Global economic growth and investment patterns have undergone significant changes, with the United States holding the largest share of global GDP and China ranking second. From a global investment perspective, recent attention has focused heavily on US Treasury yields and Federal Reserve rate hikes, which reflect not only debt issues but also marginal changes in technology, investment, and economic growth.
Global Economic Structure and US Rate Hikes
1. Changes in the Global Economic Structure
Shifts in global economic growth and investment have drawn attention not only domestically but also internationally. In terms of each country's share of global GDP, the United States holds the largest proportion, while China ranks second, currently accounting for nearly 17% of the global economy. Japan's share of the global economy has declined noticeably. From the perspective of internal economic structure, this can be observed through the proportions of manufacturing and services. China's manufacturing sector accounts for a relatively high share, and the gap that needs to be closed in the future is mainly in the services sector, which currently represents a relatively low proportion.
From a global investment perspective, recent attention has focused heavily on US Treasury yields and Federal Reserve rate hikes, which reflect not only debt issues but also marginal changes in technology, investment, and economic growth. Looking at the ratio of government debt to GDP for the United States and Japan, Japan is at a relatively high level, and the US government debt-to-GDP ratio is also approaching 100%, which is an important reason why this round of rate hikes has had a significant impact on US Treasuries. From the perspective of the global inflation cycle, we are currently roughly in the second inflation cycle since 2020. However, considering that oil prices have not yet returned to their 2022 highs, this round of inflation has not reached the previous peak from a CPI perspective. In 2022, CPI in major countries such as the United Kingdom once reached around 10%, while in the current round, CPI in major countries remains in the 3%–4% range. In terms of global benchmark interest rates, after a rapid round of rate hikes in 2022, the rate cuts in 2023–2024 only brought rates back by about half, and global interest rates are currently at a relatively neutral level, with some possibility of further increases in the future.
2. US Rate Hikes, Employment, and AI Investment
Recently, market expectations for rate hikes have been strong, and looking solely at US data, employment and inflation have performed relatively better than expected. Breaking down US nonfarm payroll data, employment growth in July and August was relatively strong, mainly driven by leisure and hospitality, services, and government sectors. However, two industries have continued to show negative employment growth: information and financial services. This indicates that AI's replacement of certain US jobs has already begun and has persisted for some time, which could also become a potential hidden risk for US economic growth.
In terms of economic growth, US GDP growth in the second quarter was 1.5%, compared with about 2% in the first quarter. The market is currently paying close attention to AI investment, particularly AI capital expenditure, and there has already been significant divergence in views on the outlook for US AI investment. Over the past period, AI investment has had a relatively obvious pulling effect on total US investment and economic growth. AI investment accounts for 60% of US corporate investment and nearly 10% of US GDP, placing it at a relatively high level overall. However, in terms of the month-over-month growth rate of AI investment, there has been some risk of decline since the beginning of this year. In particular, cash flows at several large US technology companies have turned negative, and combined with the impact of high interest rates on the US debt market, the market has certain concerns about the growth of US technology companies and related industries toward the end of this year and early next year.
On the other hand, regarding inflation, although US CPI and core CPI have shown some signs of peaking and declining, Warsh mentioned in his speech on Thursday that inflation remains "too high, for too long," and believes that the Fed's most important current goal is still to bring inflation back down. The logic behind this judgment is that Warsh believes US economic growth is currently relatively stable, making inflation control more important. After the September rate hike in the US, the market expects another possible hike in October and December. This hike brought the rate to 3.75%–4%, and the next one could push it further to 4%–4.25%, leading to a sharp rise in US Treasury yields. Recently, US Treasury yields have experienced dramatic fluctuations—on the day of the rate hike, yields actually declined somewhat, then rose again, and the 10-year US Treasury yield remains at a high level of around 5%. The difficulty in bringing US Treasury yields down is mainly due to market concerns that the Fed will continue raising rates in the future. According to the dot plot, there remains a possibility of further rate hikes before the end of 2027.
As for whether high US Treasury yields will affect US fiscal conditions and fixed asset investment, Warsh responded more from the perspective of household real income, arguing that low-income groups hold fewer financial assets and that rate hikes help control inflation and raise real incomes. He did not directly address the impact of high rates on US Treasuries and US equities. Overall, the relatively rapid investment and economic growth driven by large US technology companies and AI investment over the past two years faces significant uncertainty ahead. The risk of high interest rates, combined with uncertainty in corporate profits and cash flows, could pose substantial potential risks to the US economy and capital markets toward the end of this year and early next year.
Domestic Economic Performance and Policy Direction
1. Consumption
This year has been a phase of relatively rapid recovery in nominal growth, and whether the economy can stabilize and rebound in the third quarter still requires further observation. Looking at the "three drivers" of the economy, consumption is currently the most prominent in importance. Whether it is building a domestic grand circulation or connecting upstream and downstream transmission, the core bottleneck currently remains in consumption. Relevant consumption growth for January–August was 1.1%, compared with 1.2% for January–July. Sales of consumer goods related to trade-in programs have grown relatively quickly, but this policy also has a certain structural impact, providing greater help to some categories included in the policy scope while growth in other categories not included remains relatively low. At the same time, the pace of policy implementation can also disrupt related consumption. For example, at the end of the second quarter and the beginning of the third quarter, the Ministry of Finance issued the third batch of funds ahead of schedule, and consumption showed a clear rebound in June, but then weakened marginally in July and August. Among consumer categories, automobile consumption is under relatively greater pressure; communication equipment has seen relatively high growth, but this is mainly affected by price increases in AI-related products, which may reflect more of a price contribution.
In the entire 15th Five-Year Plan, the first document issued by the central government is the "Consumption Plan Outline," which also demonstrates the importance of consumption. To achieve the target of 60 trillion yuan by 2030, the average annual growth rate needs to reach above 3.7%, so there is still considerable pressure, and multiple measures will be needed in the future to effectively stabilize consumption and demand.
2. Manufacturing
From the perspective of profit divergence, the differences among upstream, midstream, and downstream industries are currently quite obvious. Among the more than 20 first-level industry classifications by the National Bureau of Statistics, only about 5–6 industries are currently achieving positive profit growth, and these industries are highly correlated with the capital market hotspots in the first half of this year, mainly concentrated in resources and technology, such as coal, chemicals, chemical fibers, and electronics, which have relatively high profit growth rates. At the same time, many midstream and downstream manufacturing industries still face considerable pressure, including automobiles, as well as downstream consumer services, liquor, food, and pharmaceutical industries.
3. Real Estate
From the real estate situation, the divergence characteristics remain obvious. First-tier cities are generally performing relatively well, especially Shanghai, but major large and medium-sized cities and second-tier cities, particularly provincial capitals, still have indicators below levels of previous years, and the regional divergence in real estate market recovery remains significant. In terms of housing prices, whether for new homes or second-hand homes, the year-over-year decline has narrowed somewhat, but there is still some distance from completely reversing expectations of falling housing prices. A relatively important issue is how to further resolve real estate inventory.
4. Infrastructure and the "Six Networks"
From the infrastructure perspective, the cumulative year-over-year growth rate remains negative. In terms of special bond usage, although the overall scale of special bonds last year was relatively high, the proportion actually used for investment was lower than in 2023 and 2024, with more funds being used for debt resolution. Therefore, infrastructure investment requires both accelerating special bond issuance and further increasing the proportion of special bonds used for project investment. Another issue in fixed asset investment that has recently drawn considerable attention is the "Six Networks." The construction of the "Six Networks" is very important, especially as the scale of policy-based financial instruments has increased this year, making it an important policy focus for bringing fixed asset investment growth back into positive territory in the remaining time this year.
5. Exports
From the export perspective, overall performance is currently relatively stable. In the first eight months of this year, exports maintained growth of over 20%, reflecting the resilience and advantages of China's industrial chain. In terms of industry distribution, the structural characteristics are very obvious. Exports of high-tech-related products such as integrated circuits and electromechanical products have grown relatively fast, while other traditional industries, although relatively lower, can still maintain single-digit or double-digit growth, which is not easy. This is influenced both by changes in export regions and by changes in the structure of exported goods. Overall, export growth this year is still expected to maintain double-digit or higher growth.
6. Fiscal Policy
From a policy perspective, this year's fiscal budget is generally quite proactive. From a historical perspective, China's fiscal deficit ratio has not continued to grow every year. Even though the fiscal deficit ratio rose in a one-off manner in 2020, the deficit ratio subsequently declined in 2021 and 2022. However, given that the fiscal deficit ratio already rose significantly last year, maintaining a relatively high deficit ratio this year means that the overall tone of fiscal policy this year remains very proactive.
7. Monetary Policy
From the monetary policy perspective, since the Lujiazui Forum in June, the central bank has carried out a series of structural adjustments to monetary policy, including shortening the interest rate corridor and creating an "overnight reverse repo rate." Overall, short-term interest rate movements have become increasingly stable. What is more noteworthy now is how to achieve effective transmission from short-term interest rates to medium- and long-term interest rates. The traditional interest rate transmission mechanism mainly goes from the central bank's benchmark rate to the LPR, and then to credit rates. Based on the central bank's first-quarter monetary policy report and the pilot programs at some regional banks in July, a transmission path from the central bank's short-term rate to money market rates and then to loan rates may also take shape in the future. Further diversification of the loan pricing mechanism is conducive to continuing to reduce financing costs for the real economy.
Regarding current aggregate financial indicators, although money growth and loan growth have declined to some extent, with financial innovation, especially the advancement of debt resolution policies in recent years, aggregate financial changes could be observed by combining loans and bond financing, which may provide a better explanation for the macroeconomy.
Capital Market Analysis and Outlook
1. A-Shares: Money Growth Expansion, Market Divergence, and Valuation Reversion
Since the beginning of this year, looking at the domestic A-share market, especially after "September 24" last year, money growth expansion has driven gains in the domestic capital market. From the relationship between the CSI 300, the Shanghai Composite Index and M1 and M2, as money growth rose, stock market valuations increased noticeably. Next, as the valuation uplift gradually comes to an end, more attention needs to be paid to marginal changes in corporate earnings, including PPI and export growth. From the historical relationship between PPI and listed companies' EPS, there is a high correlation between listed companies' profit growth and PPI. If PPI can continue to maintain relatively high growth and drive a recovery in listed company profits, stock market pricing in the next stage may gradually shift from valuation to earnings.
The current market divergence is obvious, especially the changes in market structure brought about by AI, which have drawn considerable attention. First, technological progress in the AI era plays a certain role in improving total factor productivity. With the expansion of AI applications and investment, profit growth has also driven the rapid development of related industries. However, from a longer-term perspective, the entire capital market still faces the issue of valuation reversion. Excessively high valuations in some industries are difficult to sustain over the long term, and in the future it will still be necessary to see further recovery in traditional industries, consumer industries, and cyclical industries so that overall capital market valuations become more reasonable and a more stable and sustainable capital market can be formed.
2. Interest Rate Market: Domestic and International Rate Spreads and the Yield Curve
From the interest rate market perspective, major overseas economies are affected by high debt and high inflation, and interest rates have generally risen. However, considering that China is still in a debt resolution cycle, monetary policy remains relatively accommodative, and the RMB exchange rate is relatively stable, the domestic interest rate market may still maintain a relatively accommodative and moderately downward trend. In terms of the shape of the yield curve, the medium- and long-end curve is currently relatively steep, and long-term interest rates may still have room to decline in the future, with the entire yield curve eventually tending to become flatter.
3. Commodities: Crude Oil and AI-Related Commodities Perform Well
From the commodities perspective, crude oil has performed relatively well this year. Apart from crude oil, driven by AI and technological development, commodities such as copper may still have some upside potential. However, prices of commodities related to traditional investment, such as ferrous metals and steel, remain under some pressure. Precious metal prices may be suppressed by further Fed rate hikes, so gold prices may show high-level fluctuations.
4. RMB Exchange Rate: China-US Rate Spread and RMB Internationalization
The RMB exchange rate recently broke through 6.7, and the market is paying close attention to whether the RMB exchange rate should refer more to the trade surplus or the China-US interest rate spread. From a historical perspective, the impact of the balance of payments on the exchange rate is relatively greater. Currently, the 10-year US Treasury yield is about 5%, while the 10-year Chinese government bond yield is about 1.6%, resulting in a relatively large China-US rate spread, but this spread is more influenced by differences in economic structure and economic cycles between China and the US. From the perspective of the exchange rate itself, considering the continuously rising global use of the RMB and a relatively healthy balance of payments with a surplus of a certain scale, the RMB exchange rate may generally still maintain a relatively strong trend. However, excessive one-sided movements should also be avoided, so this year's RMB exchange rate is judged to be in the 6.6–6.8 range. From a longer-term perspective, China's financial internationalization and RMB internationalization are the more important logic driving the development of China's financial assets. If the scale and proportion of global RMB usage further increase in the future, it will provide greater support for RMB-denominated assets, including equities and bonds. Therefore, the medium- to long-term development of RMB internationalization remains viewed with relative optimism.