GF Strategy notes that after the April oversold rebound, the A-share market has entered a narrow-range fluctuation. Three key factors may serve as breakthrough catalysts. Regarding Sino-US relations, focus remains on the 20% fentanyl tariff and progress of the Section 232 investigation. In terms of incremental fiscal policy, maintaining the January-May net financing intensity would reach the quota ceiling by August, significantly increasing the necessity for a new policy window. For technological breakthroughs, the concentrated major product launches in June will become critical variables.
Following the April oversold rebound, the A-share market has been oscillating narrowly around pre-retaliatory tariff levels. Aside from innovative drugs demonstrating rare industrial trends, most sectoral opportunities have manifested as thematic rotations. Looking ahead, which factors could become crucial triggers to help A-shares escape this stagnant trading range? Key Potential Trigger 1: Sino-US Relations – Trump’s repeated tariff policy adjustments. The focal points include the 20% fentanyl tariff and tariff developments in other areas (e.g., Section 232 investigation). – Previous global market concerns that Trump’s policy focus might shift outward after the US tax legislation passage (Republicans target early July). Key Potential Trigger 2: Incremental Fiscal Policy – Despite accelerated government bond issuance and expenditure (184.6% YoY net financing increase Jan-May 2025 vs 4-year average), most resources likely prioritize risk prevention with limited multiplier effects on. – Policy-supported sectors (home appliances, furniture, communication equipment) show robust recovery while unsupported sectors (apparel, catering, steel demand) remain sluggish. – Market stagnation partly reflects concerns that current fiscal quotas may constrain H2 bond issuance and government spending growth, making new fiscal quotas a potential trigger. If maintaining January-May net financing intensity (135% cumulative growth), quota limits may be reached by August, urgently requiring new policy windows.(3) Potential Key Trigger Three: The DeepSeek Moment in the Tech Industry
If there are no new developments in domestic fiscal policies and Sino-US relations, changes in the tech industry may become particularly important. Currently, tech stocks, especially the AI-related sector, have undergone a three-month adjustment and have fundamentally met some necessary conditions for a rebound: 1. The transaction volume proportion of TMT has reached the lower range of the 2023 AI narrative, forming a necessary condition for market movement initiation. 2. Since the oversold rebound in April’s retaliatory tariffs, the margin balance has remained at the bottom level of this year without any recovery, providing potential incremental funds for subsequent market movements. Therefore, the quality of the relatively intensive major company product launches in June may prove crucial. Report Body I. Current Topic: Triggers to Break Through the Stagnant Fluctuation Range (1) Potential Key Trigger One: Sino-US Relations 1. Trump’s repeated statements on tariff issues. The subsequent focus of Sino-US issues will be the 20% fentanyl tariff and progress in other areas (such as Section 232 investigations). On the evening of May 28th Eastern Time, the U.S. Court of International Trade ruled that tariffs citing the International Emergency Economic Powers Act (IEEPA) were invalid, including retaliatory tariffs and fentanyl tariffs, but excluding specific tariffs on automobiles, steel, and aluminum industries (Section 232 investigations) and tariffs from the previous administration targeting China (Section 301 investigations). Event Progression: After the Trump administration filed an appeal, on May 29th, the U.S. Court of Appeals for the Federal Circuit issued a ruling on the retaliatory tariff policy, temporarily reinstating the policy during the review period. Event Scenarios: 1) Continue the appeal process, temporarily reinstating tariff policies, but uncertainties remain in subsequent stages. 2) Congressional legislation granting the president broader tariff authority, though this process is time-consuming and faces significant legislative challenges. 3) Cite other statutes to impose tariffs, replacing IEEPA. For example: – Section 122 of the Trade Act of 1974 authorizes the president to impose tariffs of up to 15% for 150 days. – The USTR could initiate broader Section 301 investigations under the Trade Act of 1974. – Existing Section 232 tariffs on steel, aluminum, and automobiles could be expanded to other industries, with expectations that the Commerce Department will accelerate existing Section 232 investigations. The table below lists the primary statutes invoked in the U.S. trade war: – International Emergency Economic Powers Act (IEEPA, 1977: retaliatory tariffs, fentanyl tariffs) – Section 232 of the Trade Expansion Act of 1962 (Section 232 investigations: national security grounds, steel and aluminum, automobile tariffs) – Section 301 of the Trade Act of 1974 (Section 301 investigations: unfair trade grounds, three rounds of 2018 Section 301 investigations on China) – Trade Act of 1974 (Section 201 industry protection, Section 122 15% additional tariffs) – Tariff Act of 1930.Previously, there was widespread concern in overseas markets that once the U.S. tax bill (which Republicans hope to pass by early July) is approved, the focus of Trump’s policies might shift further from domestic to international affairs. On May 12, Eastern Time, the U.S. House Ways and Means Committee unveiled Trump’s tax bill, “The One Big Beautiful Bill.” On May 22, Eastern Time, the House of Representatives passed the tax cut bill, which has now been submitted to the Senate for review.
Republicans aim to complete the legislative process by July 4 to avoid hitting the debt ceiling “X-Date.” Additionally, the Chairman of the House Ways and Means Committee anticipates that the Senate may further expand tax cuts. If the Senate makes significant amendments to the bill, the revised text would need to be returned to the House, creating uncertainty about timely progress. The House version of the “One Big Beautiful Bill” is projected to increase the deficit by approximately $3. 8 trillion over the next decade while raising the debt ceiling by $4 trillion. Given that the U.S. annual fiscal deficit is around $2 trillion, a $4 trillion debt ceiling increase implies that the U.S. is unlikely to face debt ceiling constraints before the November 2026 midterm elections. The tax cut bill will intensify fiscal pressure in the coming years. Spending and tax cuts under the bill are concentrated in the early years of the next decade, while deficit reduction measures are focused on the years after Trump’s term, leading to a rapid rise in the U. S. fiscal deficit during his presidency. According to CRFB estimates, about 55% of the total deficit increase ($2.8 trillion) will occur in the first half of the budget window, but only 40% of the deficit reduction measures ($970 billion) will accumulate during this period. U.S. inflation data has moderated, but concerns about inflation persist. On Friday, the U.S. released April PCE data, with the PCE price index year-on-year at 2.1%, below expectations, and the core PCE price index year-on-year at 2.5%, the smallest annual increase in over four years. Tariffs represent the biggest variable. With the “Liberation Day” tariffs taking effect, commodity price increases are expected to accelerate after May (especially in June). Additionally, as inflation had already cooled by mid-2024, the year-on-year base is no longer favorable, and inflation data may rebound in the second half of the year. Furthermore, the minutes from the Fed’s May FOMC meeting, released this week, emphasized no rush to cut rates in the short term and specifically highlighted rising stagflation risks. The CME FedWatch Tool indicates that the Fed is still expected to cut rates twice this year, but expectations for next year have been revised down to two cuts.Based on the policy tone around this year’s Two Sessions, fiscal policy remains primarily focused on providing a safety net.
1. A significant rise in the broad deficit ratio helps reverse fundamental trends. Historical instances of PPI surging upward often coincide with substantial expansions in broad fiscal measures (typically increasing the broad fiscal-to-nominal GDP ratio by over 5 percentage points). Examples include: – The 2006-2007 global economic recovery and Sino-US inventory replenishment synergy, where the broad deficit ratio rose by nearly 6 percentage points. – The 2008-2009 four-trillion-yuan stimulus, with a broad deficit ratio increase of approximately 5 percentage points. – The 2016 monetized shantytown renovation and supply-side reforms, driving the broad deficit ratio up by around 10 percentage points. – The 2020 post-pandemic special treasury bond stimulus, which elevated the broad deficit ratio by 5 percentage points. Historical patterns indicate that a broad deficit ratio increase exceeding 5 percentage points tends to reverse fundamental trends (triggering comprehensive upcycles in PPI and ROE). However, the projected rise for 2025 is only about 2 percentage points, suggesting this year’s fiscal policy continues to emphasize economic stabilization. 2. Since the start of the year, accelerated government bond issuance and fiscal spending have been largely directed toward risk prevention—such as debt resolution and maintaining operational continuity—rather than stimulating. This has resulted in limited multiplier effects and subdued growth in medium-to-long-term loans. Key observations: – Government bond net financing exceeded seasonal norms (though predominantly used for debt resolution): Jan-May 2025 local government bond net financing reached ¥3.71 trillion, while central government bond net financing hit ¥2.67 trillion, far surpassing historical averages. Combined net financing was 184.6% higher than the four-year average. – General public budget and government fund expenditures grew 7.2% YoY Jan-Apr, significantly outpacing 2024. Supporting evidence includes provincial-level rejections of certain county-level special bond projects and stricter management policies. For instance: – Multiple provinces tightened special bond fund supervision in H1 2025, with the Ministry of Finance prioritizing oversight. – The Jiangsu Supervision Bureau’s March 2025 report emphasized auditing fund usage violations, project management irregularities, and expenditure efficiency. These factors indicate that the recent special bond growth likely serves risk mitigation purposes.(2) The completion rate for local government bond issuance in Q2 currently stands at 64.8%. As of May 30, 2025, based on disclosed Q2 local bond issuance plans from 29 provinces (with 5 provinces yet to disclose), the total planned issuance amounts to 2.44 trillion yuan. The completion rate is calculated as the ratio of actual issuance to planned issuance. While Q1 achieved a 108.66% completion rate, the current Q2 progress remains at 64.8%.
3. We observe that policy-supported sectors (e.g., home appliances, furniture, communication equipment sales; secondary housing transactions) have shown robust recovery this year. In contrast, sectors with limited policy support (e.g., apparel, catering; domestically-driven indicators like apparent demand, petroleum asphalt operating rates, cement and coal prices) continue to experience slower recovery. Since early 2025, accelerated treasury and local bond issuance has contributed to marginal improvements in economic sentiment. High-frequency data tracking across economic dimensions reveals structural recovery signs, though the effectiveness in expanding tangible investments and forming physical workloads remains insufficient, particularly with recent dips in high-frequency indicators: Policy-supported sectors: (1) Secondary housing transactions exceeding seasonal patterns: Year-to-date transactions outperform historical seasonal trends. (2) High growth in trade-in programs and export rush: Notable surges in home appliances, furniture, and communication equipment sales. Sectors with limited policy support: (1) Most domestically-driven industrial products underperforming seasonally: Cement prices declining after earlier gains, apparent demand below seasonal levels, petroleum asphalt operating rates below seasonal norms, and coking coal/concrete prices under seasonal averages. (2) Apparel and catering sectors lacking substantial policy funding maintain slow retail sales growth. 4. Market stagnation at current levels partly stems from concerns that existing fiscal quotas may constrain bond issuance and government expenditure growth in H2, potentially undermining economic fundamentals. Consequently, introducing additional fiscal quotas could serve as a crucial market trigger. With Q3 representing a local bond maturity peak and construction-oriented bonds typically issued in Q2-Q3, maintaining January-May net financing intensity for local/treasury bonds may reach quota limits by August, significantly elevating the need for a new policy window. (1) Based on the 6…The net financing scale for government bonds is projected at 6.6 trillion yuan (including 4.86 trillion in general bonds and 1.8 trillion in special bonds), while local government bond net financing is estimated at 7.2 trillion yuan (including 800 billion in new general bonds, 4.4 trillion in new special bonds, and 2 trillion in replacement bonds). From January to May 2025, the combined net financing of government and local bonds reached 6.38 trillion yuan, accounting for 46.1% of the annual target. Considering that the second and third quarters typically see peak issuance of local bonds for construction purposes, and June to August will also witness a peak in local bond maturities, if the net financing scale of government and local bonds from June to August grows at a year-on-year rate of 135% compared to the same period this year, the net financing scale by the end of August could reach 99.7% of the annual target. Therefore, if the current financing intensity for real estate and government bonds continues, the original target amount may be achieved by August, potentially opening a new policy window for the market. Otherwise, fiscal expenditure and debt issuance may experience a significant year-on-year decline. Another potential important trigger: The DeepSeek moment in the technology industry. In February, during a period of limited changes in domestic policy expectations and the U.S. imposition of fentanyl tariffs, DeepSeek brought significant changes to the industry, driving a substantial rally in A-shares and Hong Kong stocks. Looking ahead, if there are no new developments in domestic fiscal policy or Sino-U.S. relations, changes in the technology sector may become particularly important. Currently, technology stocks, especially AI-related sectors, have undergone a three-month adjustment and now possess some essential conditions for a rebound: – The transaction volume proportion of TMT has reached the lower range of the 2023 AI narrative, forming a necessary condition for market movement. – Since the oversold rebound in April’s retaliatory tariffs, margin balances have remained at the bottom with no recovery, providing potential for incremental funds in subsequent market movements. – Continuous catalysts in technology manufacturing in June, focusing on whether product updates exceed market expectations. End-side: 2025 Volcano Engine FORCE Conference, Apple WWDC, Rokid Glasses launch. Autonomous driving: Tesla Robotaxi. Huawei: Huawei Developer Conference. Note: This text has been abridged. Authors: Liu Chenming, Zheng Kai, Li Rujuan, Yu Kecheng. Source: Chenming’s Strategic Deep Thinking. Original title: “[GF Strategy] Breaking Free from the Range-Bound Trigger”. Risk warning and disclaimer: There are risks in the market, investment should be cautious.
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