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

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In One Yù

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

Happy New Year to all investors. In this first ten-day report of the 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 three-step verification of China’s economic recovery, along with 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 US visit to China in April remains a highly certain event 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, bilateral relations tend to stay at a low but stable level for about 3-6 months before and after top-level meetings, so we believe that in the first half of this year, US-China relations will likely remain at a low, stable level.

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

Recently, the US Supreme Court declared the US reciprocal tariffs unconstitutional, and related policies are likely to be canceled. 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, if we assume a 10% ad valorem tariff, the tariff gap between the US and China relative to other global economies will narrow, benefiting China. Based on actual tariffs in 2025, US tariffs on China were 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 drop to 15.6 percentage points, a reduction of 6.5 points from before.

The narrowing of tariff gaps 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 global (17%). After the cancellation of IEEPA tariffs (including fentanyl and reciprocal tariffs), industries previously only subject to fentanyl tariffs will see their relative tariffs 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—Fed rate hikes or cuts directly influence the dollar’s short-term strength; and long-term, whether US debt issues can be fundamentally alleviated, which determines the dollar’s medium- and 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: US economic surprise driven by demand exceeding expectations, leading to inflationary pressures and delaying Fed rate cuts. In the short term, less-than-expected rate cuts support dollar strength via interest rate spreads; but in the long term, high interest rates will increase US debt burden, raising debt service costs, and the fundamental debt problem remains unresolved, which could be bearish for the dollar over time.

Scenario 2: US economic surprise driven by AI breakthroughs causing non-inflationary growth, with supply-side improvements. This would align supply with demand, lowering inflation and giving the Fed room to cut rates. Short-term, rate cuts may narrow spreads and weaken the dollar; but fundamentally, this would resolve US debt issues, rebuild dollar credibility, and potentially strengthen the 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 spreads and whether AI-driven supply growth can be sustained. Currently, the intertwined and chaotic state of these logics, coupled with the global easing cycle nearing its end, increases market volatility—especially for highly liquidity-sensitive, speculative assets like Bitcoin and silver, where volatility is expected to be more pronounced.

4. China’s Economic Recovery Verification: Three-step process and structural prosperity outlook

For China’s economy, from the start of the year to mid-March, we face a progressive verification of recovery. If all three hurdles are cleared smoothly, the recovery will be substantively confirmed, and market focus may gradually shift to fundamentals, profitability, and dividends, possibly leading to a style rotation.

(1) First hurdle: January CPI and PPI data already show positive signals

January CPI and PPI data are out, 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, implying that the monthly year-on-year CPI will likely stay positive throughout the year—a positive sign.

Second, January PPI data exceeded expectations, leading us to significantly upgrade our forecast for PPI YoY. 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—earlier than previous estimates of Nov-Dec last year. The main reason is that PPI month-on-month figures from Nov 2025 to Jan 2026 have been consistently above expectations, boosting inflationary factors. Based on this, we revise the 2026 PPI YoY central value upward to around -0.2%.

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

(2) Second hurdle: January financial data, good but requiring further validation

January financial data has 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 the same lunar calendar timing (2015, 2016, 2018, 2019, 2021, 2024), using two methods: difference between January and December of the same year, and ratio of January to full-year data, to filter out seasonal effects.

Using this approach, we conclude:

First, residents’ savings transfer during January was moderate to high compared to comparable years.

Second, non-bank deposit growth was also moderate to high, indicating improved financial market liquidity.

Third, corporate deposit growth was very strong, a key leading indicator for subsequent economic cycles and profit improvement.

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

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

This verification will occur from early to mid-March, focusing on the combined January-February 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, the supply-demand gap will narrow, providing positive guidance for corporate profits and PPI YoY rebound in the year.

High-frequency data already show that during the Spring Festival, consumption excluding durable goods (travel, dining, etc.) performed well: data from major retail and catering firms indicate an 8.6% YoY increase in daily sales before the holiday, much higher than the 2.7% during last year’s Golden Week. However, this excludes durable goods, so overall consumption in Jan-Feb still needs further validation. Nonetheless, the holiday consumption data is encouraging.

If all three steps in March are validated and data continues to improve, and with the release of the 14th Five-Year Plan during the Two Sessions, the market will likely shift focus to fundamentals, profitability, and economic outlook. The initial validation phase is progressing well, despite some seasonal distortions, and no disproof has occurred. We remain optimistic about a mild economic recovery this year.

(4) Structural prosperity outlook: Midstream manufacturing remains the most certain main line for the year

Currently, with limited economic data and unconfirmed strong validation from financial data, we believe the most certain prosperity direction in the first half of the year remains in midstream manufacturing. We stated this in our December 2025 annual report, and it remains unchanged.

We judge that the prosperity of midstream manufacturing is likely not just a six-month opportunity but will extend over 1-2 years, supported by three main factors: first, recent tariff policy changes further strengthen China’s export advantage, benefiting midstream manufacturing; second, with expectations of a top-level visit, US-China relations will stay at a low, stable level, providing 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 sectors, making this the most independent and resilient prosperity main line. Regardless of future market style shifts, solid fundamentals in midstream manufacturing should be firmly grasped as the most certain growth driver. Refer to previous content: “Where is the most certain prosperity?”

②【Economic Judgment · 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.

1. Export: High-frequency data exceeds expectations, supported by three main logic chains

Currently, export high-frequency data is 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. This indicates exports remain on an upward trajectory. Moreover, this data does not yet reflect 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, is being validated:

First, global monetary easing boosts production. Our tracking of global manufacturing PMI has been above the expansion threshold for six consecutive months. Export growth in Korea, Vietnam, and other nearby economies 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 tech firms 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’ capex; latest plans suggest over 50%, which will directly drive Chinese midstream manufacturing exports.

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

These three factors explain the current strong export performance, and we remain optimistic for the full year.

2. Travel: Holiday data is impressive, supporting ongoing service consumption recovery

This year’s Spring Festival holiday was longer, and travel data was strong. Nationwide, travel volume in 2025 increased by about 3.5% YoY, with higher growth in related service consumption. Based on this, we assess the holiday travel peak (Feb 13–21), which saw an 8.7% YoY increase in total trips, with civil aviation and railway trips up 6.8% and 7.9%, respectively—higher than last year’s Golden Week and significantly above 2025’s annual growth, marking a major positive surprise for the economy.

3. Old economy sectors: Still weak, requiring further observation

Aside from exports and travel, high-frequency data for real estate sales, durable goods consumption, and infrastructure remain weak. It’s important to note that during the Spring Festival, real estate and durable goods consumption are seasonally low, and recent high-frequency data only go up to late January. Further data is needed for confirmation.

4. Economic structural differentiation: New economy improves, old economy remains weak, a weak recovery pattern emerges

On a quantitative level, 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 levels, we split PPI: 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 since late 2021, further confirming the prosperity of midstream manufacturing.

In summary, relying solely on exports and travel may suffice for a weak recovery; if traditional old economy sectors improve marginally, the recovery’s resilience will strengthen further.