of upstream price increases to transmit downstream, resulting in persistent PPI weakness [41][93]. - The real estate market's downturn has been linked to a broader economic slowdown, with real estate investment growth declining significantly since its peak in 2021 [35][88]. - The overall supply-demand imbalance, characterized by excess supply, has hindered price recovery, with industrial value-added growth lagging behind demand growth since 2020 [31][93]. Group 4: Recommendations for Economic Adjustment - To address the persistent weakness in PPI, it is essential to adjust the supply-demand relationship, particularly by expanding effective demand [41][93]. - Increasing the income of middle and low-income groups and promoting consumption are recommended strategies to stimulate demand and support price recovery [103]. - Stabilizing the real estate market is also suggested as a means to alleviate excess capacity and promote consumer spending, although achieving stable housing prices may be challenging [103].

Group 1 - The core viewpoint of the article highlights the rising macro leverage ratio in China, which increased by 11.6 percentage points from the end of 2024 to 302.3% in the first three quarters of 2025, surpassing the annual increase of 10.1 percentage points in 2024 [1] - Developed economies dominate the global debt stock, with some countries like Japan having a macro leverage ratio as high as 390%, although overall levels are currently lower than China's [1] - The article identifies new challenges facing domestic debt issues, including slowing nominal growth, a sharp decline in land transfer income, increased debt interest burdens, mismatches in liability-asset durations due to shifts in investment focus, and risks of balance sheet contraction [1] Group 2 - Zhang Xiaojing proposes four policy recommendations: creating a favorable macro environment to stabilize nominal growth and further reduce interest rates and reserve requirements [2] - The second recommendation emphasizes matching credit with efficiency through a market-oriented risk pricing system, reducing government intervention, and promoting equity financing [2] - The third suggestion involves exploring national macro asset-liability management to expand the central government's balance sheet and mitigate risks of private sector balance sheet contraction [2] - The final recommendation calls for adapting to the shift from "investment in objects" to "investment in people" by adjusting accounting and debt assessment systems [2]