Chen Guo, China Securities Co., Ltd.: "Dual Circulation" and "Dual Innovation" are important focuses for further boosting domestic demand in the future. Investors need to strategically pay attention to this.

China Securities Co., Ltd. published a research report stating that the "two heavy" and "two new" initiatives are highlights of this year's policies. A comprehensive evaluation by the team predicts that they will also be important focus points for future efforts to boost domestic demand, and are worth strategic attention from investors. At a press conference in October, the State Council Information Office introduced that in the next 25 years, they will continue to issue ultra-long special national bonds and optimize their allocation to support the "two heavy" initiatives. In terms of the "two new" initiatives, the scope and scale of support are expected to expand further. China Securities Co., Ltd. predicts that consumer electronics could see an increase in demand through upgrading to new products, and pushing for high-end, intelligent, and green transformations in various sectors. In a press conference in November, Minister of Finance expressed that in line with the economic and social development goals for the 25 years ahead, a more forceful fiscal policy will be implemented. This includes continuing to issue ultra-long special national bonds to support national strategic and key areas of security capabilities ("two heavy"), as well as increasing support for large-scale equipment upgrades and expanding the scope and scale of consumer goods upgrades ("two new"). Given the current macroeconomic and international context, increasing the policy focus on boosting domestic demand is both a subjective desire and an objective necessity. On one hand, since September, China has clearly stated its intention to stabilize the economy, with multiple policy makers indicating that there is room for intensified fiscal and monetary efforts. On the other hand, with the election of Donald Trump as the new U.S. President, the global trade environment is becoming more challenging, raising concerns about external demand, thus further emphasizing the necessity of domestic demand policies. "The two heavy" and "two new" are policy highlights of this year, and China Securities Co., Ltd. predicts that they will also be important focus points for future efforts to boost domestic demand. In terms of the "two heavy" initiatives, in the press conference in October, it was indicated that in the next 25 years, they will continue to issue ultra-long special national bonds and optimize their allocation to support the "two heavy" initiatives. The incremental funding needs are expected to be significant in areas such as continued infrastructure construction, urbanization of agricultural population (with a focus on building ordinary high schools and renovating hospital wards), construction of high-standard farmland, underground pipeline construction, urban renewal, among others. In terms of the "two new" initiatives, the support scope and scale are expected to expand further. Based on the effects of policies implemented since July, subsidy policies have significantly boosted consumer demand for durable goods, and it is speculated that if the categories of subsidies are expanded, consumer electronics could be a potential direction (the Guangdong region specifically proposed subsidies for electronic consumer products such as phones this year, and a subsidy policy was introduced at the central level in May 2022). Regarding equipment upgrades, in conjunction with the Ministry of Industry and Information Technology's release of the "Guidelines for Equipment Upgrades and Technological Transformation in Key Industries" in September, the push towards high-end, intelligent, and green transformations in various sectors is also likely to become a policy focus, which could drive demand for related software, automation equipment, and other additions. With the subsidy process more than halfway through, some areas have shown clear improvements. In September, year-on-year social retail sales and infrastructure investment growth rates both showed signs of recovery. A review of the fundamental performance of related sectors shows that the effects of the consumer goods upgrades are more prominent, with improvements seen in the automotive and air conditioning sectors, as well as in the sales of kitchen appliances and refrigerators since August. However, the home furnishing category only saw a slight improvement. The policy drive for equipment upgrades has shown limited elasticity. The cumulative year-on-year growth rate in the purchase of equipment and tools from July to September did not increase, and China Securities Co., Ltd. believes this could be related to the weak performance of industrial enterprise profits and cash flows. As economic demand gradually recovers in the future, policies are expected to demonstrate a stronger driving effect. On the supply side, a few sub-categories such as packaging equipment, electrical instruments, industrial Siasun Robot & Automation, have shown signs of recovery since July. On the demand side, equipment upgrade projects led by local governments, public institutions, and central enterprises have progressed significantly better than those led by private enterprises and individuals, such as high investment activity in grid upgrades, restoration of intent for medical equipment purchases, and weak improvements in the domestic sales of engineering machinery. Additionally, there has been a noticeable increase in new orders for ships, but there has been no significant increase in downstream varieties led by private enterprises or individuals, such as agricultural machinery, trucks/new energy buses, elevators, etc.