Huachuang Zhang Yu: Tariffs, the US dollar, and China's recovery validation

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One Yu’s take

①【Macro Outlook Research·Zhang Yu】Tariffs, the U.S. dollar, and China’s recovery—verification of the triangle

Hello everyone, fellow investors. In the first issue of the new year for our mid-week report, I mainly focus on four major topics: first is relations among major countries; second is global tariffs; third is the logic behind the strength or weakness of the U.S. dollar index; fourth is the “three-part verification” of China’s economic recovery, and our view on current structural cyclical optimism.

1. Relations among major countries: likely to remain low and stable in the first half of the year

At present, the April U.S. side visit to China remains one of the more certain items on the China-U.S.-Japan agenda. Related arrangements are being advanced at a normal pace, and both sides’ statements are relatively positive. This means there is clear protection for the downside floor of short-term China-U.S. relations. From historical experience, before and after meetings between heads of state, bilateral relations can generally be maintained at a low and stable level for about 3–6 months. Therefore, we also believe that in the first half of this year, China-U.S. relations will most likely remain in a low-and-stable pattern.

2. Global tariffs: narrowing the tariff gap benefits China’s export relative advantage

Recently, the U.S. equivalent tariffs were declared unconstitutional by the U.S. Supreme Court, and the related policy will most likely be canceled. Meanwhile, Trump proposed a plan to levy a universal 15% tariff, but in official notices issued by the U.S. Congress and the White House, it is still marked as 10%. Specific details of the plan are still pending further confirmation.

Overall, if we assume the Puti (Puti) scenario of a 10% tariff, calculations suggest that the tariff difference between the U.S.’ tariff toward China and its tariffs toward other economies worldwide will narrow. China will clearly benefit. Looking at the actual full-year tariff rates for 2025, the U.S. tariff rate toward China is about 22 percentage points higher than the global average. If the equivalent tariffs are canceled and the Puti 10% tariff is implemented, China’s tariff gap versus the world will fall to 15.6 percentage points, a reduction of 6.5 percentage points compared with the prior level.

As the tariff gap narrows, it will directly benefit China’s export relative advantage. Of course, different industries will be affected to varying degrees. The U.S. tariff on China under IEEPA consists of “10% Fentanyl tariffs (no exemptions) + 10% reciprocal tariffs (with exemptions),” while toward the global level (excluding Mexico and Canada) it only adds “17% reciprocal tariffs (with exemptions).” Before IEEPA became ineffective, industries that were originally exempt from reciprocal tariffs only needed to pay the 10% Fentanyl tariffs—10 percentage points higher than the global level; non-exempt industries had to pay 20% in tariffs (10% Fentanyl tariffs + 10% reciprocal tariffs), which is only 3 percentage points higher than the global level (17% reciprocal tariffs). After the cancellation of the relevant IEEPA tariffs this time (including both reciprocal tariffs and Fentanyl-related tariffs), for industries that were originally within the reciprocal-tariff exemption list and were only subject to Fentanyl-related tariffs, the tariff gap versus the world can be directly reduced by 10 percentage points. The degree of benefit certainty is the highest. These industries mainly include: semiconductors and electronic products (computer and parts, mobile phones, semiconductor manufacturing equipment, etc.), automobiles and parts, steel/aluminum and derivatives, copper, timber and derivatives, pharmaceuticals, and so on.

3. U.S. Dollar Index: an interplay of short-term interest-rate spreads and long-term supply-side logic

Regarding the strength or weakness of the U.S. dollar index, the core can be broken down into two major logics: in the short term, the relative interest-rate spread logic—whether the Federal Reserve hikes or cuts and the pace—directly determines the dollar’s strength or weakness in the near term. In the long term, whether the issue of U.S. dollar debt can be fundamentally alleviated is what determines the dollar’s long-term trajectory.

Right now, these two logics are intertwined, and market judgments are in a state of confusion. The core disagreement is that the source of the U.S. economy’s upside performance relative to expectations differs, which will lead to completely opposite assessments of the U.S. dollar’s long-term outlook. We analyze two scenarios in detail:

In the first scenario, if the U.S. economy’s upside relative to expectations is driven by demand that is stronger than expected, this will push inflation higher than expected and then force the Federal Reserve to delay rate cuts. In the short term, rate cuts coming in below expectations would support the dollar’s strength through the interest-rate spread logic. But in the long term, a high interest-rate environment will further intensify the U.S. debt overshoot pressure, raising the cost of servicing debt. The fundamental problem of runaway U.S. debt cannot be solved; instead, it would create long-term downside pressure on the dollar.

In the second scenario, if the U.S. economy’s upside relative to expectations is driven by AI technology breakthroughs leading to growth without inflation—that is, supply-side output continues to rise. Improvements on the supply side will match demand, which can both lower inflation and create room for the Fed to cut rates. In the short term, even if the implementation of rate cuts appears to narrow the interest-rate spread and form a headwind for the dollar, in substance it fundamentally resolves the U.S. debt problem, reshapes dollar credibility, and instead would push the dollar stronger in the long run.

Taken together, the core variable that can truly boost dollar credibility and support the logic of long-term dollar assets is still the deployment of AI technology and substantive improvements on the supply side. Therefore, in future analysis of the dollar’s trajectory, the key bases will be: (1) how short-term interest-rate spreads change, and (2) whether the supply-side upward momentum brought by long-term AI can be sustained. Moreover, given the current chaotic state where short- and long-term logics are intertwined, and with the global rate-cutting cycle entering its tail end, increased volatility in financial markets is an objective trend. Especially for assets highly sensitive to liquidity and more speculative—such as Bitcoin and silver—the characteristics of amplified volatility will be even more pronounced.

4. China’s economic recovery: the three-part verification and judgment on structural cyclical optimism

For China’s economy, from the start of the year to mid-to-late March, we will face three layers of progressively deeper economic recovery verification. If all three checkpoints are passed smoothly, the economic recovery will receive substantial validation. Market attention may then gradually switch to fundamental cyclical conditions, earnings, and dividends, and market style may change accordingly.

(A) First checkpoint: January CPI and PPI data—already released positive signals

January CPI and PPI data have already been released, confirming two major core conclusions:

First, due to the misalignment factor of the Spring Festival holiday, January’s year-over-year CPI reading would normally be the lowest level of the year, but January CPI did not turn negative. This implies that the year-over-year monthly CPI for the full year will most likely remain in positive growth. This is a relatively positive signal.

Second, January PPI data came in above expectations. Based on this, we have significantly revised upward our year-over-year PPI forecast. Specifically, the expected year-over-year PPI readings for Q1–Q4 2026 (January–April) are: -1.2%, -0.2%, 0.4%, and 0.2%. This means that in the earliest individual months by the end of the second quarter (June or July), the year-over-year PPI is likely to turn positive, and the probability that year-over-year PPI in the third quarter is positive is relatively high. This timing is notably earlier than the prediction made in November–December last year. The core reason is that from November last year to January this year, the month-on-month PPI readings continued to come in above expectations, lifting the “new price-increase factors” for 2026 PPI. On this basis, we have revised the central assumption of 2026 year-over-year PPI upward to around -0.2%.

Overall, the first checkpoint (inflation) has been basically verified. The data performance is better than the market’s consensus expectations, which is a fairly positive signal.

(B) Second checkpoint: January financial data—readings look good, but still need strong verification

January financial data have been published. Overall, things are still not bad, but because of the misalignment factor of the Spring Festival holiday, directly analyzing year-over-year readings introduces significant distortion. Therefore, we adjusted our analysis approach: select years such as 2015, 2016, 2018, 2019, 2021, and 2024—years that also had the Spring Festival in February—and assess the marginal changes in financial data using two methods: “difference between January of that year and December of the previous year,” and “ratio between January and the whole-year data of the previous year.” This helps eliminate seasonal disturbances.

Using this method, we reach three major core conclusions: first, the strength of “households moving deposits” in January is at a medium-to-above-medium level among comparable past years; second, the growth in non-bank deposits in January is also at a medium-to-above-medium level, and non-bank deposit growth often corresponds to improvements in liquidity in financial markets. Third, enterprise deposit growth in January is very strong, and enterprise deposit growth is an important leading indicator for the subsequent economic cycle and improvement in corporate earnings.

Overall, January financial data are heading in a positive direction, but due to the Spring Festival misalignment disturbance, we still cannot form a solid judgment with certainty regarding the repair of domestic demand. The data have not yet completed strong verification, and we still need to observe whether February data can continue the improving trend. However, it can be clearly stated that current financial data have not refuted the thesis of economic recovery; the first two checkpoints of verification have not shown any refutation signals.

© Third checkpoint: wait for January–February economic data and February financial data to determine the “quality” of recovery

The third checkpoint will land in early March to mid-March. The core is the quality of the combined economic data for January–February and the February financial data released in mid-March. We will combine these two types of data to see whether the supply-demand gap can continue to improve. If manufacturing investment continues to run somewhat weak, while terminal demand such as infrastructure, real estate, consumption, and exports keeps improving, that would mean the supply-demand gap will continue to narrow. This would provide clear positive guidance for the full-year corporate profit readings and the upward slope of the subsequent year-over-year PPI rebound.

From the high-frequency data available so far, during the Spring Festival period, consumption data excluding durable goods (including travel, dining, etc.) have performed well: in “business big data,” the average daily sales of key retail and catering businesses nationwide during the first four days of the Spring Festival holiday increased 8.6% year over year, significantly higher than the 2.7% growth rate during last year’s National Day and Mid-Autumn Festival combined holiday period. But this figure excludes durable goods. Therefore, the overall consumption data for January–February still need verification. At least for now, the consumption data released during the Spring Festival period have conveyed positive signals.

Overall, if the three-step verification in March all lands successfully, and the data keep trending positively, then February financial data can further strengthen the recovery signals. Combined with the full-text release of the 15th Five-Year Plan outline during the two sessions, the market will most likely gradually switch attention to fundamental cyclical conditions and corporate earnings. At present, the progress in the first half of the verification is going smoothly. Although there are some imperfections in validation due to the Spring Festival misalignment disturbance, at least there has been no refutation. We still hold expectations for a weak-but-improving economy this year.

(D) Judgment on structural cyclical optimism: midstream manufacturing is the most certain mainline of optimism for the whole year

We are still in a period of economic data vacuum, and strong verification from financial data has not yet landed. We believe that in the first half of this year, the most certain direction of cyclical optimism still lies in midstream manufacturing. We already stated this view in our annual report in December 2025, and it has not changed to date.

We judge that the cyclical optimism for midstream manufacturing is very likely not an opportunity limited to a half-year horizon; it will most likely continue over a cycle of 1–2 years. There are three core supports: first, changes in current tariff policies further reinforce China’s relative export advantage, providing additional benefits for midstream manufacturing; second, with expectations of head-of-state visits between the U.S. and China, within a half-year horizon China-U.S. relations will likely remain low and stable, creating a stable external environment for midstream manufacturing’s export business; third, in terms of fundamentals—supply-demand gaps and overseas business gross margins—midstream manufacturing is clearer and more certain than domestic-demand-related sectors, so its cyclical independence is stronger. Therefore, we emphasize that regardless of how market style switches later, midstream manufacturing with solid fundamentals is the independently optimistic mainline that needs to be firmly grasped and is the highest in terms of certainty. For the complete logic, please refer to our prior content “Where Is the Most Certain Cyclical Optimism?”.

②【Economic Forecast·Lu Yinbo】Observations on holiday consumption and tracking high-frequency economic indicators

Hello everyone. Combining the January data and the high-frequency performance during the Spring Festival, I believe the start-of-year economy has two upward drivers that exceeded expectations: exports and travel. At the same time, some areas have performed relatively weakly, mainly durable-goods consumption related to policy and local infrastructure spending willingness. Below I will go into the details.

1. Exports: high-frequency data exceed expectations—three logics support the continuation of cyclical optimism

As of now, export high-frequency data look extremely strong. Up to February 22, the year-over-year growth rate for port throughput in January–February this year reached 13.2%, significantly higher than 9.6% for all of 2025, and also higher than around 10% growth in January 2025. This indicates that exports are still in an upward channel. Moreover, the current data do not yet include the impact of adjustments to U.S. tariff policies, meaning this positive factor has not yet fully materialized, yet exports have already shown strong resilience.

The core logic behind it was already highlighted in our annual report and is being continuously validated. There are mainly three points:

First, global monetary policy easing drives an upturn at the production end. The global manufacturing PMI we track has been continuously above the boom-or-bust line for six months. Export growth rates of neighboring economies such as South Korea and Vietnam also remain at high levels. The logic of global industrial production recovery continues to be realized, which will support China’s exports to keep rising.

Second, overseas AI capital expenditures have exceeded expectations, boosting export demand for midstream manufacturing. Over the past month, major U.S. internet companies have successively released plans for AI-related capital expenditures, with growth rates significantly higher than market expectations from late last year. At the end of last year, Bloomberg’s consensus expected that the capital expenditure growth rate for the U.S. tech “seven giants” would be around 30%. Based on the latest published plans, this growth rate is very likely to be above 50%. The AI capex coming in above expectations will directly boost export demand for China’s related midstream manufacturing products.

Third, momentum for Chinese companies to go overseas is continuing to strengthen. In our annual report, we noted that the overseas gross margin of the midstream manufacturing sector is significantly higher than that in China. Companies have ample incentives to proactively expand overseas markets and business areas. Although overall export data for January has not yet been released, we have already seen that export growth rates in sub-industries such as excavators and automobiles remain at high levels, validating the logic of companies proactively going overseas.

These three logics can explain the current strength of exports, and we also remain optimistic about exports for the full year.

2. Travel: strong Spring Festival holiday data—supports ongoing repair of service consumption

This year’s Spring Festival holiday duration was relatively long, and travel data performed well. In 2025 full year, the total number of trips nationwide via various means increased by about 3.5% year over year. This corresponds to a slightly higher growth rate for consumption related to the travel chain. We use this as a baseline to evaluate the performance of this year’s Spring Festival travel data.

Over the 10-day travel peak during this year’s Spring Festival holiday (February 13–February 21), the total number of trips nationwide increased 8.7% year over year. Within that, civil aviation and railway travel volumes grew 6.8% and 7.9% year over year respectively. Not only are these figures higher than the growth rate during last year’s National Day holiday period, they are also significantly higher than the growth rate level for all of 2025. This makes it the second upward driver that exceeded expectations at the start of the year.

3. Old economy: still relatively weak—of course, we still need to observe later

In addition to exports and travel as two highlights, high-frequency data in areas such as real estate sales, durable goods consumption, and infrastructure have been on the weak side. It should be noted that during the Spring Festival period, real estate and durable-goods consumption are naturally in a traditional off-season, and the data volume is small. At present, the latest high-frequency data are only updated through late January, so further observation is still required.

4. Economic structure divergence: new economy is improving; old economy is weak—the weak-recovery pattern has emerged

On the “quantity” dimension, we break the economy into three parts: the travel chain, the new economy, and the old economy. It’s clear that: represented by the export chain and midstream manufacturing, the new economy is performing better; consumption related to the travel chain continues to repair. Meanwhile, only traditional old economy sectors represented by real estate and infrastructure are performing weakly. Among the three sectors, two are maintaining a positive trend, which is enough to support an upward lift in the economy’s total growth rate.

On the “price” dimension, we split PPI. In the past, upward movement in PPI relied more on the old-economy sectors related to upstream real estate chains. This year, we expect price recovery in midstream manufacturing. In the January PPI data, midstream PPI increased 0.4% month over month. This is the highest month-on-month increase since the second half of 2021, further validating midstream manufacturing’s cyclical conditions.

Overall, relying only on the two drivers of exports and travel may be enough to support the economy achieving a weak recovery. If the traditional old-economy sectors show marginal improvement later, the elasticity of economic recovery will be further enhanced.

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