The economy has maintained stable operations this year, continuing its positive trajectory of shifting towards new drivers and improved structures. However, the adverse impacts from changes in the external environment have increased, and domestic structural adjustments still face pressure. The second half of the year is a crucial bridge between these periods. Against this backdrop, The Paper's "Chief Connection" 2026 mid-year economic outlook has launched a special program titled "New Drivers, New Narratives." This initiative aims to capture the deep-seated changes currently occurring in the Chinese economy—how "new drivers" like industries, business forms, and models represented by new quality productive forces are accelerating their growth and gradually taking over from traditional growth drivers. It also explores how the "new narrative" of shifting from a "scale-driven" to a "quality-driven" development paradigm can be realized.

Zhang Yidong, a member of the Executive Committee and Chief Economist at Haitong International, recently stated during The Paper's "New Drivers, New Narratives" program that while the current "Summer Chill" might still have some lingering effects in terms of time, the adjustment space suggests that the end of July already marked the bottom range. "The collapse of old logic and the establishment of new logic are crucial for the autumn market. If a new logic is found, the tech bull market and AI bull run could continue. However, August is not suitable for chasing highs and gambling on a rebound. Strategically, one can be bullish, but tactically, it's better to stay grounded and look for the new logic," Zhang said.

Regarding the new logic, Zhang believes it is not about upstream prices rising forever. Instead, it involves a re-division of the pie between upstream and downstream sectors, requiring a clear view of where downstream demand is spreading. "Every technology wave's second half is not about 'building roads, bridges, and infrastructure.' It's always about 'running cars on the built roads,' focusing on the application side." He added, "From the second half of this year to early 2028, directions related to AI downstream applications should generate more excess returns—this is a universal excess return line globally."

Zhang also emphasized that each era has its core assets and that "carbon-based" and "silicon-based" should not be pitted against each other. "Silicon-based" ultimately serves "carbon-based," and "carbon-based" entities must adapt to the development of "silicon-based" technology, making it an ally rather than rejecting it. Looking at the medium to long term, Zhang noted, "2028 is a major hurdle for the AI bull market, and we must approach it with reverence. I wouldn't rule out a catastrophic event for the AI market in 2028. Even if it's not the end, it will be a crisis."

For the Hong Kong stock market, Zhang believes the timing for positioning is now ripe. The convergence of domestic and foreign capital in the second half of the year could potentially drive further performance. However, he advises against chasing highs, stating, "Don't think you'll miss out if you don't buy now. It won't happen that fast."

The "Summer Chill" may have lingering effects, but the end of July was the bottom range.

Regarding the market's recent volatility, Zhang explained that it is fundamentally a liquidity issue. "The market correction in June and July was primarily due to a micro-level liquidity shock, specifically the backlash from excessive crowding and over-leveraging." He pointed out that the source of this storm was the Korean stock market, which experienced the most severe adjustment, and the contagion spread globally, leading to significant corrections in tech-related indices worldwide.

Zhang further noted that from early March to the end of June, the market was generally optimistic about the shortage links in upstream computing infrastructure, most notably in optical modules, optical communications, storage, and advanced processes. Consequently, by May and June, market micro-liquidity became unhealthy. "With excessive leverage, a backlash at some point is inevitable, and the trigger came from macro liquidity," Zhang explained. If the macro liquidity environment is very loose, crowding isn't a problem. But any disturbance can easily lead to a "panic selling" scenario.

Zhang stated that this is precisely what happened. In July, long-term U.S. Treasury yields remained high, dollar liquidity tightened, and combined with excessive micro-level crowding, the Meta compute rental issue acted as a catalyst, triggering a stampede. "As of now, the crowding in the tech sector has significantly improved. The unwinding started in the least crowded areas, first the Hang Seng Index, followed by the Shanghai Composite Index and CSI 300, and then the Nasdaq and Dow Jones." In summary, Zhang believes the "Summer Chill" may have lingering effects in terms of time, but from an adjustment space perspective, the end of July was already the bottom range. Whether it's a reversal point—whether the subsequent move is a rebound or a reversal—depends on the fundamentals. "But the worst is over; we are now in the bottom range."

August is not suitable for chasing highs and gambling on a rebound.

Regarding the lingering effects of the "Summer Chill," Zhang analyzed that when he first raised the concept in May, he warned about the "gray rhino" and "black swan." The "gray rhino" was the rise in long-term U.S. Treasury yields, impacting global dollar liquidity. The "black swan" was the overcrowded trading and leveraged trading represented by the Korean stock market. "Currently, the 'black swan'—the backlash effect from crowded trading, especially quant and leverage—has already triggered the July adjustment. However, the rebound in the Korean stock market suggests that the deleveraging process isn't complete. If further shocks occur, such as U.S. long-term bond yields continuing to rise, there could be a second phase of deleveraging in Korea."

Zhang noted that looking back at the A-share market in 2015, deleveraging also occurred in several waves. Going forward, the deleveraging in Korea is likely to affect only its own market, rather than continuing the "contagion" effect. The spillover impact on the STAR Market, ChiNext, Japanese stocks, and the Nasdaq is already limited. "From now on, stock markets in different countries will follow their own logic. Even if the Korean market experiences short-term disturbances due to deleveraging again, it will be more of a buying opportunity than a selling point for other markets."

Regarding the "gray rhino," Zhang warned that short-term vigilance is still needed for potential unexpected risks. The 10-year U.S. Treasury yield has already broken through a pressure level that had held for over three years since 2023, and the trend for long-term U.S. rates remains upward. "In August, the 10-year U.S. Treasury yield could still approach 4.8% or 4.9%, and there's even a chance it could touch 5%. This will continue to pressure risk assets in the short term." Consequently, while the "gray rhino" and "black swan" of the "Summer Chill" are nearing their end, with the main impact already felt in July, the lingering effects will still suppress the initial phase of the autumn market. "It's not time to throw a wild party right after coming out of the emergency room."

Zhang emphasized the need to find new fundamental logic instead of following the old logic from the first half of the year—continuing to chase themes that have already been fully priced in. "Capital is smart. It will look for the main themes for the second half, looking for things that will truly exceed expectations." Therefore, Zhang advised that August is not suitable for chasing highs and gambling on a rebound. Strategically, one can be bullish, but tactically, it's essential to stay grounded and search for new logic.

The AI bull run has the potential to continue.

Looking ahead, Zhang believes that establishing new logic is crucial for the start of the autumn market, as the old logic collapses. "As the market fell towards the end of July and early August, more and more people began to question whether the AI bull market was over. Some agree there might be a rally from August to October but remain pessimistic, viewing it as a major bear market rally that will confirm the start of a bear market." Zhang disagrees. "If a new logic is found, the tech bull market and AI bull run can continue. But if no new logic is found, the rally from August to October could be followed by a significant downturn."

Zhang further explained that if the third leg of an "N-shaped" pattern is merely a rebound driven by improvements in liquidity—such as expectations of a U.S. rate cut or Chinese stimulus—it would be a major bear market rally (a B-wave rally). "However, I think this probability is low. The market will find new logic to trigger a reversal, which would be a new fundamental logic."

Regarding the current AI industry and market trend, Zhang shared observations from his business trip to North America from late June to early July. "The biggest difference between Wall Street and Silicon Valley is their focus on different time horizons. Wall Street is more concerned with short-to-medium-term earnings and returns; Silicon Valley focuses on industry trends, long-term returns, and the long-term logic of the industry. Silicon Valley believes the AI mega-trend is irreversible, while Wall Street is more focused on short-term earnings and returns."

For the Chinese capital market, Zhang emphasized focusing on how capital serves the real economy, ultimately combining with industry. "My framework remains: short-term pricing is driven by liquidity, long-term pricing is driven by industry trends and fundamentals. It's about finding the main contradiction at a specific time."

The second half of the AI bull market will shift from hardware dominance to application dominance.

Regarding market rhythm, Zhang said that when he proposed the "Summer Chill" in early May, he was essentially warning that "even good things can be overstretched." When prices become too extreme, they need to correct. Once the market starts to doubt, it can trigger a stampede. "The focus now must be on finding new logic. Not the old logic of upstream prices rising forever, but a re-division of the pie between upstream and downstream, and seeing where downstream demand actually spreads."

Zhang pointed out that the second half of every technology wave is not about building infrastructure. It's always about applications. "If the application logic doesn't work, it might be a bubble, not a technology wave. If it's a genuine technology wave, the application diffusion will exceed expectations." He believes the new logic for the second half of the AI bull market will be a shift from hardware-led to application-led. "In the medium to long term, AI hardware isn't without opportunities. But in the short term, given the high expectations and sector crowding, it's hard to generate significant relative returns. For relative returns, the focus now should be on less crowded areas—the directions being empowered by AI."

Zhang identified three key directions: First, AI + B-side, including healthcare, government services, and finance. Second, AI + Consumer Entertainment, including media, consumer electronics, and smart terminals. Third, AI + Going Global. "New main themes for the market are already brewing. In August, while there are still some disturbances from the overseas 'black swan' and 'gray rhino,' it's a good time to strategically position for these new themes. August is precisely the time for patient positioning for the autumn market, not for harvesting."

China-US AI investment logic cannot be simply compared.

Further elaborating on the development and investment logic of AI in China and the US, Zhang stated that the US's AI serves capital, driven entirely by profit. This is why most large models are closed-source, and applications are generally charged, whether for C-end or B-end users. "China's AI is people-centric, a key driver and engine for developing new quality productive forces, shaping new production relations and industrial systems." Ultimately, one serves capital, and the other serves the people.

Therefore, Zhang advises against simply comparing the AI investment logic between China and the US, or using the same approach for investing in US and A-share markets. "Focus on the driving force. The driving force of AI in the US is to serve capital, so the subsequent AI applications for the C-end will be very exciting and genuinely profitable. For China's AI, the direction towards the B-end deserves significant attention—whether in government services, entertainment, or going global, the opportunities and returns are visible."

Don't pit "carbon-based" against "silicon-based."

Regarding the current market debate on "carbon-based" vs. "silicon-based," Zhang suggested understanding it from three aspects. First, silicon-based ultimately serves carbon-based. AI's purpose is to improve social productivity and optimize production relations. AI serves humanity; any good technological innovation is meant to make people happier. "From this perspective, 2028 is a major hurdle for the AI bull market. I am in awe of 2028; I wouldn't rule out a catastrophic event for the AI market in 2028. Even if it's not the end, it will be a crisis." He explained that the current relative leader in AI is still the US, where an anti-AI sentiment is brewing. By 2028, carbon-based entities will likely impose rules on silicon-based entities, and sometimes rule-setting can lead to over-correction.

Second, the AI process is a shift from quantitative to qualitative change. One must be able to observe the iteration of AI technology calmly. Carbon-based entities should adapt to the development of silicon-based technology, making it an ally, not rejecting it. In the future, AI will inevitably permeate every aspect of human life, just like electricity, automobiles, or the internet.

Third, every era has its core assets. "Don't pit carbon-based and silicon-based against each other in a life-or-death struggle. Just like the 'Five Golden Flowers' of the past, few remember those bull stocks now. Times have changed." Zhang said that in the AI era, carbon-based demand will manifest in new forms. Therefore, one must consider what directions benefit carbon-based entities in the AI era and what new, more explosive consumer demands are emerging. This includes areas related to elderly care, healthcare, and emotional interaction. "The future consumer direction should be AI entering consumption, the combination of consumption and AI, not the old 'eating meat and drinking alcohol.' For now, baijiu is still more of a bond-like asset."

The timing is ripe for positioning in Hong Kong stocks.

Regarding whether the timing is ripe for positioning in Hong Kong stocks, Zhang's answer is yes. He pointed out that in the second quarter, Hong Kong stocks were impacted by three "capital-devouring beasts": first, capital diversion to markets like the US, Japan, and Korea; second, new IPOs and lock-up expirations; and third, capital flowing back to A-shares due to lack of positive returns. "These three forces have all reversed after the adjustment in July."

Zhang further explained that with the adjustment in US, Japan, and Korean markets, the valuation comparison has improved significantly, leading to some capital flowing back to Hong Kong. "Second, the worst impact of IPO lock-up expirations is over. At the same time, under new regulations, the impact of future new listings on the secondary market in Hong Kong will also weaken." Finally, with the volatility in the STAR Market and ChiNext, A-share investors are focusing more on cost-effectiveness, increasing attention on good assets in Hong Kong.

Therefore, Zhang believes the convergence of domestic and foreign capital in the second half could fully support the Hong Kong market. "Overall, Hong Kong stocks offer good value now and are suitable for value investors. One can patiently and counter-cyclically position in August, taking advantage of potential lingering disturbances from overseas 'gray rhinos' and 'black swans'." He noted that there are many value traps, but some genuinely good companies in Hong Kong are being unjustly sold off and ignored—these are opportunities, especially in commodities like gold stocks, copper, aluminum, and some small metals. "Also, safe assets with cyclical growth elasticity in Hong Kong, and the 'going global' related industry chains, have the logic of 'old trees blooming new flowers' worth attention." However, Zhang reminds investors not to chase highs and not to feel they will miss out. "If US bonds and US stocks fluctuate, Hong Kong stocks will still be affected, at least in August and September."

AI applications are the universal excess return line for the second half of the year.

Regarding allocation, Zhang stated that in the first half, "everything was junk except AI." "But in the second half, from a global perspective, capital will flow out of the crowded tech hardware sector and into other areas. The main direction is AI applications." In the first half, AI applications acted as a "blood bag" for upstream hardware. "In the second half, the situation will be reversed, with a re-division of the pie. From the second half of this year to early 2028, directions related to AI downstream applications should perform better and generate more excess returns—this is a universal excess return line globally."

Specifically for A-shares, Zhang believes that over the next year to year and a half, new stocks and sub-new stocks in the A-share market deserve significant attention. "They could be a very important opportunity and strategy. At the same time, besides new and sub-new stocks, one can also focus on mergers and acquisitions." He added that he has always talked about "old trees blooming new flowers," which is not driven by macro stimulus but by new quality productive forces. Traditional industry companies can inject equity from good companies in advanced manufacturing or AI-related industry chains incubated by local governments. "So, in the second half of the year, restructuring, asset injections, and new stocks in A-shares might be directions for excess returns. Invest in fertile ground; go fishing where the fish are."