Yan Jianfeng: We can be more optimistic in 2026.

1. Introduction: Why does it feel so "difficult" Looking back on the past few years of the Chinese economy, it can be said to be "difficult". From a macro perspective, taking the GDP deflator index that covers the widest range of prices as an example, it has recorded negative values for 10 consecutive quarters since the second quarter of 2023. The secondary industry, mainly manufacturing, has recorded negative values for 12 consecutive quarters since the fourth quarter of 2022, with a much greater magnitude of negative growth than the overall GDP deflator index. From a micro perspective, both the investment desire of the corporate sector and the consumption willingness of the household sector are at historic lows. Against this background, the growth rate of China's macro leverage ratio has slowed down significantly, and the deleveraging subject has shifted from the private sector to the public sector. With the net interest margin continuously narrowing under a low interest rate environment, competition in the financial sector is intensifying, with a focus on government-related assets with fiscal credit endorsements, leading to a more pronounced "asset shortage" phenomenon. However, from the medium-term perspective of industries, we have found clear signs of the economy bottoming out and stabilizing. By observing the changes in the business climate index (ranging from 0 to 100, with higher values indicating a more prosperous outlook) of 31 first-level and 124 second-level industry indices, and the driving logic behind them, we can roughly divide all industries into three main core sectors: industries impacted by policies, cyclical industries, and strategic emerging industries. By classifying all industries according to this logic, we have not only identified the reasons why the economy has been "difficult" in recent years but also revealed the positive factors that could make us more optimistic about 2026. In summary, from the medium-term perspective of industries, the difficulties of the past few years can be attributed to three main points: first, traditional industries have lost momentum due to a series of domestic and foreign policies since 2017; second, cyclical industries have entered a trough in their investment cycle of roughly 6 years; and third, most strategic emerging industries are still in the early stages of development, making it difficult for new momentum to offset the decline of old momentum. Looking ahead to 2026, these three "difficult points" are changing. 2. Industries Impacted by Policies Since 2017, several industries have successively entered a downturn in prosperity, a trend closely related to a series of significant impacts at home and abroad during this period. Mainly including: 1. In 2017-2018, environmental protection policies highlighted the issue of blanket shutdowns, with some regions implementing "campaign-style" production suspensions and restrictions; 2. In March 2018, at the start of Trump's first term, he initiated the first round of tariffs war; 3. In April 2018, new rules on wealth management were implemented, leading to a significant contraction in non-standard financing due to deleveraging in the financial sector; 4. In May 2018, the establishment of the National Healthcare Security Administration led to a peak in the governance and rectification of the pharmaceutical and healthcare industry; 5. In March 2020, the outbreak of COVID-19 led to the first round of epidemic impact; 6. In January 2021, the "three red lines" policy for real estate came into effect, causing comprehensive shocks to real estate companies and the real estate market; 7. In March 2022, a new round of epidemic outbreak occurred, leading to a more serious second round of COVID-19 impacts; 8. In January 2025, Trump was re-elected and initiated a second, more extensive and severe round of tariffs wars. These eight impacts have compounded and amplified each other, and were key factors leading to economic weakness in recent years. It can be seen that under these eight impacts, China's core CPI and consumer willingness have been weakening since 2017. Affected by these eight impacts, traditional industries are generally facing significant downward pressure on prosperity. As shown in Figure 2: first, traditional manufacturing industries such as clothing and home textiles, jewelry (textile apparel industry), environmental protection equipment (environmental protection industry), etc., are facing challenges such as saturation of demand and industrial transformation; second, traditional service industries such as retail, transportation, advertising and marketing (media industry) are experiencing weak growth due to weak consumption; third, optional consumption such as tourism and scenic spots (social services industry), and movie theaters (media industry), are highly sensitive to residents' income and consumption willingness; fourth, the financial sector, such as diversified finance (trusts, futures, asset management, etc.), state-owned large banks, which are closely linked to the prosperity of traditional industries, face pressure on asset quality and interest rate spreads; fifth, the real estate sector has seen a gradual decline in prosperity from downstream to upstream since 2018 (Figure 3) - real estate services (mainly real estate agencies, property management, etc.), architectural decoration, real estate development, construction materials; sixth, the pharmaceutical business, such as pharmaceutical commerce, biotechnology products, medical services and other pharmaceutical and biotechnology subcategories, were highly prosperous during the epidemic period, but subsequently returned to normal levels due to demand normalization and cost control policies. In contrast to the above industries, some essential consumer industries such as white goods, liquor, and beverage dairy products, exhibit defensive properties that can withstand economic cycles. Even in periods of overall economic decline or weak consumer sentiment, their industry prosperity remains at a high level (Figure 4). This is mainly due to their strong demand elasticity, minimal impact from economic cycle fluctuations and a relatively mature industry competitive landscape. In the post-epidemic period, the prosperity of most traditional industries has shown signs of bottoming out. Sectors such as tourism and scenic spots, movie theaters, and other optional consumer industries have begun to show slow signs of recovery (see Figure 2). It is important to note that in this round of recovery process, the investment logic of traditional industries is undergoing a transformation. Taking the culture and tourism sector as an example, it is necessary to differentiate between "corporate" and "retail" perspectives. From a "corporate" perspective, the focus is on the stability of cash flow. Pre-epidemic, existing high-quality scenic spots with stable cash flow have a higher certainty of recovery and risk resistance compared to new cultural and tourism projects that require market cultivation and face cash flow pressures. From a "retail" perspective, the key is the transition from asset businesses to liability businesses. With consumer behavior becoming more cautious and a low willingness for borrowing, the growth space for asset businesses, represented by consumer loans, is limited. On the other hand, liability businesses driven by growth in individual wealth and the upgrade in experiential consumption, such as customized travel-themed wealth management products and wealth management services combined with cultural and tourism consumption, have more development prospects. These businesses go beyond simple consumer transactions to embed in customers' wealth preservation, value growth, and quality lifestyle needs, thereby helping to build more stable customer relationships and sustainable non-interest income sources. 3. Cyclical Industries The changes in the prosperity of some industries show distinct cyclical characteristics. Based on their different key drivers, they can be broadly categorized into three main cycles: investment cycles, energy cycles, and non-ferrous metal cycles. These three cycles follow their respective macro logic while interacting with each other in the economy. Representative industries in the investment cycle include general steel (steel industry), coking coal (coal industry), etc., whose prosperity is highly synchronized with the year-on-year growth rate of the producer price index (PPI) of production materials. The producer price index (PPI) of production materials mainly reflects changes in ex-factory prices in the mining, raw materials, and processing industries, corresponding to capital formation activities such as infrastructure construction, real estate development, and manufacturing investment. General steel is mainly used in basic areas such as construction, infrastructure, and manufacturing, while coking coal is an important raw material for steel smelting, hence their prosperity is closely related to the year-on-year growth rate of the producer price index (PPI) of production materials reflecting investment demand (Figure 5). Representative industries in the energy cycle include refining and trading, oilfield engineering (petroleum and petrochemical industry), and coal mining (coal industry), whose prosperity is closely related to the trend of international energy prices. As shown in Figure 6, the trends in prosperity of these three major industries are highly consistent with the Brent crude oil price index. Brent crude oil, as a key "anchor" in international energy pricing, directly affects downstream refining and trading. While coal mining belongs to a different energy category, under the common effects of global energy structure linkage, substitution effects, and market sentiment, its prosperity cycle also exhibits some synchronization with oil prices. This synchronization indicates that the energy sector is influenced by global macroeconomics, geopolitics, and energy supply-demand patterns, with strong price linkages and cyclical resonance effects between various sub-sectors. Representative industries in the non-ferrous metal cycle include non-ferrous metals (non-ferrous metals industry) and chemicals (basic chemical industry), whose prosperity is highly correlated with the international copper price index trend. As shown in Figure 7, with industrial upgrading and the development of new energy industries, the application of non-ferrous metals in areas like new materials, energy storage, electric vehicles, etc., is steadily increasing. The demand structure for these industries aligns closely with the long-term trends of "electrification, automation, and intelligence". This trend not only strengthens the correlation between the non-ferrous metals sector and copper prices but also indicates that under the drive of structural demand, this sector is expected to enter a long-term cycle of prosperity and drive a more prolonged "copper bull". The interrelationship between the investment, energy, and non-ferrous metal cycles has shifted from the traditional "investment-driven" model to a "new momentum-driven" model. Prior to 2021, with the investment cycle as the leading factor, the three major cyclical industries were highly in sync (Figure 8): the year-on-year growth rate of the producer price index (PPI) of production materials, which reflects domestic investment demand, typically leads the London copper price index (representing the non-ferrous metal cycle) and the Brent crude oil price index (representing the energy cycle). This was mainly due to the highly synchronized global economic cycle at the time, where domestic infrastructure and real estate investment strongly drove upstream energy consumption and related metal consumption. However, starting from 2022, this mechanism has significantly weakened - the copper price index has independently risen, decoupling from the relatively sluggish producer price index (PPI) and oil prices. The decoupling of copper prices from oil prices and the PPI is due to a fundamental change in the demand logic of copper - under the global trends of electrification, automation, and intelligence, the rapid growth of new industries such as new energy vehicles, photovoltaic wind power, AI data centers, and their increasing demand for electrical transmission and electrical equipment have driven an independent "copper bull" trend that is separate from the traditional investment cycle (Figure 9). Therefore, when assessing cyclical industries, it is important to not only track traditional domestic macroeconomic indicators (such as PPI, real estate investment) but also pay close attention to structural incremental demand driven by global industrial transformation and technological progress. 4. Strategic Emerging Industries Strategic emerging industries have become a key focus for countries to seize high ground in future economic and technological competition. Since the publication of the "Decision of the State Council on Accelerating the Cultivation and Development of Strategic Emerging Industries" in 2010, which identified nine core areas including new generation information technology, biotechnology, new energy, and high-end equipment, and the subsequent recommendation in the "14th Five-Year Plan" to accelerate the deployment of strategic emerging industry clusters such as new energy, new materials, aerospace, and low-altitude economy, China's strategic emerging industries have moved from the early stage of "comprehensive cultivation" to the focus breakthrough stage of "cluster development". Looking at the prosperity of major strategic emerging industries, of the 27 industries listed in Figure 10, 19 industries have a prosperity level higher than the average prosperity level of all 124 industries. However, due to the different stages of technological development each industry is in, there is a significant difference in prosperity levels among industries. Technological development usually goes through three stages: "0-1" (technological breakthrough and validation), "1-10" (initial commercialization and market adoption), and "10-100" (large-scale promotion and ecological construction). In these stages, industries face different primary contradictions (Figure 11). First, there are the future industries that are in the "0-1" stage. In this stage, the first turning point in technological development has not yet arrived. From the supply side of the industry, the technological route is yet to be validated, and from the demand side of the industry, application scenarios are relatively ambiguous. These industries mainly belong to the "future industries" identified in the draft proposal of the 15th Five-Year Plan, such as quantum technology, brain-computer interfaces, embodied intelligence, 6G, etc. Second, there are strategic emerging industries in the "1-10" stage. In this stage, the demand side of the industry is basically determined, with the bottleneck lying in the breakthrough and commercialization of key technologies on the supply side. In the strategic emerging industries identified in the 14th Five-Year Plan and 15th Five-Year Plan, many industries are in this stage. For example, in the commercial space industry, on the one hand, there is a massive demand for satellite launches to build satellite networks, but on the other hand, limited by domestic satellite launch technology, satellite launch prices remain high; another example is the optical optoelectronics industry, where the domestic demand for chip manufacturing is substantial, but constrained by foreign "chokepoints" and the lack of breakthroughs in domestic lithography technology, the industry's prosperity remains at a lower level (see the prosperity of the optoelectronics industry in Figure 10). Third, there are strategic emerging industries in the "10-100" stage. In this stage, technological development has surpassed the second turning point. From the supply side of the industry, key technologies and their commercialization scenarios have seen comprehensive breakthroughs, production capacity continues to expand, and at the same time, there is strong demand on the demand side, leading to an expansion where supply and demand are both prospering. However, relative to the demand side, the supply side expands faster, leading to the risk of overcapacity. In strategic emerging industries, more than half of the industries have entered the "10-100" stage. The most typical examples are the photovoltaic equipment industry and the new energy vehicles industry, where the photovoltaic equipment industry entered this stage earlier and experienced pressure from overcapacity, while the new energy vehicles industry only entered this stage at the end of last year, resulting in differences in the prosperity levels of the two industries (see the prosperity levels of the photovoltaic equipment industry and the passenger vehicle industry in Figure 10). In summary, looking at the changes in the prosperity of industries and comparing various industries, industries in the late "1-10" stage (such as semiconductors) and early "10-100" stage (such as components, batteries, grid equipment, passenger vehicles, etc.) have relatively high prosperity levels; while those in the early "1-10" stage (such as optical optoelectronics) and late "10-100" stage (such as rail transit equipment, photovoltaic equipment, etc.) have relatively low prosperity levels. As most strategic emerging industries have entered the late "1-10" stage and early "10-100" stage, new economic momentum will effectively complement the shortcomings of old momentum. 5. Conclusion: Three Reasons for Optimism Based on the medium-term perspective of industries on the macroeconomy, we can derive three simple, intuitive, and optimistic reasons: First, industries impacted by policies will gradually recover. The 2026 ceasefire in the China-US trade war will see a one-year "truce", combined with core CPI monthly growth returning to over 1% since September and corporate current account deposits turning positive since June, multiple signals indicate that the policy environment both domestically and internationally, and the "scarring effect" of the epidemic, are expected to further improve in 2026. Therefore, traditional industries that were significantly impacted by previous policy adjustments will enter a path of recovery. Second, cyclical industries may usher in a new investment cycle. The Central Economic Work Conference in 2025 clearly stated that "domestic demand should lead", emphasizing that fiscal policy should be "more proactive", and that "investment in goods" should be closely integrated with "investment in people." As the year marking the beginning of the 15th Five-Year Plan, 2026 is expected to witness the commencement of a new investment cycle, which will in turn revive energy cycle industries. At the same time, with non-ferrous metals like copper being continuously boosted by the trend of electrification, automation, and intelligence, high levels of prosperity are expected to be sustained. Third, strategic emerging industries transition from exploration to strength. Some industries have moved from technology exploration and pilot demonstrations to large-scale, industrialized development, particularly in areas like new energy, new energy vehicles, etc., where China leads in global technology. In the future, investment strategies should be tailored based on each industry's stage of technological development. For industries in the late "10-100" stage, the focus should be on avoiding the risks of obsolete capacity elimination, highlighting leading enterprises with increased industry concentration and monitoring capacity expansion abroad; industries in the late "1-10" stage and early "10-100" stage should seize opportunities actively; for early "1-10" stage industries, close tracking of related enterprises' technological developments is necessary for early positioning. This article was originally published on the Chief Economist Forum and was first posted on the WeChat public account "Jianfeng Steering" by Yan Jianfeng, Chief Economist of China Zheshang Bank and Director of the Chief Economist Forum. GMTEight Editor: Wenwen.