Huachuang Zhang Yu: Tariffs, the US Dollar, and China's Recovery Verification

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Yiyu Insights

①【Market Outlook · Zhang Yu】Verification of China’s Recovery through Tariffs, US Dollar, and Global Relations

Happy New Year to all investors. For the first ten-day period of the new year, I focus on four major topics: first, major power relations; second, global tariffs; third, the logic behind the strength or weakness of the US dollar index; and fourth, the verification trilogy of China’s economic recovery and our views on current structural prosperity.

1. Major Power Relations: Likely to remain stable at a low level in the first half of the year

Currently, the April visit of the US to China remains a highly certain item on the US-China agenda, with arrangements progressing normally and both sides expressing positive signals. This means the short-term lower bound of US-China relations is clearly protected. Historically, before and after summit meetings of major powers, bilateral relations tend to stay at a low-level stable state for about 3-6 months. Therefore, we believe that in the first half of this year, US-China relations are likely to remain at a low-level stable pattern.

2. Global Tariffs: Narrowing tariff gaps benefit China’s export advantages

Recently, the US Supreme Court declared the reciprocal tariffs imposed by the US unconstitutional, likely leading to their cancellation. Meanwhile, Trump proposed a 15% global tariff increase, but official notices from Congress and the White House still indicate 10%, with further details to be confirmed later.

Overall, under the scenario of a 10% ad valorem tariff, the tariff gap between the US and China relative to other global economies will narrow, benefiting China. Based on the actual tariff rates in 2025, US tariffs on China are about 22 percentage points higher than the global average. If reciprocal tariffs are eliminated and a 10% ad valorem tariff is implemented, China’s relative tariff gap will decrease to 15.6 percentage points, a reduction of 6.5 points from before.

The narrowing tariff gap directly favors China’s export competitiveness, though impacts vary across industries. US tariffs under IEEPA consist of “10% Fentanyl tariffs (no exemption) + 10% reciprocal tariffs (with exemption),” while tariffs on the rest of the world (excluding Mexico and Canada) are only “17% reciprocal tariffs (with exemption).” Before IEEPA expired, industries exempt from reciprocal tariffs paid only 10% Fentanyl tariffs, 10 points higher than global; non-exempt industries paid 20% tariffs (10% Fentanyl + 10% reciprocal), just 3 points above the global 17%. After the cancellation of IEEPA tariffs (including reciprocal and Fentanyl tariffs), industries previously on the exemption list, only subject to Fentanyl tariffs, will see their tariff gap with the global reduce by 10 points, with the highest benefit. These include semiconductors and electronics (computers and parts, mobile phones, semiconductor manufacturing equipment), automobiles and parts, steel and aluminum products, copper, wood and derivatives, pharmaceuticals, etc.

3. US Dollar Index: Interplay of short-term interest rate spreads and long-term supply logic

Regarding the strength of the US dollar index, two main logic chains can be identified: short-term relative interest rate spreads—where Fed rate hikes or cuts directly determine the dollar’s short-term strength; and long-term debt sustainability—whether US debt issues can be fundamentally alleviated, which influences the dollar’s medium- to long-term trend.

Currently, these two logics are intertwined, leading to market confusion. The core disagreement lies in the source of the US economy’s unexpected strength, which could lead to completely opposite long-term dollar outlooks. We analyze two scenarios:

Scenario 1: If the US economy’s unexpected strength stems from demand exceeding expectations, it will push inflation above expectations, delaying Fed rate cuts. In the short term, less-than-expected rate cuts will support a stronger dollar via interest rate spreads; but in the medium to long term, high interest rates will intensify US debt overextension, raising debt servicing costs, and the fundamental debt problem will remain unresolved, which is bearish for the dollar long-term.

Scenario 2: If the unexpected US economic strength is driven by AI breakthroughs leading to non-inflationary growth—i.e., sustained supply-side expansion—this will align supply with demand, suppress inflation, and give the Fed room to cut rates. Short-term, rate cuts may narrow spreads and weaken the dollar; but fundamentally, this will resolve US debt issues, rebuild dollar credibility, and support a stronger dollar in the medium to long term.

Overall, the key variables that can truly boost dollar credibility and support its long-term asset logic are AI technology implementation and substantial supply-side improvements. Therefore, future dollar outlook analysis will focus on short-term interest rate spread changes and whether AI-driven supply growth can be sustained. Additionally, the current chaos of intertwined long- and short-term logic, coupled with the global rate-cut cycle nearing its end, increases market volatility—especially for highly liquidity-sensitive, speculative assets like Bitcoin and silver, where volatility is likely to intensify.

4. China’s Economic Recovery Verification Trilogy and Structural Prosperity Outlook

For China’s economy, from early January to mid-March, we face a three-stage verification of economic recovery. If all three hurdles are cleared smoothly, the recovery will be substantively validated, and market focus may gradually shift to fundamentals like prosperity, earnings, and dividends, possibly leading to a style rotation.

(1) First hurdle: January CPI and PPI data, which have already shown positive signals

January CPI and PPI data are available, confirming two key conclusions:

First, due to the offsetting effects of the Spring Festival, January CPI should have been the lowest of the year, but it did not turn negative, indicating that the annual CPI YoY is likely to remain positive, a positive signal.

Second, January PPI data exceeded expectations, leading us to significantly revise upward our PPI YoY forecast. Specifically, we expect PPI YoY for Q1-Q4 2026 to be: -1.2%, -0.2%, 0.4%, 0.2%. This suggests that PPI may turn positive as early as June or July, with a high probability of positive YoY in Q3—much earlier than previous estimates in Nov-Dec last year. The main reason is that PPI month-on-month figures from Nov to Jan continued to beat expectations, boosting the upward price pressure for 2026. Based on this, we revise the 2026 PPI YoY central estimate to around -0.2%.

Overall, the first hurdle (inflation) is basically validated, with data outperforming market consensus, which is a positive sign.

(2) Second hurdle: January financial data, which look good but need further validation

January financial data have been released, generally positive. However, due to the offsetting effects of the Spring Festival, YoY comparisons are biased. We adjust our analysis by comparing data from years with similar Chinese New Year timing (2015, 2016, 2018, 2019, 2021, 2024), using two methods: “difference between January and December of the same year” and “January vs. full-year previous data,” to assess marginal changes and remove seasonal effects.

From this, three core conclusions emerge: first, January residents’ savings transfers are moderate to high; second, non-bank deposit growth is also moderate to high, indicating improved financial market liquidity; third, corporate deposit growth is very strong, which is an important leading indicator for subsequent economic cycles and profit improvement.

Overall, January financial data look promising, but due to seasonal distortions, we cannot yet confirm a solid recovery in domestic demand. The data need further validation, especially in February. However, it’s clear that current financial data do not disprove economic recovery; the first two hurdles remain unrefuted.

(3) Third hurdle: waiting for February-March economic and financial data to determine recovery quality

This verification will occur from early to mid-March, focusing on the combined February-March economic data and the February financial data released mid-March. We will analyze whether supply and demand gaps continue to improve. If manufacturing investment remains weak but infrastructure, real estate, consumption, and exports continue to improve, it indicates ongoing narrowing of supply-demand gaps, providing positive guidance for corporate profits and PPI YoY rebound in the year.

Current high-frequency data show that during the Spring Festival, consumption excluding durable goods (travel, dining, etc.) performed well: data from major business sources indicate that the first four days of the holiday saw an 8.6% YoY increase in retail and catering sales, significantly higher than the 2.7% during last year’s Golden Week. However, this excludes durable goods, so overall January-February consumption still needs further validation. Nonetheless, the holiday consumption data already show positive signals.

If all three verifications in March are successful and data continue to improve, and if the full “14th Five-Year Plan” is released during the Two Sessions, market sentiment is likely to shift toward fundamentals like prosperity and corporate earnings. The initial verification phase is progressing well, despite some seasonal distortions, and no disproof has occurred. We remain optimistic about a weak but positive economic recovery this year.

(4) Structural Prosperity Outlook: Midstream manufacturing remains the most certain main growth driver for the year

Currently, we are in an economic data vacuum period, with the strong validation of financial data yet to materialize. We believe that the most certain growth direction in the first half of the year remains midstream manufacturing, a view we explicitly stated in our December 2025 annual report, and it remains unchanged.

We judge that the prosperity of midstream manufacturing is likely not a short-term opportunity but will extend over a 1-2 year cycle, supported by three main factors: first, recent tariff policy changes further strengthen China’s export relative advantage, providing additional benefits to midstream manufacturing; second, under the expectation of a summit visit, US-China relations will remain at a low level of stability for about half a year, creating a stable external environment for exports; third, the fundamentals of midstream manufacturing—supply-demand gaps and overseas profit margins—are clearer and more certain than those of domestic demand-related sectors, making its prosperity more independent. Therefore, regardless of future market style shifts, solid fundamentals in midstream manufacturing should be a key, highly certain growth main line. Refer to previous content “Where is the most certain prosperity?”

②【Judging the Economy · Lu Yinbo】Holiday Consumption Observation and High-Frequency Economic Tracking

Hello everyone. Based on January data and high-frequency holiday performance, I see two unexpected upward drivers at the start of the year: exports and travel; meanwhile, some sectors underperform, mainly related to policy-driven durable goods consumption and local infrastructure willingness. I will elaborate below.

一、Exports: High-frequency data exceed expectations, supported by three main logic chains

Currently, export high-frequency data are very strong. As of February 22, port throughput for January-February increased by 13.2% YoY, significantly higher than the 9.6% for all of 2025 and above the roughly 10% in January 2025, indicating exports remain on an upward trajectory. Moreover, this data does not yet include the impact of US tariff adjustments, which is a positive factor not yet realized, showing strong resilience.

The core logic, previously outlined in our annual report, continues to be validated, mainly through three points:

First, global monetary easing boosts production. Our tracking of global manufacturing PMI has been above the expansion line for six consecutive months. Export growth in neighboring economies like Korea and Vietnam remains high, supporting the continued recovery of global industrial production and China’s export growth.

Second, overseas AI capital expenditure exceeds expectations, boosting demand for midstream manufacturing exports. Over the past month, major US internet companies announced AI-related capital plans, with growth rates significantly above market expectations at year-end. Bloomberg’s consensus expected about 30% growth in US tech giants’ capital expenditure, but recent plans suggest over 50%, which will directly drive Chinese midstream manufacturing exports.

Third, Chinese companies’ proactive overseas expansion continues to strengthen. As noted in our annual report, midstream manufacturing firms have higher overseas profit margins than domestic, providing strong motivation to expand abroad. Although January’s overall export data are not yet available, we see high growth in sectors like excavators and automobiles, confirming the logic of proactive overseas expansion.

These three points explain the current strong export performance, and we remain optimistic about the full-year outlook.

二、Travel: Holiday travel data are impressive, supporting ongoing service consumption recovery

This year’s Spring Festival holiday was longer, and travel data performed well. In 2025, total travel volume across all modes increased by about 3.5% YoY. Based on this, we assess the holiday travel peak (February 13-21), which saw an 8.7% YoY increase in total trips, with civil aviation and railway travel up 6.8% and 7.9%, respectively—higher than last year’s Golden Week and significantly above the full-year 2025 growth, making it the second major unexpected upward driver at the start of the year.

三、Old Economy: Still weak, requiring further observation

Aside from exports and travel, high-frequency data on real estate sales, durable goods consumption, and infrastructure remain weak. It’s important to note that real estate and durable goods are seasonal and typically small in volume during the Spring Festival. The latest high-frequency data only go up to the end of January, so further observation is needed.

四、Economic Structural Divergence: New economy is improving, old economy remains weak, a weak recovery pattern is emerging

On the volume side, dividing the economy into travel, new economy, and old economy sectors shows: the new economy, represented by export chains and midstream manufacturing, is performing well; travel-related consumption continues to recover; while traditional old economy sectors like real estate and infrastructure remain weak. Two of these three sectors are improving, supporting overall economic growth.

On price trends, we’ve split PPI into segments. Historically, PPI increases depended heavily on upstream real estate-related sectors. This year, we favor price recovery in midstream manufacturing. January PPI rose 0.4% MoM, the highest monthly increase since late 2021, further confirming the prosperity of midstream manufacturing.

Overall, relying solely on exports and travel may be enough to support a weak recovery; if traditional old economy sectors improve marginally, the recovery’s resilience will strengthen further.