WE THINK: Domestic Demands is the Key to Globalisation 2.0

In November, the A-share market saw its focus shift upward amid oscillating rotations, with the Wind All A Index rising by 1.34% for the month and the CSI 300 Index increasing slightly by 0.66%, reflecting characteristics of a slow bull market.

In contrast, Hong Kong stocks and Chinese concept stocks were influenced by the emotions surrounding the U.S. elections, leading to weaker performance in November. The Hang Seng Index fell by 4.4% and the Hang Seng Tech Index dropped by 3.24%. The adjustment in Hong Kong stocks during this period essentially erased the gains made since September 24. The A-share market experienced a smaller degree of adjustment. Nevertheless, both the major indices in Hong Kong and A-shares recorded double-digit gains over the first eleven months of the year.

With the dust settling from the November U.S. elections, the market has recently been trading on the "Trump strategy." Assets like Bitcoin and Tesla have shown strong performance, while currencies of countries threatened by the trade war have weakened. Some investors, who originally lacked confidence in Chinese equity assets, are now becoming pessimistic again in light of the uncertainties of the Trump 2.0 era.

In this edition of WE THINK, we will conduct some preliminary scenario analyses on the possible trajectories of the Chinese economy and Chinese assets in the Trump 2.0 era.

Is Trump really a price killer for Chinese assets?

From January 20, 2017, to January 20, 2021, was the Trump 1.0 era. Although trade tensions between China and the U.S. began in 2018, looking back at the performance of the A-share market during this period, it did not exhibit characteristics of a sustained bear market. The Wind All A Index rose by 33.48%, and the value of the RMB appreciated by 5.44%.

The previous A-share bear market began in February 2021, right after Trump left office. The decline in Chinese housing prices also started in the second half of 2021, as various tightening policies in the real estate sector began to take effect. Some highly leveraged private real estate companies started to face defaults, which gradually spread and led to systemic difficulties in the real estate industry, causing prices to fall significantly from their peak in 2021.

The downturn in the real estate sector negatively affected the performance of upstream and downstream industries closely related to real estate, leading to a sharp decrease in land sales revenue for local governments. Consequently, local finances began to encounter difficulties. The negative feedback from the decline in the real estate sector contributed to a downturn in the macro economy, which clearly transmitted to the profits and ROE of listed companies. Thus, after 2021, the bear market sentiment in the stock market should be considered relatively aligned with the changes in fundamental economic conditions.

What factors led to the bear marketin real estate and in the stock market after 2021? Was it due to U.S.-China trade tensions? The cause can be considered from different angles, and there is no right answer. However, I do not attribute the bear market in Chinese assets to U.S.-China trade disputes or America’s high-tech blockades. If the key factors determining whether Chinese assets enter a bear or bull market do not lie in the hands of the Americans, then concerns about the impact of the Trump 2.0 era on the Chinese stock market may be somewhat alleviated.

To resolve a problem, one must start with its root cause. Recently, we have observed that China’s macro policies have begun to shift from a tightening stance to an expansionary one. If the determination and intensity are sufficient, this will be crucial for the recovery of asset prices. This is also a key reason why we believe it is important to shift our mindset from a bear market to a bull market since September.

Being vigilant about the uncertainties brought by the Trump 2.0 era to the global landscape is not a bad thing. "Survival through adversity, demise through complacency!" As long as we maintain a cautious mindset and persist in making the right responses, we will naturally achieve good results!

How should we understand the new changes in the era of globalization 2.0? Are the new rules really frightening?

The trade tensions initiated by Trump in 2018 are indeed a landmark event. The 40 years from 1978 to 2018 marked the era of globalization 1.0, based on World Trade Organization rules. During this time, China's exceptional qualities—its intelligence and diligence—allowed it to transform from a state of poverty before reform and opening up to becoming the world's second-largest economy and a global manufacturing hub. China undoubtedly reaped the largest share of the globalization dividend.

Overall, the United States also benefitted during the globalization 1.0 era, but the gains were primarily concentrated among large tech companies and the associated capitalists. Traditional manufacturing and related workers, on the other hand, experienced relative losses during this period. This is the demographic and regional group described in Vice President Pence’s book, "The Hillbilly Elegy." The fact that American voters elected Trump to the White House twice indicates that his advocacy for "America First" and the desire to bring manufacturing back to the U.S. is backed by significant public support.

In recent years, I have visited countries like Greece, Portugal, Spain, and Switzerland, as well as some Southeast Asian nations and the United States. Upon entering these places, I could deeply sense their despair and helplessness in the face of China as a formidable competitor in the manufacturing sector.

On the other hand, our researchers extensively study and track the competitive landscape between China and the global market across various industries. In fields where China has achieved technological breakthroughs, Chinese companies generally lead by a wide margin. A significant reason for this is our population of 1.4 billion, who, largely without religious affiliations, work tirelessly in pursuit of wealth and national prominence. Coupled with the advantages of a vast domestic market, complete industrial support, and efficiency, continuing under the rules of globalization 1.0 would lead to unsustainable wealth and employment imbalances globally.

The emergence of a figure like Trump, who seeks to alter the rules of globalization 1.0, reflects a historical inevitability, though the timing and method remain uncertain. We are currently undergoing an unstable transition period from globalization 1.0 to globalization 2.0. During this transitional phase, where the old order is breaking down and the new one is yet to be established, it is understandable that some people feel confusion and fear about the future. Although no experts have systematically described the rules and characteristics of globalization 2.0 yet, analysis suggests that certain features will likely emerge.

The primary demand of the globalization 2.0 era will be a significant increase in the share of U.S. interests. Trump's declaration of "America First" essentially prioritizes American interests. As the world's leading technological and military power, the largest consumer market, and the top destination for talented immigrants, the U.S. holds the best cards globally. Since World War II, it has been the architect and leader of global game rules, including those established during the globalization 1.0 era.

Now, the U.S. is dissatisfied with the rules it created and seeks to modify them to continue participating. The objective of changing these rules is undoubtedly to enhance the share of American interests. For the high-tech globalization rules that previously benefited the U.S., there is little reason to alter them. However, for free trade rules that have been unfavorable to U.S. manufacturing, we can expect targeted increases in tariffs, coupled with domestic tax reductions and subsidies to facilitate the return of manufacturing.

Given the current structure and characteristics of global trade, which differ significantly from the homogeneous goods of the 1930s, many products imported by other countries from the U.S. possess irreplaceable features, making a trade war similar to that period less likely.

A critical characteristic of globalization 2.0 will shift the focus from "Made in China, sold globally" to "Made globally, sold globally." At first glance, this may suggest a decrease in China's share of global interests. However, from a longer-term perspective and a broader view, this shift may not necessarily be a bad thing. Its advantage lies in sustainability. The concept of a community with a shared future, emphasized by the General Secretary, implies that if all benefits are monopolized by one or two participants, the game cannot continue. Sustainable rules that everyone is willing to engage with represent the greatest benefits.

In fact, the phenomenon of "globally made, globally sold" was also prevalent during globalization 1.0. For instance, Toyota is the world's largest automotive manufacturer, but out of the 10 million vehicles produced in 2023, only 3.4 million were made in Japan, with 66% being globally sourced. Similarly, many Volkswagen cars sold in China are produced locally. This is an accepted, sustainable game rule that benefits all parties involved.

In fact, many entrepreneurial friends around me have been actively preparing to adapt to the era of globalization 2.0 over the past few years. Most outstanding Chinese companies, particularly industry leaders, have either completed or are on the path to completing their global layouts. The flow of the universe is neither inherently good nor bad; outcomes depend on choices made. The transition from globalization 1.0 to 2.0 is an unstoppable historical trend—those who align with it will thrive, while those who resist will face challenges. This applies to entrepreneurs, investors, and ordinary people alike.

Regarding the emerging globalization 2.0 era, I am not personally pessimistic. Of course, the demand for certain replaceable manufacturing jobs within China may decrease, but we will remain the most competitive manufacturing powerhouse globally. China is also bound to produce a group of excellent enterprises and entrepreneurs, akin to Toyota, who will lead in various fields during the globalization 2.0 era.

Recent Strategy

Recently, the A-share market has shown a pattern of advancing two steps and retreating one, with rapid style rotations. Aside from a few trading-oriented investors, the market's wealth effect has not been very pronounced. However, the interest and sentiment of outside investors have been activated, with incremental funds flowing into the market primarily through various ETFs. For some friends with relatively short investment horizons (who have not experienced a complete bull-bear cycle) and those overly focused on market movements, sentiment remains less optimistic.

We view these phenomena as normal. Since late September, the market's development has largely aligned with our expectations. The pace has stabilized, and the characteristics of a slow bull market are quite evident. It is also typical not to see a strong wealth effect at this stage. Just as in farming, spring is not the season for harvesting; it is the time for sowing! Currently, overall valuation levels (especially for a group of quality companies) remain low, and market sentiment is not very high. When autumn arrives and the temperature rises, the wealth effect will naturally follow, signaling the approach of the harvest season.

In terms of specific strategies, we advocate maintaining a bull market mindset and positions. Structurally, we suggest keeping quality, undervalued value stocks and growth stocks as the core holdings, while ensuring a balanced style.

WU Weizhi

                  2024 Dec 1, on the way to Wan Ning

本期《偉志思考》簡體中文版鏈接：

伟志思考：对全球化2.0时代思考，内因才是关键！