Guotai Haotong Strategy: China Stock Market Expected to Present Significant Bottom and Batting Point

Source: One View of the Big Picture

Author: Fang Yi / Guo Yihan / Tian Kaixuan / Su Hui

Core Viewpoint: Micro-level trading shocks are unlikely to last long; the current position is not suitable for blindly selling off. China’s stock market is expected to form an important bottom and hitting zone. China’s supportive easing stance and diversified reserves/diversified growth help to break risk narratives more quickly.

Investment Highlights

▶ China’s stock market is expected to form an important bottom and hitting zone. Stability is the foundation, confidence is key. The Shanghai Composite Index broke below key levels, although the CSI 300 and ChiNext Index experienced limited pullbacks, there is significant differentiation. The All-Share Index has adjusted nearly 9% on average, and the CSI 1000 has fallen 10%. Recent market adjustments are due to two reasons: first, inflation risks and expectations of financial tightening. The uncertain US-Iran situation has led to energy inflation and concerns about financial tightening. Second, micro-transaction structures in the stock market are loosening. Although external conflicts do not directly impact China logically, uncertain outlooks reduce market risk appetite. Recently, stocks and bonds have adjusted simultaneously, with floating gains in fixed income+ products narrowing, and increased unrealized losses constraining institutions with relatively rigid liabilities and high positions since the beginning of the year. We expect the impact of micro-transaction shocks to be short-lived. The current position is not suitable for blindly selling, and China’s stock market is likely to see an important bottom and hitting zone. Although inflation risks remain, China’s assets benefit from increased technological productivity, relatively stable security conditions, and stable economic, social, and capital market environments. Even globally, such diversification of energy reserves and growth is scarce.

▶ How will energy shocks and financial tightening expectations be priced? A three-stage evolution: expectation shock – real shock – return to growth. During recent roadshows, some investors expressed deep concerns about energy price shocks and financial tightening expectations. A key historical reference is the resilience of the US stock market in 2022 amid Russia-Ukraine conflict and multiple Fed rate hikes, which showed strong resilience and rebounds without collapsing. Risk pricing generally occurs in three stages: first, expectation shock. From March to June 2022, Russia-Ukraine conflict erupted, oil prices surged, and the Fed began substantial rate hikes, causing US stocks to decline; second, real shock. After June 2022, the conflict persisted but intensity did not increase, oil prices started to decline from high levels, and risk pricing largely ended. However, due to inflation stickiness and Fed rate hikes, US stocks remained volatile with rebounds. third, return to growth logic. From January 2023, the US AI industry advanced actively, with capital expenditure and performance growth driving stock prices higher. From this, two insights on market pricing emerge: 1) Risk pricing does not mean risks have ended, but that it ends when intensity no longer rises. 2) After risk pricing ends, the key is whether the market has growth capacity. Currently, the US tolerates higher inflation, and China’s central bank emphasizes supportive monetary policy, with stronger easing certainty and increased tech investment and stable domestic demand helping to break risk narratives faster.

▶ Industry comparison: finance and stability remain top priorities; China’s tech manufacturing and stable domestic demand are key to breaking inflation risk narratives. 1) Financial and stability sectors: important stabilizers, high dividend yields have allocation value. Recommended: banks, power, highways, coal. 2) Tech manufacturing and energy transition: China’s globally competitive and cost-advantaged capital goods and equipment companies benefit from energy shocks and transition. Recommended: power equipment, new energy vehicles, engineering machinery. AI space is broad; by 2026, increased tech investment in China is expected to accelerate domestic growth. Recommended: semiconductors, communication equipment, machinery. 3) Domestic demand value: policy deployment stabilizes investment; combined with rising inflation, this may boost replenishment demand. Recommended: building materials, construction, hotels, consumer goods.

▶ Theme recommendations: 1) Energy transition: geopolitical conflicts disrupt key energy supplies; policies focus on building new energy systems and future energy. Favorable sectors: power grids, new energy storage, nuclear fusion. 2) Computing and energy synergy: connecting computing power, electricity, and source-grid-storage integration. Favorable sectors: computing infrastructure, grid digitalization, green energy data centers. 3) Token going global: domestic large models lead in global calls; favorable sectors: large models, AIDC, domestic computing power. 4) Commercial aerospace: building emerging pillar industries in aerospace. Favorable sectors: large rocket manufacturing and launch services.

▶ Risk warnings: Overseas economic recession exceeding expectations; global geopolitical uncertainties.

Contents

01

China’s stock market is expected to form an important bottom and hitting zone. Stability is the foundation, confidence is key. The Shanghai Composite Index broke below key levels, although the CSI 300 and ChiNext Index experienced limited pullbacks, there is significant differentiation. The All-Share Index has adjusted nearly 9% on average, and the CSI 1000 has fallen 10%. Recent market adjustments are due to two reasons: first, inflation risks and expectations of financial tightening. The uncertain US-Iran situation has led to energy inflation and concerns about financial tightening. Second, micro-transaction structures in the stock market are loosening. Although external conflicts do not directly impact China logically, uncertain outlooks reduce market risk appetite. Recently, stocks and bonds have adjusted simultaneously, with floating gains in fixed income+ products narrowing, and increased unrealized losses constraining institutions with relatively rigid liabilities and high positions since the beginning of the year. We expect the impact of micro-transaction shocks to be short-lived. The current position is not suitable for blindly selling, and China’s stock market is likely to see an important bottom and hitting zone. Although inflation risks remain, China’s assets benefit from increased technological productivity, relatively stable security conditions, and stable economic, social, and capital market environments. Even globally, such diversification of energy reserves and growth is scarce.

02

How will energy shocks and financial tightening expectations be priced? A three-stage evolution: expectation shock – real shock – return to growth. During recent roadshows, some investors expressed deep concerns about energy price shocks and financial tightening expectations. A key historical reference is the resilience of the US stock market in 2022 amid Russia-Ukraine conflict and multiple Fed rate hikes, which showed strong resilience and rebounds without collapsing. Risk pricing generally occurs in three stages: first, expectation shock. From March to June 2022, Russia-Ukraine conflict erupted, oil prices surged, and the Fed began substantial rate hikes, causing US stocks to decline; second, real shock. After June 2022, the conflict persisted but intensity did not increase, oil prices started to decline from high levels, and risk pricing largely ended. However, due to inflation stickiness and Fed rate hikes, US stocks remained volatile with rebounds. third, return to growth logic. From January 2023, the US AI industry advanced actively, with capital expenditure and performance growth driving stock prices higher. From this, two insights on market pricing emerge: 1) Risk pricing does not mean risks have ended, but that it ends when intensity no longer rises. 2) After risk pricing ends, the key is whether the market has growth capacity. Currently, the US tolerates higher inflation, and China’s central bank emphasizes supportive monetary policy, with stronger easing certainty and increased tech investment and stable domestic demand helping to break risk narratives faster.

03

Industry comparison: finance and stability remain top priorities; China’s tech manufacturing and stable domestic demand are key to breaking inflation risk narratives. 1) Financial and stability sectors: important stabilizers, high dividend yields have allocation value. Recommended: banks, power, highways, coal. 2) Tech manufacturing and energy transition: China’s globally competitive and cost-advantaged capital goods and equipment companies benefit from energy shocks and transition. Recommended: power equipment, new energy vehicles, engineering machinery. AI space is broad; by 2026, increased tech investment in China is expected to accelerate domestic growth. Recommended: semiconductors, communication equipment, machinery. 3) Domestic demand value: policy deployment stabilizes investment; combined with rising inflation, this may boost replenishment demand. Recommended: building materials, construction, hotels, consumer goods.

04

Theme recommendations: energy transition / computing and energy synergy / Token going global / commercial aerospace

1. Energy transition: geopolitical conflicts disrupt key energy supplies; policies focus on building new energy systems and future energy. Investment advice: safety and transition resonate; accelerating the construction of a clean, low-carbon, safe, efficient new energy system. The 14th Five-Year Plan emphasizes speeding up the development of a clean, low-carbon, safe, and efficient new energy system and building a strong energy nation. Implement a ten-year plan to double non-fossil energy, and strengthen energy resource supply security. Geopolitical conflicts threaten energy supply security; policies focus on building new energy systems and developing future energy. Focus on opportunities in new energy infrastructure, energy equipment, and future energy.

Direction one: benefiting from increased investment in major energy projects—power grids, wind, solar, hydro, nuclear, new energy storage.

Direction two: benefiting from breakthroughs in key technologies and scenarios—green hydrogen, nuclear fusion.

2. Computing and energy synergy: connecting computing power, electricity, and source-grid-storage integration. Investment advice: lead new infrastructure with green energy and computing synergy. The 14th Five-Year Plan proposes large-scale intelligent computing clusters and computing-energy synergy projects. Accelerate the construction of national hub computing clusters and promote green electricity and computing synergy. Increasing green energy capacity requires new high-load scenarios; expanding computing power faces electricity cost and flexibility constraints. Connecting computing and energy sources through integrated pathways.

Direction one: benefiting from large-scale intelligent computing clusters—HVDC, liquid cooling, energy storage.

Direction two: benefiting from grid digitalization—smart grids, virtual power plants.

Direction three: green energy and data center operators.

3. Token going global: domestic large models lead in global calls; China’s models connect with global AI demand. Investment advice: China’s models leverage global AI needs; the AI industry will gradually build a systematic advantage of electricity, computing, models, and applications. The 14th Five-Year Plan emphasizes creating a new intelligent economy, expanding “AI+,” and promoting large-scale AI commercialization. Strengthen computing, algorithms, and data supply, and foster innovation in models and algorithms. Domestic large models have talent, power, and competitive advantages, with leading scores and strong overseas competitiveness. Many top model companies are deploying globally, and China’s AI industry is building a systematic advantage.

Direction one: domestically leading large models benefiting from increased token calls.

Direction two: AIDC power equipment, computing leasing, domestic GPUs.

Direction three: internet platforms with traffic advantages, high user stickiness, and mature products.

4. Commercial aerospace: low Earth orbit satellite internet network acceleration, new technology breakthroughs, and launch site improvements. Investment advice: accelerating low Earth orbit satellite internet deployment; new tech breakthroughs and launch site infrastructure complement each other. The 14th Five-Year Plan emphasizes developing aerospace and strategic emerging industries, including low Earth orbit satellite networks. By 2025, China will have completed 92 space launches, with 51 commercial launches (including ridesharing and payloads), accounting for 55.4%. By 2030, satellite launch demand is expected to increase over tenfold from 2024, requiring capacity expansion. Breakthroughs in reusable and large liquid rockets, accelerated launch site construction, and terminal application scenarios will promote industry scale-up. The Zhuque-3 plan aims for recovery tests in Q2 2026 and possibly first reuse flights in Q4, depending on test results. Private rocket companies are accelerating financing and commercialization.

Direction one: benefiting from faster rocket launches and financing—large reusable liquid rockets and low Earth orbit satellite manufacturing.

Direction two: benefiting from infrastructure investment—launch sites and special fuels.

05

Risk Warnings

Overseas economic recession exceeding expectations; global geopolitical uncertainties.