Dear Esteemed Readers,

Previously, we shared our views on the new asset attributes of BTC after its new highs. In light of the significant changes in the Sino-American competitive landscape, we believe it is necessary to share our perspective on RMB assets.

Our core viewpoint is: We are about to enter the largest joint fiscal and monetary easing cycle between China and the U.S. since 2008. The main theme of this easing will be the synchronized recovery of the Chinese and American economies and the most intense competition for monetary and international influence.

Among these, RMB assets, especially A-share assets, will face a triple impact from liquidity, policy, and fundamentals. A-shares have undergone over a decade of consolidation and possess a similar cost-performance ratio to Bitcoin at $28,000. For a long time to come, the main competitive point between China and the U.S. will be the proportion of international currency usage, which will also be a major theme in the future world.

As of the date of this writing, the total market capitalization of the RMB equity market (including H-shares) is approximately 120 trillion RMB, while the total market capitalization of the U.S. stock market is about $50 trillion. The scale difference between the two may be smaller than most people's first impression. However, compared to the total economic size of China and the U.S. (in terms of GDP, the U.S. is about 1.5 times that of China), there is still a significant disparity. At this moment, the facts we observe are:

1. From a political perspective, the U.S. is fully turning towards pure populist right-wing policies, and its global strategy will further contract. The existing core influences of the U.S. in NATO, the Asia-Pacific, etc., will inevitably weaken further. The decline of U.S. global influence in the Middle East and the Russia-Ukraine war is evident, and the downward trend of the dollar's influence since the Iraq War may enter a new accelerated downward cycle, while domestic divisions and struggles have also entered a new state of turmoil.
2. From a monetary perspective, during the period of continuous easing of the dollar accompanied by soaring U.S. stock assets, China has been entering various deleveraging cycles since 2015, which has accumulated significant space for long-term monetary and fiscal policy. The issue of U.S. Treasury bonds has become increasingly prominent and is already the most important asset issue for the next decade. After going all-in on technological innovation, the U.S. will gradually need to exchange its monetary and fiscal space for global influence in the short term.
3. From a trend perspective, RMB assets have already seen clear bottom signals in net liquidity (represented by M2), fundamentals (represented by CPI and housing prices), and policy (political meetings since September) over the past two months.

We believe that during this easing cycle, there are clear turning points in the aforementioned political, monetary, and fundamental aspects. The accumulated differences between Chinese and American equity assets and liquidity over the past decade may usher in a new trend of convergence. Increasing exposure to the RMB system can enhance our ability to withstand external shocks, providing a margin for error in our vision of becoming a long-term family office for high-net-worth LPs.

Our Understanding and Trading Thoughts on the A-share Market

Understanding the A-share Market and Chinese Assets

The A-share market is a typical policy-driven market dominated by pure RMB policies. Since 2015, it has undergone a continuous 10-year deleveraging and capacity reduction cycle, compounded by a 7-year decoupling cycle of domestic and foreign capital that began in 2018. It can be said that the clearing of A-shares has undergone an extreme 10-year process, and China's economic growth rate has also begun to accelerate since 2015.

At this moment, we believe that the significant opportunities facing A-shares or Chinese assets mainly stem from the following facts and inferences regarding policy, fundamentals, and liquidity:

On the factual level, our understanding is:

1. From the perspective of policy space, China's deficit ratio (the ratio of fiscal deficit to GDP) has long adhered to a framework based on total GDP and growth rate since 2008, maintaining a narrow deficit ratio of 3%. This is far lower than the U.S. (about 7%, with several years exceeding 10% in recent years) and Japan (around 6% annually, recently about 8%) and other major economies' deficit and debt pressures.
2. From the economic fundamentals perspective, China possesses the world's only complete industrial production system and the cheapest, most robust power system and resources.
3. From the perspective of A-share liquidity and positioning, the capital market has long been on the political periphery, and the speech in September 2024 is the first clear requirement for the capital market since taking office.
4. From the perspective of national strength development, China's military and global influence in coastal and aerial areas have undergone tremendous changes compared to a decade ago.
5. The differences in economic growth rates since 2015 and the divergence in the performance of Chinese and American stock markets since 2022 ultimately stem from mismatches in monetary cycles, with the core issue of China's short-term economy being CPI deflation.

On the inferential level, we believe under general assumptions:

1. China can issue 50-200 trillion RMB in the next decade (simply considering a convergence of the deficit ratio towards that of the U.S. and Japan; in fact, recent statements from the Ministry of Finance have clearly indicated a desire to relax the narrow deficit ratio).
2. The Chinese government's governance capacity can ensure at least 1-2 industrial cycles occur in China.
3. China's global influence will trend upwards before a leap in proxy hot wars/war forms, and the current two local wars will accelerate this trend.
4. The probability of a direct hot war between China and the U.S. in the medium term is almost zero.
5. In the short term, the reversal of CPI has little chance of failure; local government debt and real estate issues are not the main contradictions based on a) and b) and are easy to resolve. China's social culture and people's characteristics (easy to inspire, desire for money) determine that building social confidence will not be difficult.

In summary, we believe that before a hot war breaks out between China and the U.S., we will witness a synchronized leap in the economies of both countries. The Chinese capital market will face a triple impact from policy, fundamentals, and liquidity, similar to the situation faced by Bitcoin in 2023, with the biggest difference being that the consolidation of A-share chips has already taken 10-15 years.

The A-share market has currently completed the first liquidity repair at the index level, and the expected future trend will follow the laws of economic operation, roughly as follows: commodities/high-end consumption -> industrial trends/domestic unified market consumption -> industrial trends. It is expected that the core capacity of each industrial trend and sector will be between 3-5 times, with reversal/high-growth targets around 10 times. From a principled standpoint, the current gap positions in the A-share index are 2889-2863 and 3017-3000 (taking the Shanghai Composite Index as an example). As of the date of this report, the Shanghai Composite Index is moving around 3400 points.

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