The core logic of next year's market: Where will the demand driving China's reflation come from?

招商 Securities believes that the core logic of China's economy and capital market next year will be "reflation," but the driving force will not come from internal stimulus. Rather, it will stem from exports strongly offsetting the downturn in real estate investment. In a recently published research report, the team led by Zhang Yiping at 招商 Securities wrote: As long as exports maintain steady growth, even if domestic consumption and investment remain low, total demand will not contract. Coupled with “anti-involution” reforms on the supply side, reflation will likely occur, with the GDP deflator expected to turn positive around mid-year. Reflation: The Core Scenario for Next Year’s Market The report clearly points out that "reflation" is the key to understanding China's economy and capital market next year. Since the second quarter of 2023, the Chinese economy has been troubled by weak prices. If this situation can be successfully reversed next year, current asset performance—relatively strong stock market and weak bond market—will continue. However, the main market concern is the demand side. Many opinions maintain that relying solely on supply-side “anti-involution” reforms to restrict supply, without corresponding demand-side policy support, would make price recovery unsustainable. The report argues that although dedicated demand-side policies to support “anti-involution” may not be introduced, this does not mean that total demand lacks support for expansion. How Exports Fill the Massive Gap Left by Real Estate Currently, the primary drag on total demand is real estate investment. Unlike retail sales, manufacturing investment, and infrastructure investment, which still maintain positive growth, real estate investment has declined for three consecutive years. This year's drop may expand to around -15%, making its negative contribution to total demand significant. However, from the expenditure-side GDP perspective, a key offsetting mechanism is in play: Stable export growth can fully offset the demand gap caused by the downturn in real estate investment. Take 2022 as an example. Export value that year was 25 trillion yuan, up 2.13 trillion yuan compared to 2021. At the same time, real estate investment excluding land purchase fees was 9.19 trillion yuan, a reduction of 1.22 trillion yuan. The combined change of the two shows a net increase in demand of 904.446 billion yuan, indicating that export growth effectively compensated for real estate contraction. In 2024, the combined change will expand to 1.308909 trillion yuan, with exports playing an increasing role in offsetting real estate investment's decline. Next Year’s Focus: Exports 招商 Securities predicts that this year, actual real estate investment will fall to around 6 trillion yuan, while exports will rise to around 28.59 trillion yuan. This means that the sum of export growth and the real estate investment gap will still exceed 1 trillion yuan, and the offsetting effect will persist. Next year, even assuming a pessimistic scenario in which real estate investment growth drops further to -20%, with exports growing by only 3.1% (according to the expenditure method), the gap in demand will still be adequately offset. The likelihood of achieving this growth is high. The report predicts that in 2026, there may be a "China-US policy resonance": After the US midterm elections, a hypothetical Trump administration may implement both fiscal and monetary expansion to stimulate the economy; at the same time, China will be starting its 15th Five-Year Plan, with major projects likely to begin. The resonance between the Chinese and US economies will drive global trade demand expansion, providing strong support for China’s export growth. The conclusion is very clear: As long as exports are stable, even if domestic consumption and investment remain low, China's total demand level will not shrink. On this basis, combined with supply-side constraints like "anti-involution," the likelihood of reflation in China’s economy next year is high. A clear signal will be: The year-on-year growth rate of the GDP deflator will turn from negative to positive around mid-year. Risk Warning and Disclaimer The market carries risks, and investment should be made cautiously. This article does not constitute personal investment advice, nor does it consider individual users’ specific investment objectives, financial situations, or needs. Users should assess whether any opinions, views, or conclusions in this article are suited to their particular circumstances. If you invest on this basis, you do so at your own risk.