Li Chao, the Chief Economist at Zheshang Securities, recently presented at a book club event on July 23rd, discussing major asset allocation within a transforming global trade system. He constructed a comprehensive framework for moving from macroeconomic analysis to practical investment deployment, starting with broad trends and market pricing logic.



The Macro View: Silicon-Based Inflation vs. Carbon-Based Deflation

Li Chao argues the global economy is currently defined by a distinct K-shaped divergence. The silicon-based new economy, driven by artificial intelligence, is expanding rapidly, while the carbon-based traditional sectors covering basic needs like food, clothing, housing, and transportation are under pressure. This creates a situation where roughly 20% of the economy (silicon-based) is rising and 80% (carbon-based) is declining, leading to opposite price trends he terms "silicon-based inflation" and "carbon-based deflation." Traditional frameworks that rely solely on economic fundamentals to predict asset performance are becoming less effective. He suggests a four-level decision-making system, prioritizing global political and economic landscapes, social stability, structural transformation, and finally economic growth.

The primary support for silicon-based inflation comes from the expectation that US AI capital expenditure will not peak within the year. Driven by technological competition, the US government is strongly pushing corporate investment in AI, and even if private sector willingness wanes, policy support will provide a floor. This keeps upstream supply-demand gaps open and product prices rising. This implies that tech stock investing requires a cyclical mindset, focusing on price increases as a leading indicator rather than waiting for earnings to materialize.

Regarding carbon-based deflation, traditional manufacturing and the real estate chain are broadly under pressure. He views overcapacity and deflationary pressures as normal, painful consequences of a transition period. This makes traditional "distressed asset" reversal strategies much more difficult.



The Decision Framework: A Four-Level Thinking System

The first level is the Sino-US rivalry, which is the primary factor driving current asset pricing and can be broken down into trade, technology, military, and financial dimensions.

The second level is social stability. Consumption is transitioning from a pro-cyclical to a counter-cyclical variable. When economic downward pressure intensifies, policy will use consumption stimulus as a key tool to support livelihoods, replacing real estate's previous counter-cyclical role. This is a major expectation gap: previously, consumption investment required waiting for a strong economy, rising incomes, and housing wealth effects. In the future, policy stimulus will be the direct driver of consumer market performance.

The third level is structural transformation, with the core direction being "moving away from real estate and embracing manufacturing." Real estate is reverting to a function of providing shelter, manufacturing becomes the core economic driver, and technology is the fundamental support for manufacturing upgrades. To achieve excess returns, investors must stick to the technology theme or risk missing the most important opportunities in a gradual bull market.

The fourth level is economic growth, which sits at the bottom of the priority list. While growth targets face downward pressure, policy focuses more on high-quality development and industrial upgrades, and will not launch strong stimulus solely to support growth rates.



Investment Strategy: A Barbell Approach Driven by Risk Appetite

Based on this framework, Li Chao proposes a "barbell" allocation strategy for the current environment. The core logic is that total demand may decline in the second half of the year due to high oil prices, and long-term interest rates in developed countries are expected to fall due to quantitative easing policies from central banks. This will likely cause equity market investment directions to show a barbell-style divergence.

One end of the barbell should embrace extreme prosperity. In the context of an intensifying K-shaped economic divergence, technology investment themes, especially the AI infrastructure industrial chain, remain the main focus. He notes that the fundamentals of silicon-based inflation are unlikely to see a turning point this year, so the technology track should focus on price increases as a leading indicator to capture growth opportunities with long-term cyclicality.

The other end should maintain extreme defense. Assets like Chinese state-owned enterprise (SOE) dividends and resources, which he calls "new gold," are set to begin a new round of value reassessment. This is based on two factors: first, the potential for global long-term funds buying Chinese assets to continuously reshape the valuation of central enterprises, and second, the prolonged K-shaped economic divide could lead to non-linear risks, making safe-haven assets long-term beneficiaries.



Economic Fundamentals and Policy Direction

On China's economic fundamentals, the first-half GDP growth of 4.7% falls within the 4.5-5% target range. He believes it is unlikely that the Politburo meeting at the end of July will announce strong aggregate stimulus. In consumption, goods are under pressure while services are stronger. The National Bureau of Statistics has included services consumption in retail sales data, and policy is continuously tilting towards the service sector. On the investment side, high-tech industries are a bright spot, while traditional infrastructure is constrained by local debt controls and is shifting towards key projects in the "15th Five-Year Plan." Real estate remains in a downward cycle, with policy focus shifting to "good houses." While some core cities have seen "land kings" and "property kings," aggregate stimulus is unlikely.

The recent rapid growth in imports and exports is seen as temporary: exports are boosted by order transfers and stockpiling due to international shipping disruptions, and imports are driven by domestic AI hardware demand and gold imports. Overall domestic demand remains relatively weak. He expects import and export growth rates to normalize later. On prices, CPI is weak, and tech-related categories have become a significant disruptive force in PPI for the first time, confirming the silicon-based inflation logic. The impact of price increases on PPI warrants attention going forward.

Monetary policy faces multi-objective threshold management, with the primary task now being to promote price recovery while maintaining financial stability. Bond market leverage controls have limited the room for continuous easing, so consecutive RRR and interest rate cuts should not be overly expected. The slowdown in credit growth is a normal part of structural transformation—moving from a real estate-chain-driven credit demand to high-tech manufacturing inevitably involves an adjustment in credit growth rates. Fiscal policy is shifting from extraordinary counter-cyclical measures to supporting high-quality development, with a slightly lower broad deficit ratio and a change in support direction from "investing in things" to "investing in people," focusing on social security, livelihoods, and technology. Industrial policy's core is technological self-reliance, with increased investment in future industries.

Overseas, the US is also showing a K-shaped pattern. AI's substitution effect on labor has pushed the labor force participation rate to a low level, making the unemployment rate a distorted indicator. More attention should be paid to the participation rate. Fed Chair Warsh advocates using "trimmed mean PCE" instead of the traditional PCE measure. This alternative indicator points towards deflationary pressure and a direction for rate cuts, but a consensus within the Fed has not yet formed. The probability of substantive rate hikes this year is extremely low. Quantitative tightening also faces obstacles: US financial institutions have limited willingness and capacity to absorb government bonds, and the Fed's balance sheet reduction likely cannot happen until after mid-2027.



Outlook for Major Asset Classes

In his outlook for major asset classes, Li Chao believes A-shares have the institutional foundation for a gradual bull market, but investors must stick to the technology and dividend yield themes. The technology track follows the price increase logic, while dividend-yielding assets benefit from global sovereign wealth funds' allocation to central state-owned enterprises. Bond market trends are mainly influenced by expectations of international relations, following a chain of "relationship expectations → exchange rates → corporate forex settlements → short-term liquidity → long-term interest rates." Short-term rates are range-bound, and the next opportunity requires waiting for high-level meetings to bring about currency appreciation and liquidity release.

Gold benefits long-term from the global trend of diversifying reserves. He notes a major turning point occurred in December 2025 when global central bank gold reserves surpassed US Treasury holdings for the first time. However, gold has risen significantly in the short term, reducing its risk-reward ratio, making it suitable for tactical trading. Strategic metals can serve as a hedging allocation due to national security needs, while agricultural products require waiting for signs of supply contraction. The US stock market bull trend is not over, as there are no trend reversals in fundamentals or liquidity, but significant accumulated profits mean periodic pullbacks are normal corrections.



Panel Discussion: Navigating Change from Multiple Perspectives

The event's second half featured a panel discussion with Sun Wei, Chief Asset Allocation Officer at Guotai Asset Management, and Yang Yiting, a Macro Strategy Researcher at Guotai Asset Management, moderated by Tian Zhongfang, Chief Reporter at The Paper.

Question 1: Has the Merrill Lynch Clock Malfunctioned? What are the Main Variables Driving the Cycle?

Li Chao: The Merrill Lynch Clock is highly applicable in the US because the Fed's interest rate pricing largely follows the "Taylor Rule," determined by the output gap and inflation. However, China's interest rates are influenced by seven monetary policy objectives, making it too multi-faceted. Growth and prices alone cannot accurately describe the cycle. We have incorporated variables like the global macro landscape, social stability, and structural transformation into our asset allocation framework to improve our success rate.

Question 2: How do Geopolitics and Computing Power Affect the Economic Cycle?

Sun Wei: Geopolitical conflicts, like the US-Iran and Russia-Ukraine situations, push up the prices of resources like crude oil, increasing global inflation pressure and suppressing demand. Similarly, technological revolutions like AI lead to a classic K-shaped economy. AI-related industries with technological advantages grow quickly, experiencing inflation within their value chain. Non-AI sectors face more sluggish growth and low prices due to competition for resources and elements. These changes significantly impact asset allocation. Furthermore, the growing global liquidity pool has a major impact. Post-financial crisis QE and the 2020 pandemic easing led to a dramatic expansion of central bank balance sheets. For example, the Fed's balance sheet increased more than tenfold from the end of 2020 to the end of 2025. This increased liquidity means the monetary and financial cycle's influence on asset allocation is much higher, and volatility has increased as a result.

Question 3: How do Industrial Policies Affect Asset Allocation?

Yang Yiting: In the past, the market was very accustomed to macro counter-cyclical adjustments, making "distressed asset reversal" strategies highly successful. Now, policy has shifted towards using industrial policy to build long-term advantages. Sticking with old strategies is likely to fail. China helps industries build advantages before going overseas, while the US focuses on national security and tariff suppression. When investing, one cannot just look at policy announcements. You must combine the policy puzzle with the industrial cycle to find the right rhythm.

Question 4: Is the Global Liquidity Anchor Shifting?

Li Chao: Warsh subjectively does not want to raise rates, and inflation will naturally fall year-on-year. It is difficult to have a strong rate hike cycle this year. More importantly, quantitative tightening is very hard to implement. US financial institutions cannot fulfill government requirements like Chinese banks can. Their willingness to absorb government bonds is limited, and they face regulatory conflicts with the Basel Accords. Even if Warsh considers exiting Basel, banks may not expand their balance sheets due to risk considerations. Therefore, we do not see a trend reversal in liquidity.

Question 5: Are We Destined for a Barbell Allocation Strategy?

Sun Wei: Under the intertwined influence of geopolitics, the AI industry cycle, and the monetary/financial cycle, the "barbell" allocation is likely the "least bad" choice for the current environment. At the same time, in an AI era of information parity, effective allocation strategies can be quickly adopted, potentially reaching extremes, requiring timely adjustments. Initially, the barbell strategy bet on one end on the high elasticity of AI computing power, and the other end on gold, resources, and high-dividend stocks. This year, gold, resources, and AI have all shown high elasticity at different stages. After a surge, the defensive nature of gold and resources can decrease. Recently, AI computing power, after accumulating huge gains, has also seen significantly increased volatility. In this context, the defensive high-dividend stocks on the other end of the barbell demonstrate stability.

Question 6: Are Aging and Climate Transition Pushing the Economy Towards Long-Term Mild Stagflation?

Yang Yiting: Aging will drag both supply and demand. A declining working-age population drags potential growth, a falling savings rate drags investment, and higher pension spending puts pressure on government finances, all of which have stagflationary characteristics. Climate transition is a long-term, sticky process. The combination of these two factors creates stagflationary pressure. AI is both a potential cure for aging and a source of inflation through its energy and resource consumption. Which direction we ultimately move in depends on the pace of AI supply and demand realization.

Question 7: What is the Biggest "Black Swan" That Could Cause This Framework to Fail?

Li Chao: Black swans are often not the "grey rhinos" the market pays daily attention to. Global central banks are all guarding against risks, and emerging markets have learned to "mirror" US policy, making systemic risk identification more difficult. It's worth watching for a reversal of inertial thinking. For example, Southeast Asia's oil and electricity shortages are causing it to embrace new energy faster. Similar expectation reversals could breed risks.

Sun Wei: If we try to look for potential "black swans," by definition they are unexpected. Possible scenarios include an escalation of geopolitical conflicts leading to runaway oil prices, AI capital expenditure growth failing to be sustained, or an El Niño event causing a food crisis. As mentioned earlier, the increased global liquidity makes the monetary/financial cycle's impact on asset allocation higher, so a black swan could also emerge from this angle. If the US dollar continues to strengthen, global liquidity tightens, and related risk assets could come under pressure.

Yang Yiting: First, whether the Fed's framework can transition smoothly after weakening independence and diversifying objectives. Second, the persistence of geopolitical shocks is unprecedented, affecting investment rhythms. Third, if the AI capital expenditure narrative experiences a temporary disruption and multiple events occur simultaneously, it could create resonance risk.



Book Recommendations by Guests

During the book recommendation segment, the three guests combined their research and investment experience to recommend several classic works.

Li Chao Recommended: "New Quality Productive Forces," "Principles," "Elon Musk," "Zero to One"

"New Quality Productive Forces" extrapolates technology trends from total factor productivity. The creative meritocracy and macro-hedging thinking in "Principles" by Dalio aligns well with his team's decision-making process. "Elon Musk" reveals the forward-looking logic from humanoid robots to brain-computer interfaces. The concept of temporary technological monopoly emphasized in "Zero to One" fits well with China's current strategic need to address original innovation shortcomings and guide capital towards "early-stage and small-scale" investments.

Sun Wei Recommended: "The Intelligent Investor," "The Alchemy of Finance"

"The Intelligent Investor" is a "bible" for building a personal asset allocation framework, helping distinguish between aggressive and stable approaches. "The Alchemy of Finance" provides a macro perspective and the theory of reflexivity, helping investors understand the self-reinforcing power of markets in an era of tenfold liquidity expansion.

Yang Yiting Recommended: "The Little Book of Trading"

This book is simple yet profound. The author, a former trader, reflects on common human weaknesses from his own experience of moving from success to devastating failure. He points out that the only consensus among all investing masters is "cutting losses." The book teaches readers to identify the psychological stages after a loss, distinguish investing from gambling, and is highly practical for behavioral management and mental adjustment.