Shenwan Hongyuan Securities Chief Economist Zhao Wei: Focus on the "Pro-Cyclical" New Narrative and Capital "Rebalancing" in 2026

2026 is not only the starting year of the 14th Five-Year Plan but also a critical node for comprehensive economic transformation and institutional reform. In 2026, the economy will enter an atypical “recovery” phase, with nominal GDP repair driving improvements in corporate profits; due to support from both supply and demand sides, there will be significant differentiation across industries and companies, and structural characteristics will remain prominent.

“Countering internal competition” and “expanding domestic demand” will become key strategies to break the cycle of stagnation. On one hand, policies will curb low-price competition through “countering internal competition,” restore damaged corporate profit statements, and promote positive PPI and profit recovery; on the other hand, policies will emphasize “investment in people,” relying on reforms in social security and the opening of the service industry, potentially continuing to open up space for service consumption growth. To strengthen domestic demand, fiscal policies will continue to take the lead, increasing debt issuance to alleviate the “crowding out effect” on investment funds, ensuring steady recovery of fixed asset investments—especially in equipment renewal, digital infrastructure, and energy transition—and stimulating endogenous economic momentum.

In the short term, 2026 is expected to see the A-share market continue to rebalance under a new “pro-cyclical” narrative. As nominal GDP recovers and asset return expectations improve, funds are likely to flow from the low-interest, high-volatility bond market to equities, driving asset price revaluation. Despite ongoing uncertainties in external trade conditions, the domestic policy toolkit remains ample, and export structure continues to optimize, maintaining economic resilience. The capital market will not only reflect growth in economic volume but also price quality improvements and substantial profit enhancements. The A-share market is expected to gradually lift its central level amid volatility.

From a long-term perspective, the “15th Five-Year Plan” period’s industry “transformation” and reform “dividends” will become core engines for high-quality development. Whether it is building a unified national market or reforming fiscal, tax, and financial systems, the focus is on breaking institutional bottlenecks and stimulating the vitality of market entities. These deep reform dividends, combined with the cultivation and promotion of “new quality productivity,” provide a solid rationale for China’s long-term asset revaluation.

In 2026, the focus on “reform” dividends may include key areas such as: building a unified large market, high-level opening-up, accelerating green transformation, social security, and reform of fiscal, tax, and financial systems.

The construction of a unified large market involves standardizing fundamental market infrastructure, resource and factor markets, government regulatory standards, and law enforcement, as well as continuously expanding opening-up both domestically and internationally. Starting in 2026, with a focus on “service industries,” further institutional opening-up is expected, characterized by measures such as free trade zones and free trade ports for external opening, and relaxed restrictions for internal opening—creating important opportunities for the era. Additionally, accelerating green transformation may also be a key policy focus. Unlike previous cycles, this transformation may center on energy-saving and carbon reduction upgrades in traditional high-energy-consuming industries, driven by technological innovation, capacity replacement, and energy consumption control, promoting a low-carbon, high-efficiency transition in synergy with “countering internal competition.” On one hand, phasing out outdated capacity can effectively curb disorderly industry competition; on the other hand, combining green upgrades with industrial upgrading will enhance the core competitiveness of traditional industries, achieving a win-win situation of “carbon reduction” and “quality improvement.”

In summary, 2026, as the inaugural year of the “14th Five-Year Plan,” will see service consumption upgrades and corporate profit improvements, the growth of new quality productivity, strengthened domestic demand-driven momentum, and enhanced global competitiveness. By firmly grasping reform as the main line and adhering to high-quality development, China’s economy is standing at the starting point of a new development model.

(Source: Shenwan Hongyuan)