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

21st Century Business Herald Reporter Yi Yanjun

The ongoing escalation of the Middle East situation continues to disrupt 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 fell 6.49%, and the Nikkei 225 declined 3.48%.

The Shanghai Composite Index, ChiNext Index, and Shenzhen Component Index all dropped over 3% for the day, marking their largest single-day declines this year. The Hong Kong stock market also fell in tandem, with the Hang Seng Index down 3.54% for the day.

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

CITIC Securities’ Chief A-Share Strategist Qiu Xiang believes 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 thinks 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 competitiveness of China’s advantageous manufacturing industry is just beginning to shift toward pricing power and profit margins.

“Investors should remain patient and calmly handle stock price fluctuations. April and May will be the decisive period,” Qiu Xiang advised.

Global Stock Markets Under Pressure

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 Composite Index declined by 4.13%, 3.38%, and 2.90%, respectively. Small-cap stocks performed even 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 volatility.

In 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 spot prices continued to challenge the $110 mark.

Currently, the evolving Middle East situation remains a key factor 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 “short and decisive” to now “long-term 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%).

“As expectations are 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 second-order pressure of high energy costs on inflation and supply chains. This may also be one of the reasons for the sudden increased volatility in gold, US bonds, US stocks, and even A/H shares last week,” Liu Gang noted in his research report.

Some European and American fund professionals also believe 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 easing monetary policy amid inflation pressures. This “double squeeze” has caused widespread volatility across energy, metals, major currencies, and capital markets.

Additionally, Golden Eagle Fund reminds that, fundamentally, this adjustment is more about 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.”

Revaluation of China’s Advantage Manufacturing Pricing Power

Given the uncertain development 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 navigation resume? Second, does the Federal Reserve prioritize inflation indicators or employment data? Third, is China facing cost shocks or opportunities for supply chain re-shoring?

“These questions may only become clearer by April. Facing great uncertainty, the market has seen some short-term reduction in positions, with previously high-flying sectors experiencing recent declines. But overall, most performance-driven and narrative-driven market clues 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 agitation and cooling, not the full-year winning or losing strategy,” Qiu Xiang stated in his report. “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 will be in April.”

He believes that Q2 will be a critical window for restoring confidence in the A-share market’s slow bull path. The valuation space for indices is limited to further repair, and the recovery of corporate profit margins will be key to the continuation of the bull market. The disruptions in global supply chains once again provide an opportunity to verify whether China’s advantageous manufacturing industry can truly regain pricing power.

“This Middle East conflict has given us a window to observe and verify whether China’s advantageous manufacturing can structurally demonstrate pricing power. Whether it is the high dependence on Chinese crude oil imports, severe internal competition, and compressed profit margins, or whether industries with significant global market share are beginning to pass costs onto the outside, we may see more concrete evidence in Q2. The petrochemical chain is currently the best example, with the potential to replicate the post-2020–2021 global supply chain disruptions and order shifts back to China,” Qiu Xiang analyzed specifically.

Some buy-side institutions share similar views.

Qianhai Kaiyuan Fund officials 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 supply regions, leading to both volume and price increases.

Focusing on market styles, Qiu Xiang notes 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 trend level, expansion of code and physical scarcity in China reflects the enhancement of manufacturing industry pricing power. The disruptive innovation of AI and disturbances in the global energy supply chain are reinforcing this trend.

Overall, Minsheng JiaYin Fund points out that geopolitical conflicts shift the market’s core contradiction 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. Short-term rising oil prices lead to re-inflation trades and delay Fed rate cuts, which may influence market risk appetite, causing A-shares to remain volatile with clear market segmentation.

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

Layout Based on “Certainty”

In the fog, three keywords may define sector allocation in A-shares: advantageous (advanced) manufacturing, pricing logic, and low-volatility dividends.

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

Regarding the hot 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 share is gradually converted 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 do not show significant valuation differences, nor do they generate excess returns since 2025. HALO is not a straightforward concept that can be simply overlaid on A-shares, unlike North America.

Qianhai Kaiyuan Fund suggests two future directions: first, 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).

An official 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 gaining appeal, with three focus areas: traditional low-volatility dividends, chemical industry segments with potential profit margin improvements, and oil and gas sectors benefiting from long-term product price increases.

Additionally, Ping An Fund highlights 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 fluctuating interest rates and increased market uncertainty; third, upstream energy and commodities benefiting from rising resource prices, providing some hedging in inflation environments with relatively clear profit elasticity.

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