China's Manufacturing Advantages and Pricing Power Weighted! What Are the Certainties in Chinese Assets?

Why is the second quarter a key window for rebuilding confidence and validating pricing power in A-shares?

21st Century Business Herald Reporter Yi Yanjun

The ongoing escalation of the Middle East situation is disrupting global supply chains, putting significant pressure on domestic and international risk assets.

On March 23, major Asia-Pacific markets experienced a “Black Monday.” South Korea’s Kospi index plunged 6.49%, and the Nikkei 225 index closed down 3.48%.

The Shanghai Composite Index, ChiNext Index, and Shenzhen Component Index all fell more than 3% during the day, marking their largest single-day declines this year. The Hong Kong market also declined in tandem, with the Hang Seng Index dropping 3.54% for the day.

Under panic sentiment, the performance of various assets will further diverge. From a medium- to long-term perspective, China’s advantageous manufacturing industry is expected to undergo a new round of value revaluation.

CITIC Securities’ Chief A-Share Strategist Qiu Xiang stated in a recent research report that some core debates about the impact of Middle East conflicts will gradually be answered after April. Until then, the market will remain in a narrative game stage, reflecting liquidity withdrawal characteristics.

Looking at the current global market landscape, Qiu Xiang believes that as risk aversion diminishes globally, countries are strengthening their energy and resource security strategies and accelerating electrification, which has become a new development trend. The transformation of China’s competitive manufacturing strength into pricing power and profit margins has just begun.

“Investors should remain patient and calmly handle stock price fluctuations. April and May are the decision-making periods,” Qiu Xiang advised.

Recently, A-shares have experienced increased volatility. On March 23, major A-share indices collectively declined. By the close, the Shanghai Index fell over 3.6% to 3,813.28 points. This means that in the past two trading days, the main indices have consecutively fallen below 4,000 and 3,900 points.

Reviewing the week of March 16–20, most core indices in Wind A-share market showed a downward trend. The Wind All A, Shanghai Index, and Shenzhen Component Index declined by 4.13%, 3.38%, and 2.90%, respectively. Small-cap stocks performed worse, with the CSI 50 and CSI 2000 indices dropping over 5.7%, and the Wind Micro-cap Index falling 7.12%. The ChiNext Index was relatively resilient, rising 1.26% for the week.

In fact, not only A-shares but global financial markets are also experiencing intense turbulence.

During the week of March 16, the DAX, FTSE 100, CAC 40, and Nasdaq declined by 4.55%, 3.34%, 3.11%, and 2.07%, respectively.

Data source: Wind

Gold and crude oil prices moved in opposite directions. As of March 20, international gold prices had fallen for eight consecutive trading days, with a weekly decline of over 10%. Meanwhile, Brent crude oil continued to push past the $110 mark.

Currently, the evolving Middle East situation remains one of the key factors weighing on equity markets.

According to Liu Gang, Managing Director of China International Capital Corporation and Chief Overseas and Hong Kong Stock Strategy Analyst, as the situation develops, market expectations for a quick resolution to the conflict have been revised from initial hopes of a swift victory to now expecting a prolonged confrontation.

Polymarket betting odds show that the probability of the conflict ending in March has dropped from 78% on February 28 to 4% on March 20. The highest probability now is that the conflict will end between April 1 and May 15 (44%).

“With expectations continually pushed back, trading focus will gradually shift from short-term emotional shocks to longer-term secondary effects, such as liquidity feedback on assets and the impact of high energy costs on inflation and supply chains. This may also explain the sudden increased volatility last week in gold, US Treasuries, US stocks, and even A/H shares,” Liu Gang noted in the report.

Some experts from China-Europe Fund also pointed out that the core of this crisis is the physical risk of geopolitical supply chain disruptions. Economies worldwide are facing both imported inflation from soaring energy costs and capital outflows due to the Federal Reserve’s delay in cutting interest rates amid inflation pressures. This “double squeeze” has caused widespread volatility across energy, metals, major currencies, and capital markets.

Additionally, Golden Eagle Fund reminded that, fundamentally, this adjustment is more about the market pre-emptively pricing in “tail risks.” Under conditions of incomplete information and uncertain pathways, the probability of extreme outcomes (such as the Strait of Hormuz blockade causing a surge in global energy prices) is discounted into asset prices, elevating overall risk premiums. This does not necessarily mean a substantial downward revision of corporate earnings expectations or macro fundamentals. It also indicates that current market prices partly reflect “excessive emotional reactions.”

Given the uncertain trajectory of the Iran conflict and the unclear status of the Strait of Hormuz navigation, what are the certain and uncertain factors facing investors?

Qiu Xiang believes there are three core questions currently unverified and difficult to answer: First, after the conflict intensity decreases, to what extent can shipping routes resume? Second, does the Federal Reserve prioritize inflation indicators or employment data? Third, is China facing cost shocks or opportunities for supply chain re-shuffling?

“These questions may only become clearer in April. Facing great uncertainty, the market has seen some short-term reduction in positions, with previously high-flying stocks experiencing recent declines. But overall, most performance-driven and narrative-driven market signals have returned to the same starting line since the beginning of the year. The first three months can be seen as a market rotation driven by expectations and narrative games during spring turbulence and cooling, not the overall year’s victory or defeat,” Qiu Xiang pointed out in the report. He added that the broader rebound of PPI, price transmission, and corporate profit recovery are the directions with both expectations and room for growth this year, and the key decision point is in April.

He believes that the second quarter is a critical window for rebuilding confidence on the path of a slow bull market in A-shares. The space for valuation repair is limited, and the recovery of corporate profit margins will be crucial for the continuation of the A-share bull market. The disruptions in global supply chains once again provide an opportunity to test whether China’s advantageous manufacturing industry can truly demonstrate pricing power structurally.

“The recent energy cost shocks caused by the Middle East conflict give us a window to observe and verify whether China’s advantageous manufacturing industry can indeed reflect pricing power structurally. Is it the narrative that China, with high dependence on oil imports and severe internal competition, compresses manufacturing profits through oil prices, or that China’s industries with significant global market share are gradually passing costs onto the outside? We expect to see more concrete evidence in the second quarter. The petrochemical chain is the best current example, with the potential to replicate the post-2020/2021 global supply chain disruptions that shifted orders to China,” Qiu Xiang analyzed specifically.

Some buy-side institutions share similar views.

A representative from Qianhai Kaiyuan Fund pointed out that in the medium to long term, facing unprecedented changes, China’s complete supply chain and massive manufacturing capacity will enable its advantageous industries to further gain market share from unstable external supply regions, leading to both volume and price increases.

Regarding market style, Qiu Xiang noted that the Middle East conflict is a catalyst for style switching this year. Under the backdrop of rising global costs and weakening financial conditions, valuation and pricing power are the two most important factors. At the industry level, expansion of code and physical scarcity in China manifests as increased pricing power of advantageous manufacturing industries. Accelerated disruptive innovation in AI and disruptions in global energy supply chains are reinforcing this trend.

Overall, Minsheng Plus Silver Fund pointed out that geopolitical conflicts shift the market’s core contradictions toward supply security and strategic resources, changing the logic from risk aversion to re-inflation concerns. Rising oil prices strengthen inflation expectations, suppress the outlook for rate cuts, and impact most assets. The short-term upward trend in oil prices, driven by re-inflation trades and delayed Fed rate cuts, may influence market risk appetite, leading to continued volatility in the A-share market with clear structural differentiation.

“If the conflict eases, risk appetite and liquidity are expected to recover; if it escalates into a long-term war, it could trigger a more severe global liquidity shock. Sectors like oil and gas, shipping, and coal are directly linked to supply and transportation risks, and A-shares in oil, shipping, and coal may perform relatively better. Overall, under liquidity shocks, indices are likely to remain relatively weak in the short term,” the firm stated.

Amid the fog, three keywords for industry allocation in A-shares may be: advantageous (advanced) manufacturing, pricing logic, and low-volatility dividends.

Qiu Xiang recommends confidently focusing on layout based on China’s advantageous manufacturing pricing power. “Currently, the core holdings should be industries with a share advantage in China, high costs for overseas capacity reorganization, and supply flexibility influenced by policies, such as new energy, chemicals, electrical equipment, and non-ferrous metals. Recent liquidity shocks have brought valuations of many stocks back to cheap levels, similar to the post-April 7 last year, creating significant expectations and undervaluation. Based on these core holdings, continue increasing exposure to undervalued factors, especially insurance, securities firms, and power sectors.”

Regarding the recently popular HALO concept, Qiu Xiang believes that overseas HALO trading mainly involves selecting defensive stocks that can avoid damage to free cash flow or declining capital returns under AI disruptive innovation. Essentially, it is a passive defensive switch.

“China’s logic is different. It’s about finding industries and companies with capacity that is difficult to replicate globally, where large market shares are gradually translated into external price pass-through under government-controlled capacity, increasing profit margins and cash flow. This is a proactive value revaluation logic, with resilience, sustainability, and certainty surpassing overseas counterparts,” he explained.

He further analyzed that if applying the HALO framework to A-shares, the high-HALO and low-HALO score portfolios show no significant valuation difference, nor have they yielded excess returns since 2025. HALO is not a straightforward concept that can be simply applied to A-shares, unlike North America.

Qianhai Kaiyuan Fund suggests two follow-up directions: first, stocks benefiting from energy price increases, such as coal, power, chemicals, and agriculture; second, sectors with independent growth logic, like advanced manufacturing (new energy, machinery, military industry).

A representative from China-Europe Fund also mentioned that rising global inflation and geopolitical tensions will further drive cyclical commodity performance. In a context of increasing volatility, low-volatility assets are becoming more valuable, with three areas to watch: traditional low-volatility dividends, chemical industry segments with profit margins likely to improve beyond expectations, and oil and gas sectors benefiting from long-term product price increases.

Additionally, Ping An Fund highlighted three clues: first, technology growth sectors supported by policies and industrial upgrades, including computing infrastructure, semiconductors, and high-end manufacturing, which have medium- to long-term growth potential amid global supply chain restructuring and self-reliance; second, high-dividend assets with stable cash flow and dividend capacity, which offer defensive attributes and allocation value amid interest rate fluctuations and increased market uncertainty; third, upstream energy and commodities benefiting from rising resource prices, which can hedge inflation and have relatively clear profit elasticity.

Overall, Ping An Fund believes that in the short term, the market may remain highly volatile, but the long-term logic remains intact, and structural opportunities are still worth actively seizing.