The anti-involution bull may become a new driving force for the market's upward trend

Report Highlights 1. "Anti-involution Bull": An important opportunity to drive the switch between the two halves of the bull market. ① In the first half of the bull market, there is financial re-inflation, while in the second half, there is physical re-inflation. "Anti-involution" is expected to drive inflation back, becoming a turning point for the switch between the two halves of the bull market. ② Local governments have fiscal confidence, which empowers the central government to execute policies. Since the beginning of this year, land auctions have continued to warm up, with the total land acquisition amount of the top 100 real estate companies from January to August increasing by 28% year-on-year, and the national total land transaction price at 0.9%. ③ Stimulating demand after clearing supply, there are opportunities in infrastructure, consumption, and manufacturing in the coming year. 2. Changes in the past two months: Strengthened top-down policy determination and improved bottom-up corporate cooperation. ① In July, the market's doubts about "anti-involution" mainly revolved around policy determination, the willingness of micro-enterprises to cooperate, and the moral hazard of "those who comply suffer losses" under industry self-discipline guidance. These concerns have been continuously alleviated over the past two months. ② Top-down: The shift from industry associations guiding self-discipline to ministries accelerating intervention, with policy documents clearly deployed, and the policy determination from the central to local levels continuously strengthened. ③ Bottom-up: The willingness of enterprises to cooperate has increased. A typical example is the photovoltaic industry, where Daqo Energy has expressed active support for the "anti-involution" initiative and has proactively implemented production reduction strategies. The "polysilicon storage plan" has been mentioned and discussed by several companies, which may lead to acquisitions of some existing production capacities. Industry allocation: Focus on the price increase expectations of cyclical resource products, and pay attention to glass fiber, coal, energy metals, cement, commercial vehicles, and wind power equipment. Industries with relatively tight supply include: cyclical (industrial metals, steel, petrochemicals), consumption (textiles, agriculture, light industry), and technology manufacturing (logistics, pharmaceuticals, machinery, optical optoelectronics). Report Body 1. "Anti-involution Bull": An important opportunity to drive the switch between the two halves of the bull market The logic of the bull market shifts from a "funds bull" driven by liquidity to an "anti-involution bull" driven by fundamentals. Huachuang Strategy's report on 24/11/19 titled "Re-inflation Bull Market - 2025 Investment Strategy" clearly states the view of "re-inflation bull market": in the first half, there is financial re-inflation, and equity assets are valued higher in a liquidity easing environment; in the second half, there is physical re-inflation, shifting to a dual-driven return of valuation and performance for leading blue-chip stocks. The meeting of the Financial Committee on 7/1 marked a clear policy turning point, indicating that "anti-involution" has shifted from previous high-level calls to the central government's policy formulation and local governments' accelerated execution, analogous to the supply-side structural reform proposed by the Central Financial Leadership Group in November 2015. "Anti-involution" is expected to drive inflation back, becoming a turning point for the switch between the two halves of the bull market. Currently, we have seen improvements in inflation expectations driven by the activation of funds in enterprises and households, with the August PPI stabilizing and rebounding year-on-year at -2.9%, and month-on-month shifting from decline to flat, ending eight consecutive months of decline. Structurally, "anti-involution" has driven prices of coal, black metals, etc., from decline to increase, with coal mining rising from -1.5% to 2.8% month-on-month, black metal selection from -1.1% to 2.1%, and black metal smelting from -0.3% to 1.9%. As inflation returns, the driving force of the bull market is expected to shift from liquidity-driven to "anti-involution bull," with sectors potentially extending from current growth tracks like computing power and innovative drugs to manufacturing, consumption, and cyclical sectors, thus achieving a comprehensive bull market The core behind the "anti-involution bull": Local governments have financial confidence, and the central government has the execution power. We believe that the market's concerns about the intensity of the "anti-involution" push from the perspective of ownership are not the core contradiction of China's supply-side issues. The current acceleration of "anti-involution" is rooted in the improvement of local finances. Since last year, local governments' financial accounts have continued to warm up, especially with the recovery of land auctions. Since the beginning of this year, land auctions have continued to recover, with the total land acquisition amount of the top 100 real estate companies from January to August increasing by 28% year-on-year, and the total national land transaction price increasing by 0.9%, with the decline in land transfer revenue narrowing, showing a cumulative year-on-year decline of -4.6% from January to July. The alleviation of local financial pressure has dispelled concerns about the impact of supply-side reforms on local government tax revenue and employment, making the push for "anti-involution" more confident, thus fundamentally changing the situation of the past year and a half where the central government spoke while local implementation was relatively slow. The underlying logic is similar to that of 2013-2015—before performing surgery, one must first stop the bleeding. The core contradiction of the slow de-capacity from 2013 to 2015 was the pressure on local finances, while the premise for advancing supply-side reforms in 2016 was the significant recovery of local governments' financial accounts. "Anti-involution bull" policy rhythm: Clear supply before stimulating demand, with infrastructure, consumption, and manufacturing all having leverage in the coming year. Huachuang Strategy's report on July 20, "Supply Clearing May Precede Demand Stimulation," compares domestic and international experiences in stimulating the economy. In Japan, demand was stimulated without effective supply clearing, leading to "zombie enterprises" absorbing credit resources, resulting in a policy dilemma of "pushing a rope." In contrast, China has rich successful experiences; the two rounds of inflation in 1998 and 2016 both followed the pattern of clearing supply before stimulating demand—no clearing, no stimulation. The July Politburo meeting can be seen as an adjustment in policy rhythm, with supply clearing preceding demand stimulation. It is worth mentioning that the order of demand being placed later does not mean there is no demand stimulation. The current market concerns about weak demand are expected to see incremental growth in infrastructure, consumption, manufacturing, and other fields in the coming year. Infrastructure projects in the second half of the year are entering the implementation phase, combined with the Yaxi Hydropower Station and the "Rural Road Regulations" to be implemented starting in September, it is expected that the demand for cyclical resource products will continue to increase. In terms of consumption, the National Development and Reform Commission stated at a press conference on August 29 that it will accelerate the introduction and implementation of policies in areas such as the first economy, digital consumption, and "artificial intelligence + consumption." In the medium to long term, the outlook for manufacturing going overseas and external demand remains optimistic. In recent years, global investment growth has been suppressed by geopolitical risks, with global FDI outflows (reflecting foreign investment capacity) decreasing from USD 2 trillion in 2021 to USD 160 billion in 2024. In the future, as the world enters a rate-cutting cycle, geopolitical tensions ease, and the AI industry wave unfolds, global investment growth is expected to enter an upward cycle. Chinese manufacturing may play an important role; according to the United Nations Statistics Division, as of 2023, China's manufacturing output accounts for nearly 30% of the global total. In recent years, Chinese manufacturing has formed the most complete industrial system and supply chain network globally, along with high cost-effectiveness and advanced technological competitiveness driven by continuous technological innovation. II. Changes in the Past Two Months: Strengthening Top-Down Policy Determination and Improving Bottom-Up Corporate Cooperation Market concerns about "anti-involution" are gradually being alleviated. In July, market doubts mainly revolved around the determination and strength of the implementation of anti-involution policies, the willingness of enterprises to cooperate at the micro level, and the moral hazards under industry self-regulation. These concerns have been continuously dispelled over the past two months. Top-Down: Transitioning from industry association-led self-regulation to accelerated intervention by ministries, with policy determination from central to local levels continuously strengthening. Before the 7/1 Financial Committee meeting, "anti-involution" mainly focused on self-regulatory behaviors led by industry associations, with the market worried that under a self-regulatory agreement without administrative constraints, enterprises would face the moral hazard of "those who comply suffer losses." Since July, policies from the central to local levels have shown strong determination, with the Ministry of Industry and Information Technology emphasizing at a State Council Information Office press conference on 9/9 that "the cultivation of enterprises and industries is extremely difficult, and irrational competition can destroy a company or an industry overnight; we absolutely cannot tolerate such things happening." _ From the perspective of key industries, photovoltaic, new energy vehicles, and takeaway platforms all show a policy deployment that links the central and local governments. At the central level, in the past month, the intervention of ministries and commissions has escalated from holding corporate symposiums to clear deployments in policy documents, marking the transition of "anti-involution" from the initial stage of verbal advocacy and self-discipline to a phase that may advance through more administrative means in the future. On September 4th, the Ministry of Industry and Information Technology and the State Administration for Market Regulation issued the "Action Plan for Steady Growth in the Electronic Information Manufacturing Industry 2025-2026," emphasizing achieving high-quality development in fields such as photovoltaics by breaking down "involution-style" competition, legally governing low-price competition for photovoltaic products, guiding local orderly layout of the photovoltaic and lithium battery industries, and instructing localities to sort out capacity situations. On August 23rd, the National Development and Reform Commission, the State Administration for Market Regulation, and the Cyberspace Administration jointly released the "Rules for Pricing Behavior of Internet Platforms (Draft for Comments)," requiring the guidance of operators to set prices independently according to the law, clarifying price labeling requirements for operators, and regulating price competition behavior among operators. The local response has been positive; in July, several photovoltaic companies in Leshan and Yibin, Sichuan, suspended or reduced production; in August, Guangdong and Yiwu raised express delivery prices, and the Guizhou Provincial Market Supervision Administration held concentrated talks with five travel platform companies including Ctrip, Tongcheng, Douyin, Meituan, and Fliggy; in September, Anhui Province issued a notice on the "Action Plan for Promoting High-end, Intelligent, and Green Development of Manufacturing through New Technology Transformation," emphasizing the promotion of key industries such as automobiles, photovoltaics, and energy storage, as well as state-owned enterprises and listed companies, through mergers and acquisitions to integrate the upstream and downstream of the industrial chain. The collaboration from the central to local levels reflects the determination of the "anti-involution" policy and will accelerate the pace of policy advancement. Bottom-up: Increased willingness of enterprises to cooperate. As the ultimate entities for implementation, enterprises are a crucial determining factor in advancing this round of "anti-involution," and they were also the crux of previous market concerns. The ownership attributes dominated by private enterprises, along with the characteristics of the manufacturing industry and the lifespan of production capacity, have raised market worries about the willingness of enterprises to cooperate. However, after several rounds of symposiums convened by industry associations and ministries, enterprises have enhanced their understanding of policy determination and, considering the healthy ecological outlook of the industry, many leading companies have recently responded to "anti-involution" and committed to actively cooperate. A typical example is the photovoltaic industry, where Daqo New Energy's interim report stated that the company actively responds to the industry's "anti-involution" initiative and proactively implements production reduction strategies, with the company's polysilicon output in the first half of the year decreasing by about 60% year-on-year, and the production reduction strategy will continue in the third quarter to control reasonable inventory levels. The market's focus on the "polysilicon storage plan" has also been mentioned and discussed by several companies, which may lead to acquisitions of some existing capacities. At the semi-annual performance briefing, GCL-Poly Energy responded to questions about polysilicon storage and share repurchases, stating that "the overall (polysilicon industry) reform plan has not been 100% confirmed this year; if the silicon material storage plan is finalized, silicon material companies need to allocate some cash to support the plan and also set up some funds." In the automotive sector, Great Wall Motors' interim report stated that the automotive industry needs to strengthen policy guidance and self-discipline norms, advocating the "anti-involution" concept to avoid homogenized competition and resource wastage. In the e-commerce platform sector, after talks with the State Administration for Market Regulation in July, Meituan, Taobao Instant Purchase, Ele.me, and JD.com successively issued statements III. Industry Comparison: Which Industries Benefit from Anti-Competition, Which Industries Have Tight Supply Industry Allocation: Focus on the price increase expectations of cyclical resource products, pay attention to glass fiber, coal, energy metals, cement, commercial vehicles, and wind power equipment. Huachuang Strategy's "Who Competes? Who Wins? - Comparison of Anti-Competition Industries" filters potential beneficiary industries of "anti-competition" from five perspectives: state-owned enterprise proportion, industry concentration, price elasticity, taxation, and employment. The industries filtered out the most, appearing 4 times, include: glass fiber, coal mining, coke, cement, energy metals; infrastructure, commercial vehicles, wind power equipment, decoration; hotel catering, and liquor. Those appearing 3 times include: chemical products, agricultural chemical products, chemical raw materials, non-metallic materials, steelmaking raw materials, chemical fibers; rail transit equipment, real estate development, motorcycles; beverages and dairy products; other electronics. "Anti-competition" focuses on backward production capacity under supply surplus, specifically reflected in high inventory, high CAPEX, low capacity utilization, and low price levels. We measure inventory levels using the inventory of listed companies and the finished goods inventory of industrial enterprises, measure CAPEX using capital expenditure/(depreciation + amortization), measure capacity utilization using total asset turnover, and measure industry price levels using gross profit margin, filtering industries with higher current "competition" levels. Industries with relatively tight supply: mainly concentrated in cyclical industrial metals, minor metals, steel, petrochemicals, and building materials (cement, decorative building materials). In consumption, textiles and clothing (textile manufacturing, clothing and home textiles), agriculture, forestry, animal husbandry, and fishery (breeding, feed, fishery, agricultural product processing), light industry manufacturing (home furnishings, papermaking), home appliances (black appliances, kitchen and bathroom appliances); in manufacturing, logistics (tight supply, competition reflected in price wars compressing gross profit), pharmaceuticals (chemical pharmaceuticals, medical devices), machinery (general equipment, engineering machinery); in technology, optical optoelectronics, consumer electronics, and communication equipment. Author of this article: Yao Pei, Ding Yancheng, Source: Yao Pei Strategy Exploration, Original Title: "【Huachuang Strategy Yao Pei】Anti-involution Bull May Become a New Driving Force for Market Upturn" Risk Warning and Disclaimer The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk