China Conversations: AI momentum and policy tailwinds into 2026

[MUSIC PLAYING] Global insights, strategic foresight. This is Beyond Markets. Hello, everyone. Welcome to the Julie Sparer podcast. This is Richard Tang, the Chinese strategist and head of research Hong Kong for Bang Julie Sparer. Time flies. It's already December. It's great to have Hong Hao with us again. How is a renowned economist? And he's also the managing partner and CIO of Lotus asset management. In this episode, we will focus on the outlook for next year. Hi, Hao. Thank you very much for the time speaking with us today. Thanks, Richard. Thanks for having me. So the China market has done quite well this year. And obviously, this year is now close to an end. And today, we will focus on what next year might look like. Let us start with the overall equity market. You today, the Shanghai Composite, as well as the CSI 300 index, have both gained around 16%, whereas the Hang Tsing index in Hong Kong is up 30%, which obviously has outperformed global markets. But the momentum in these indices seem to have slowed down a little bit since October. And instead, we've seen more sector rotation beneath the headline indices. For example, growth stocks in particular tax stocks have come under pressure in recent weeks. And money seems to have moved into those value and cyclical names to look at how do you think the Chinese equity market will have another good year after all these past two or three months of consolidation? Well, from a technical point of view, I think the Chinese stock market should have a year that is comparable to this year, if not more, in next year. I think the technical structure looking very good, even though in the near term, we're still facing some resistance. And also, maybe towards the end of the year, people are busy mocking in some profits, because they have done well this year, and they want to wrap it up for the year. So there are many reasons to explain why the market is weakish recently. But I think going into the next year, because it's the first year of the five-year plan, and normally in the first year of the five-year plan, the policies intensity tend to be high. And also, this is the year where you want to lay out your policies so that you can have another four-year to work on those policy initiatives. So one should be to supply to see more and more policies, initiatives come out in the coming months. So I think all in all, because policy is going to be supportive. And also, the Chinese market is still very cheap. Technical structure looking very good. I think the Chinese stocks should have another good year ahead. And as you mentioned, one key catalyst for next year will be the 15-5-year plan. And obviously, we'll expect to hear more details on the plan in March around the two sessions. And obviously, also afterwards, when the different government departments announce the policy details. Now, we all assume that technology is a major focus in the plan. But beyond that, I also noticed particularly in the recent Politburo meeting, where the policymakers emphasize its goal to strengthen domestic demand further. And at the same time, when I spoke to some investors, they seem to be raising their expectations for a renewed consumer subsidies next year in 2006. We all know that consumption stocks have not been doing particularly well this year, probably with the exception of new consumption. But let's say, all consumption or broader consumption theme will that be a contrarian idea for just in '26? Just in case, some policy supports does materialize. Yeah, I think consumption actually has done well earlier this year in the first half of the year. So the new consumption stocks that was selling retail gold, selling Labubu and all sorts of stuff earlier this year. I think going into the second half of the year, because in the first half, they've been running so strong. Therefore, people are probably taking some profits and they're giving back some gains they had earlier this year. I think going into the next year, policies initiative on consumption will be more and more obvious, more and more prominent. Also, in the new five-year plan, in the new development strategy, we're seeing the priority of promoting consumption in the overall economic structure has been increasing to number three in the overall scheme of things. So I think we would be looking for policy strengths in the consumption sector. And then also for those names that has been sold down really hard recently, but still have a good long-term prospect, they probably should do well as well. I think in the long run, because China, in terms of income, the Chinese society, is now closer to a middle-income country. So much of the savings bound to spend at some stage. So one shouldn't be completely right of the Chinese consumption story, even though we've been talking about consumption restructuring for decades now. If you look at the experiences from the past two decades, the Chinese economic structure continue to be investment driven. And it's even more so than before, right? So consumption is now just a little bit over 50% of the overall economic structure while for other countries with similar income, they will have substantially more in consumption in their overall economic structure. I said the US is 70%, I think Japan is even higher, because it has an older population. But I think all this is showing that at some stage, much of the savings by the Chinese household would be spent. So right now, we need to continue to build out the social infrastructure for people to have the money to spend and also have the energy to spend, so to speak. Because right now, one of the crises on Chinese with consumption is that, you know, because the Chinese social safety net is weakish, and therefore, people are too afraid to spend the lifelong savings on consumption so that they have to save up for retirement. I think over time, much of this down to be changed. I think the consumption story, the flip side of the consumption story really is the investment, right? In the past 20 years, just I mentioned that investment as a percentage of overall economy has actually been increasing. The consumption is weakish because investment is too strong, basically. So I think by resolving the domestic demand issue for much of the Chinese manufacturing goods and also doing other reforms such as the capital market reform, the foreign capital account and reform, et cetera, et cetera, allowing some forms of capital free flow in and out of the country, letting the market to decide where the exchange rate is going to go in the coming future, et cetera, so much of all of these restructuring initiatives are related. For example, once you allow some form of free capital flow in and out of the country, then Chinese households have more channel to invest, right? So they can have a much higher investment return with a lower investment risk because of geographical diversification, for example. And therefore, they would boost up the nest egg for their retirement, and therefore, they would have the confidence to spend. So all of these are related. In China, we have this saying, once there's a will, there's a way. So once the top wants to achieve a certain target, for some reason, China end up achieving it. So for example, in the last couple of years, the Chinese economic system has been undergoing a dramatic transformation. China now is one of the leading manufacturing hub of the world. And also, the Chinese society has changed dramatically over the past couple of years. So I think this is not a one-year project, right? This is a project that is going to take years to accomplish. But I think in 2026 would be a year that can be recognized as the turning point for consumption restructuring. And hopefully, over the coming years, we will see the results from this initiative more and more clear. Sure. So I guess the point is that the consumption clearly has something to do with the long-term policy settings as well as structure of the Chinese economy. Yeah, maybe I'll just add that it's a long-term policy initiative. It's very difficult to call a sector's performance based on the multi-year initiative. So I'm pretty sure that over time, the consumption sector is going to receive more and more policy support. And also, over time, the Chinese household will spend more because they have reached a stage to spend the money. They've been saving all their lives. And income is now high enough for people to spend. But then at the same time, one has to be sort of careful not to call a near-term sector's performance because of the long-term policy initiative. Right. So I think we should reset that expectation to expect a more gradual recovery and focus more on the long-term potential, rather than just punting on one year outlook, right? That's fair. Cool. Then let's move on to talk about technology. We've definitely had a lot of discussion on the strong performance on the Chinese tax stocks over the past few months. But this is not you need to China. Other Asian markets were also led by tech. And as you all know, this is largely driven by the boom in US AI, especially for those in South Korea, Japan, et cetera. And in fact, some of these best-performing AI and humanoid stocks seen China are also part of the MVD and Tesla supply chains. And for this reason, US tech performance will surely have some strong influence on Asian tech stocks, including those in China. Right now, global investors are all debating one question, whether the US AI theme is in a bubble. And at Jules Barrett, our view is that US AI is price to perfection, but not utopia. So we shall still see some momentum for further upside. Now, let me ask you the most difficult question. How close are we to the bubble burst? I think we're in the bubble. But I think whether it is a bubble or when the bubble is going to burst is an entirely different story. So even though I myself have some very record to show in my past market course on bubbles performance, but I would say that now the condition for a bubble bursting right now is not in place just yet. I think normally when the bubble burst, the trigger is some liquidity problem. It's either because the Fed is raising industry, like it did in 2000, right? So it actually creates the bubble. Or because the market microstructure has changed, for example, there was a force liquidation of leverage in the market place. For example, in the 2015 Chinese market bubble burst, right? So during that time, it was of the authority trying to deliver it forcefully by command. So they actually asked the brokerage to lower their leverage. They forbid many forms of short-term lending in the marketplace. And therefore, this liquidity shortage and then price come down. And then there's margin call, and then there's another round of selling, et cetera, et cetera. So bubble bursting inevitably, it was because the liquidity issue. Normally when a system that has a very high leverage tend to be very sensitive to the changing liquidity condition. Right now, I think the US market's leverage is a little bit tricky to define as compared to before. In a bag that we look at the brokerage account to see leverage long, et cetera, et cetera, but right now, I think the US market is adding leverage by derivative. For example, half of the US trading volume is in options and futures. I so it's in some forms of derivative. And therefore, I think this type of leverage is very difficult to discern. And therefore, I don't think there's a correct answer. So see whether there's a liquidity problem in the US system. Another angle that we can look at to gauge whether there's a liquidity shortage is the market industry or the short-term rep or rate and the solver. So we compare that to the faffon target range, just to see whether it should significantly above the faffon target range to determine whether there's a funding shortage in the near term. But I think other than that, right now, the challenge for this cycle is that because much of the leverage is hidden. And therefore, it makes it very difficult to call to tie when the bubble is going to burst. Then come back to the first question whether it is a bubble. I think there isn't too much of a debate there. It is a very expensive bubble in terms of valuation. So the valuation is at such level that has only been seen for a couple of times in history. And normally, when the valuation is up at this level, something bad will happen. And also in the coming years, the US market return tend to be very low single digit foreign investors. So these are the market risk that people need to be aware of. I think right now, we are still not seeing enough ripen condition for a bubble burst. For example, the Fed just cut into three and also announced that it's going to expand its balance by $40 billion a month, starting from this month. And also, our proprietary liquidity indicator and liquidity leading indicator, all pointing to a better liquidity conditions ahead. So I say, as a result, in the next three months, let's say, it would be tricky to short the US market based on the bubble series. But I think beyond that, because now we at such high level, the market has a very high certain level of leverage building. And therefore, we need to monitor the situation as we go. But I think in 2026, it would be a year that the bubble burst in window has opened up. We agree with you how that is very difficult to time, believe we have to guess. Probably it's still not very close in terms of the timing of the bubble burst. In particular, when we're going to have hopefully a more accommodative Fed chair next year, leading to reasonably accommodative financial conditions. And also the fact that the cash flow of these hyperscalers in the US have been fairly good. And it's only recently that they really start to tap on the bond market. So it looks like the leverage even is going up is still at a very initial stage. That basically means we still a little bit far away from the burst of the bubble. But I guess a more important question is what do we do with it? Because I'm sure a lot of investors are invested in AI, whether that's US AI or China AI anyway. And we're now focusing on the bubble of US AI. And if I have fresh money, do I still invest into US AI? Or should we look for some diversification markets? I would say that people should look at the 9 US market more. Reason being they are still very cheap. And indeed, this year, the 9 US market has already outperformed the US market so far. And also going into next year, we're seeing the secular trend of the US dollar depreciation is going to continue. The US dollar has depreciated quite a bit at one stage this year. So the US dollar index declined from 133 down to like 96 as its lowest. So that's a very significant depreciation for major reserve currency. And we believe that after this rebound, the weakness in the US dollar is going to continue in the next couple of years. So this is because the US dollar credibility is in traction because of a fact that it's public on a control by Donald Trump. And also the US national debt problem is very prominent. It's very difficult to write it off. And how the US is going to deal with that situation is going to further impair the credibility of the US dollar. So I think the US dollar is going to weaken the secular trend is weakening from here. So on top of that, you have a very expensive US market. So just now we mentioned that the US market valuation is at its highest in history, one of the highest in history. And also the US market relative performance to the emerging market and also to the other developed market and the US developed market has been reaching its extreme as well. So there are plenty of reasons not to continue to putting money into the US market. And instead people should take some of the winnings and put it into other than US markets, such as emerging market, such as China and such as Japan. So to gain more relative performance from there. I think for people who has been investing really hard in the US in the past 10 years, they have done exceedingly well. I think, for example, for the S&P 500 right? So it went up from $666 to now $6,816,900. So it's a round number. It's up 10 times, basically. So if you invested with $10 as a starting capital, now you have 100. Then people should take 50 of the 100. We invest 50 into other markets, then US market. And then the remaining 50, they can continue to remain invested in the US market. And so doing, you sort of rebellious your investment portfolio to make the US percentage in the overall investment portfolio as close to 50%, which is slightly lower than the index weight of the US market in the overall global index. And in so doing, then you keep half of your winning from the past 10 years. And then you're going to enjoy the winning from the non-US market in the coming years. But then at the same time, you still have invested in the US to continue to enjoy probably the productivity gain from the AI technology pretty soon. Very enough. I think we pretty much on the same page when it comes to diversification of the portfolio. We also like Europe, China, Japan, when it comes to Asian markets. I think how you just mentioned one very, very important point, which is the currency, because the attractiveness of the underlying assets obviously are very important. But the currency swing can also influence your return of the portfolio a lot as well. And since we've been talking about China, I want to ask you about what's your view on the Chinese yen. Obviously, it should benefit from the dollar depreciation if it happens. What are the things that we should consider when it comes to the outlook of this currency? Yeah, well, I think the opposite to the US dollar, right? So I think the Chinese yen is one of the most undervalued currency in the world. The achievement of China in the past couple of years is for all to be seen. It's very obvious. The manufacturing strengths are going from strengths to strengths, and also the Chinese exports remain very highly sort of a contributing factor to global growth in the past couple of years. And so I think for that, China is now enjoying a huge humongous trade surplus. And then at the same time, the Chinese foreign currency reserve has not been rising at the same pace. So what that means is that much of the winnings, as much of the exports surplus has been remested overseas, either through 1.1 row program, either through the Chinese companies to go overseas program and many other programs. And also this pattern is very similar to the Chinese pattern post-90s bubble. So basically, Japan invested heavily overseas to remake another Japan, outside of Japan, so that the profits from outside of Japan is actually now larger than domestic profits. So I think China probably is learning from that experience and trying to do the same and expand its international coverage and international influences through the belt-in-roll program. So I think as a result, as you can see, the nominal yuan has slightly appreciated this year to now 7.05, and we believe that the nominal exchange rate has further room to move. But if you look at the real effective exchange rate data has been adjusted after purchasing power parity, the Chinese year actually depreciated more than 25% in the last couple of years. So it's staggering. So how could a country's currency depreciate against the background where the country's exports has been going from strengths to strengths? It just doesn't make sense. So I think just to revalue the Chinese year to its fair value, require 20% to 30% appreciation of the currency. Obviously, the Chinese central vendor someone has a sudden large-scale appreciation of the Chinese year, right? So because they will make capital flow unstable, make the capital market sensitive and also take away the shine of some of the Chinese exports as well. So I think the appreciation will be gradual, measure and controlled. But having said that, the past to appreciation is very obvious. By the way, the magnitude of appreciation that you forecast is quite large, I'm surprised. You did mention that this is going to be fairly gradual, probably to happen over a few years time. So we've talked about currency. We've talked about the equity market. We've talked about the AI theme. Now let's talk about commodities, which will be our last topic today. In the past episodes of our podcast, we've really talked a lot on goal and silver. But we haven't spoken as much on other commodities. So today, let's focus on this theme. And this year, the material stocks in China have actually done pretty well. And in some cases, I would say even better than the technology stocks. First, it started as a trade on anti-inflution. But in recent months, I think the narrative has clearly shifted to an AI theme. For example, the energy storage system will consume a lot of aluminum. Or you're going to need a lot of copper wiring in AI servers, et cetera, et cetera. And at Gillis Bear, our view on commodities is I would say pretty neutral, except being constructive on gold and precious metals. And the argument is really a largely balanced demand has applied. But what about a macro perspective? How you're an economist, you have sharp insights on this run? So can you share your angles on how you predict the outlook for commodities in 2026? Yeah, I think commodities will do well in the coming months. So we don't know where it's going to do well for the entire 2026. But I think in the coming few months, commodities are going to do exceedingly well. Now we're part of the economic cycle that tend to augurize well for commodities. Just now, I mentioned that we are at mid to late stage of an economic cycle. At this part of the cycle, precious metals tend to upper form. So now, we've already seen gold and silver has been surging this year. Actually, silver price is more than double. And also, the gold price has risen almost 70% yet today. I was a phenomenal rise this year. So I think as the economic cycle continues to run, then the strength in the precious metal is going to project and permeate onto the non-ferrous metals and industrial metals. So I think they are going to do well in the coming months as well. Now we've seen the US Fed has cut industry and will probably continue to cut in the coming months. It has already started re-expanding its balance sheet by 40 billion a month, but therefore the quality condition is very constructive for commodities as well. And certainly, I think demand for AI is still rising, right? So nobody knows how this technology is going to evolve. To invest in AI, it's very capital-intensive and resource-intensive. AI is a technology that probably doesn't make our society initially more equal. It's probably going to make it even more unequal because to invest and benefit from AI, you actually need a lot of capital. So I think that's one of the reasons why we're seeing in the US, a K-shaped society is being formed. On the one hand, you have the pop echelon of the society that is doing exceedingly well. And then you have the lower echelon of the society that is getting poorer. And the disparity between the rich and poor is even more glaring than before. So this is the reality we have to face when we are dealing with a transformational technology such as AI. And it's very different from the internet technology where it benefits everyone in the society, right? So even in a most remote area in Africa, for example, they have a mobile that can connect to the internet and then inform them and make them be able to do all sorts of things that is unimaginable. So I think the internet technology, especially the mobile internet technology, has been a beneficial technology for all. But I think AI so far is only benefiting a certain part of the society. And therefore, some parts, some groups in the society is ripping all the gains while the rest is being left behind. So I think we are at this point where the pace to invest in AI is going to accelerate rather than this salary. I think the US will believe that scaling up the investment in AI is one of the key ingredients to win. So I think the US companies will continue to invest very heavily in AI area. And so therefore, I think the demand for commodities, for resources is going to increase, not decrease, in the coming months, if not years. And therefore, there's sort of a structural demand for resources. And therefore, I think commodity is going to do well in the coming months. Definitely a very interesting time that we're in. And we'll have to see how the year of 2026 pans out. Anyway, that's all we have time for today. Thank you very much, Hal, for your sharing. Ladies and gentlemen, thank you very much for listening to our podcast this year. And stay tuned for our next one in 2026. Goodbye and speak soon. - Thanks, Richard. You have been listening to Beyond Markets by Julius Baer. If you like what you've heard, please tell us by leaving a review and rating on Apple podcasts or Spotify. Subscribe to Beyond Markets on your favorite podcast player to stay up to date with our latest episodes. To learn more about Julius Baer, our people, our latest thinking, visit us at www.JuliusBair.com. We will be back with a brand new episode soon. The information and opinions expressed in this podcast constitute marketing material and are not the result of independent financial or investment research. Please refer to www.JuliusBair.com/legal/podcast for further important legal information.