Zheshang Securities Li Chao: Consumption will be the most important counter-cyclical variable in 2026. Bullish on A-shares

Recently, Zhejiang Securities Chief Economist Li Chao appeared on The Paper’s “Spring Water Flows East—‘Chief Connection’ 2026 Market Outlook” special, offering analysis and forecasts.

Li Chao stated that from the overall policy guidance, fiscal policy in 2026 should maintain an active stance and sustain a certain level of deficit. At the same time, from a monetary policy perspective, moderate easing with reserve rate cuts and interest rate reductions will still be possible.

Regarding the key economic task “domestic demand” identified at the Central Economic Work Conference for 2026, Li Chao pointed out that from the perspective of expanding domestic demand, 2026 should place greater emphasis on consumption. In the past, real estate was the main countercyclical variable in expanding domestic demand, while consumption was often treated as a procyclical variable. Moving forward, the market needs to recognize that consumption will be the most important countercyclical variable.

“Regarding China’s stock market in 2026, there’s no need to focus excessively on interest rates anymore; instead, more attention should be paid to risk appetite. If market confidence can remain relatively optimistic in the long term, the stock market may continue its ‘slow bull’ trend through valuation uplift,” Li Chao said.

As for the future performance of the Renminbi in 2026, Li Chao expects the exchange rate to remain basically stable at an equilibrium level. Although the overall trend will be gradual appreciation, it will be accompanied by two-way fluctuations rather than a one-sided trend.

“High-Quality Development” is the Key Word

Looking back at the recently concluded 2025, Li Chao said that last year was a year of significant progress in China’s economic reform and transformation. On one hand, China achieved substantial results in high-quality development. On the other hand, during the structural transformation, China effectively responded to uncertainties and achieved breakthroughs in high-tech sectors represented by the “Six Little Dragons,” greatly boosting investor confidence.

“Overall, in 2025, China’s economy not only operated steadily but also made remarkable achievements in structural transformation,” Li Chao said.

Looking ahead to 2026, the key phrase for China’s economic development is “high-quality development,” which runs throughout the entire 14th Five-Year Plan and serves as a directional guide for future economic growth.

“Another key phrase, in simple terms, is ‘say goodbye to real estate, embrace manufacturing,’” Li Chao explained. Compared to 2025, a major change in 2026 is the gradual withdrawal of unconventional countercyclical policies. It should be noted that this withdrawal will be a gradual process rather than a sharp exit.

Li Chao further stated that from the overall policy guidance, fiscal policy in 2026 should maintain an active stance and sustain a certain level of deficit. Meanwhile, from a monetary policy perspective, moderate easing with reserve rate cuts and interest rate reductions will still be possible.

“So, from the perspective of economic growth momentum, China needs to rely more on high-end manufacturing and high-tech development to lead structural transformation on a solid footing. ‘New quality productivity’ is an important focus,” Li Chao said.

Consumption Will Become the Most Important Countercyclical Variable

Regarding the “domestic demand” key task for 2026 identified at the Central Economic Work Conference, Li Chao pointed out that from the perspective of expanding domestic demand, 2026 should place greater emphasis on consumption. In the past, real estate was the main countercyclical variable, while consumption was often treated as a procyclical variable. Moving forward, the market needs to recognize that consumption will be the most important countercyclical variable.

For the work of expanding domestic demand in 2026, Li Chao said that from a consumption perspective, efforts should be made to effectively unleash consumption potential, including old-for-new programs, relaxing restrictive measures on consumption, and policy support for service consumption.

“At the same time, expanding domestic demand cannot completely ignore investment. In the process of transforming from ‘say goodbye to real estate, embrace manufacturing,’ although real estate investment will inevitably face significant downward pressure, new infrastructure remains an important direction. How to stimulate new infrastructure is a new question in the investment field,” Li Chao pointed out.

Li Chao further noted that in manufacturing investment, how to develop high-quality industries in the context of transitioning from traditional economy to new quality productivity, and how to increase investment in the eight strategic emerging industries and nine future industries, also require attention.

“This can be effectively promoted through fiscal policies, monetary policies, and even some new types of policy financial tools, to help stabilize investment,” Li Chao said.

Reserve Rate Cuts and Interest Rate Reductions Will Still Occur, But Not Overly Relying on Them

Regarding China’s fiscal and monetary policies in 2026, Li Chao said that under the extraordinary countercyclical adjustments in 2025, fiscal policy in 2026 should maintain a necessary deficit ratio, likely stabilizing around 4%.

“At the same time, special bonds and ultra-long-term special government bonds are expected to remain stable. Among them, special bonds will play a very important role in some government debt expansion, and ultra-long-term special bonds will mainly target the ‘two new’ fields for structural efforts,” Li Chao pointed out.

On monetary policy, Li Chao said that under the tone of moderate easing, attention should be paid to the diversification of the People’s Bank of China’s monetary policy goals, rather than simply characterizing the policy direction, but starting from the ultimate goals of monetary policy.

“The current monetary policy needs to balance financial stability, so tools like reserve rate cuts and interest rate reductions will definitely be used in 2026. However, it should be noted that the magnitude and frequency of these cuts are unlikely to be large or frequent, and there will be no over-reliance on reserve rate cuts and interest rate reductions,” Li Chao said.

Additionally, Li Chao believes that for fields like the digital economy and low-altitude economy that require future support, monetary policy will provide targeted structural support, such as new policy financial tools and coordinated fiscal and monetary measures.

As for the future performance of the Renminbi in 2026, Li Chao expects the exchange rate to remain basically stable at an equilibrium level. Although the overall trend will be gradual appreciation, it will be accompanied by two-way fluctuations rather than a one-sided trend.

Stock Market Performance Can Focus on Risk Appetite

Regarding the impressive overall performance of the capital markets in 2025, Li Chao pointed out that last year’s stock market rally was mainly driven by falling interest rates. It is observable in markets like the US, Europe, and Japan that during prolonged quantitative easing and declining interest rates, there is often a “bullish bond and stock” phenomenon.

“Although stocks and bonds have different preferences for economic performance, during interest rate declines, bonds tend to be in a bull market. While this may not directly benefit stocks from the perspective of economic growth and price trends, it does support valuation uplift, creating a ‘win-win’ for stocks and bonds,” Li Chao explained.

For China’s stock market, Li Chao said that it is already facing a significant decline in risk-free rates, and market confidence is gradually recovering. Whether dealing with overseas disturbances or breakthroughs in high-tech industries, the market is increasingly confident that the new quality productivity will lead future economic development and gradually replace the traditional real estate development model.

“Overall, for China’s stock market in 2026, there’s no need to focus excessively on interest rates; instead, more attention should be paid to risk appetite. If market confidence can remain relatively optimistic in the long term, the stock market may continue its ‘slow bull’ trend through valuation uplift,” Li Chao said.

Optimistic on A-shares and Hong Kong Stocks

In terms of asset allocation, Li Chao recommends investors focus on five major directions.

First, during the expansion of the balance sheets of major economies’ central banks, equity markets will still face continued valuation expansion. Therefore, bullish on stocks in economies with expanding balance sheets, including A-shares. Among these, he favors interest rate decline yield assets such as technology stocks and high-dividend stocks like large-cap stocks.

Second, the upstream of military industry, namely relevant non-ferrous metal sectors. These sectors are supported by fundamentals and genuine demand, offering considerable investment opportunities.

Third, Hong Kong stocks, as Chinese capital flows back, have room for valuation uplift.

Fourth, the export chain. As companies go global, capital expenditure will accompany this process. Although it may erode profits to some extent, once capital expenditure is completed, export companies will gradually realize profits, and these companies have strong global competitiveness, presenting investment opportunities.

Fifth, in the medium to long term, attention can be given to controlled nuclear fusion fields.

However, Li Chao also reminds that “regarding uncertainties, attention should be paid to potential shocks from overseas geopolitical events affecting market risk appetite. Additionally, relative changes in external demand may lead to unexpected policy efforts to boost domestic demand, thereby changing market styles.”