TF SECURITIES Chief Macro Analyst Song Xuetao will also be a speaker at the Alpha Annual Summit held by Wall Street Insights from December 20 to 21, sharing his latest outlook for the new year with the audience

Looking back at the macroeconomic situation and A-share trends in 2024, Song Xuetao, the chief macro analyst at TF SECURITIES, may be one of the most accurate observers. On July 31 of this year, when A-shares were still below 3,000 points, Song Xuetao published an article titled "Why Am I Optimistic About the Market?" to express a bullish outlook: he emphasized that a series of reform measures established by the Third Plenary Session of the 19th Central Committee will promote a shift in market direction.

As 2025 approaches, Li Guanyun, head of Wall Street Insight's "Insight Masterclass," recently engaged in a dialogue with Song Xuetao regarding the most 关注的 global macro trends and major asset movements for next year. Song Xuetao will also be a speaker at the Alpha Annual Summit held by Wall Street Insight from December 20 to 21, where he will share his latest outlook for the new year with the audience.

Song Xuetao has a solid research background, holding a Ph.D. in Economics from North Carolina State University in the United States. He is currently one of the most influential macro analysts in the market, having been awarded the title of Best Analyst by New Fortune in 2023, and has received numerous prestigious awards such as the Golden Bull Award for Most Valuable Analyst, Wind Gold Medal Analyst, and Sina Golden Qilin Analyst from 2018 to 2023.

In this dialogue, Song Xuetao shared unique insights on the US-China economy in 2025, the Federal Reserve's interest rate policy, the US dollar, US stocks, gold, the RMB exchange rate, and A-share trends. We have summarized the most "sharp" viewpoints as follows:

The Federal Reserve may adopt a "deep V" interest rate policy in 2025, first cutting rates and then raising them. There are two reasons for the initial rate cut: the return of Trump may exert significant political pressure on Powell (the Federal Reserve Chairman) to lower rates. The second reason is that inflation trends also support cutting rates before raising them; Trump's encouragement of domestic oil drilling, along with the easing of the Russia-Ukraine conflict and the Israel-Palestine conflict, will help lower oil prices and reduce inflation. However, the impact of tariffs on raising inflation will manifest in the second half of 2025, putting pressure on the Federal Reserve to raise rates.
The trend of US stocks in 2025 will still be determined by AI, depending on whether the narrative around AI can continue. Next year, US stocks will certainly experience significant volatility, influenced by tariffs, tax cuts, deregulation, and uncertainties arising from government disintegration, as well as US-China relations.
The market is overly optimistic about the return of the Trump 2.0 era, focusing only on the economic benefits while ignoring the risks. After Trump takes office on January 20, the market will realize that the US economy may first experience chaos and pain, and even a decline in economic demand and inflation. This presents a gap in expectations for US stocks.
Musk is equivalent to a "shadow president"; without him, Trump cannot escape stagflation. Only by relying on Musk to reform the deep government and enhance efficiency through technology and AI can the US potentially overcome stagflation. Both of these rely on AI; governance must rely on AI, technological revitalization must rely on AI, and manufacturing reshoring must rely on AI. However, whether this can be achieved is a huge question mark for me
The AI industry has recently begun discussing the issue of hitting a wall with Scaling Law, but the investment community is indifferent to this. Most people heavily invested in AI are doing so to maximize their enjoyment of the bubble. The investment community is more concerned about whether major companies will withdraw from the AI "arms race," so the key leading indicator is the Capex (capital expenditure) of major companies like the "Mag 7" (the seven tech giants).
The US dollar is likely to weaken in 2025, with the turning point of the dollar index shifting from strong to weak possibly appearing as early as the end of 2024 or the beginning of 2025. The previous strong dollar was priced based on Trump's policies, and the subsequent weakening reflects a re-evaluation of the potential underperformance of his policies. Additionally, next year, US inflation may follow a V-shaped pattern, and the transition from interest rate cuts to hikes may also be V-shaped, which will affect the dollar's trend from the perspective of real interest rates.
The fundamental reason for the continuous rise of gold in 2024 is the disintegration of the world's trade, credit, and settlement systems. The situation will be exacerbated by Trump's presidency, which will have the greatest impact on the credit currency system established by the dollar. Therefore, Trump's administration is certainly favorable for gold. Although the ceasefire and the strengthening of the dollar have put short-term pressure on gold, in the long run, it will continue to rise until the US emerges from stagflation.
The renminbi is expected to appreciate in 2025, and the exchange rate of the renminbi against the US dollar at 7.3 will not easily break. The external benefit for the renminbi's appreciation is the weakening of the dollar index in 2025. Trump's isolationist policies will be beneficial for the internationalization of the renminbi, allowing us to get closer to America's traditional allies. From an internal perspective, it depends on how China navigates the pains of transformation next year.
A depreciation of the renminbi does not necessarily help us cope with trade frictions. The logic behind actively depreciating the currency to hedge against tariff impacts is flawed. If the renminbi appreciates, it will encourage some foreign capital to flow back, and the Hong Kong market will be more sensitive to fluctuations in the value of the renminbi, especially the offshore renminbi.
For China, if we can emerge more quickly from the transformation and local government fiscal reforms, and achieve high-quality development and new productive forces, then the stock market will perform relatively better. Bonds, given the current valuation level, are relatively safe, but obtaining significant excess returns may be quite challenging.
I remain optimistic about the underlying logic of the A-share market next year, which is reform—reform will continuously release the potential for economic growth, mitigate risks during the growth process, and address issues that arise. However, the market's rise will not be a steady upward trajectory towards the "northeast," but rather a tortuous process of taking three steps forward and two steps back
The so-called "Japanization" cloud that has been hanging over A-shares has been blown away. The most important change for A-shares next year is the collapse of the old narrative of "Japanization," which will lead to a valuation recovery for those Chinese companies that have long been undervalued but actually possess global competitiveness. The first to see changes will be the manufacturing and consumer companies with the lowest valuations, competitiveness, and sustainable growth, which may become the main theme of A-shares next year. Beyond this major theme, there may also be two minor themes following fluctuations in risk appetite. When risk appetite declines, investors may choose undervalued blue chips, leaning towards a dividend style. When risk appetite rises, they may speculate on small-cap stocks in the technology sector based on current policy themes.
For A-shares, foreign capital remains one of the important incremental and marginal funds. When the market is in an overly pessimistic or optimistic extreme, the movements of foreign capital are a significant indicator. In extreme situations, foreign capital serves as a leading indicator and can be an important marginal force that may lead to changes in market balance. However, when the market is in a relatively stable state, foreign capital may not be a crucial variable.
The Central Economic Work Conference in December may set an uplifting target, providing a range and scale of policy tools with relatively more options. By the time of next year's Two Sessions, the specific scale of some policies, such as new bond issuance related to finance and quotas, will become clearer.
In terms of price, the Chinese real estate market still has limited adjustment space until 2025, and from a national perspective, it is still on the left side of the bottom. The transaction volume of second-hand houses must reach at least 60-70% for the real estate market's sales to stabilize.
The policy for real estate storage is relatively difficult to implement from a purely economic logic standpoint. Unless the central government steps in to provide funding, local governments lack strong motivation, and it does not significantly help the real estate market. It requires a very strong risk bearer and policy promoter for this to be feasible. I think we should not have overly high expectations; it is better to let the market clear itself and find its bottom.
At this stage, A-shares are increasingly less affected by the economy, and the economy is also less influenced by real estate. The impact of real estate on A-shares is not as strong as before and is no longer a particularly important pricing logic. A-shares are more often driven by expectations; for example, if the economy worsens, but policy expectations become stronger, A-shares may rise.

The following is a summary of the dialogue:

The Federal Reserve's "Deep V" of Rate Cuts Followed by Rate Hikes

Li Guanyun: Many investors have begun to look ahead to the market trends of 2025 and consider their layouts. So, let's first ask Teacher Song to share the most critical macro trend changes and the key movements of global major asset classes in your view for 2025.

Song Xuetao: I believe that in 2025, China and the U.S. will be mirrors of each other. The current state of China is related to the long-term decline of real estate. Of course, the most important aspect may be related to the fiscal gap caused by the imbalance of local government revenues and expenditures, as well as the risks of debt repaymentSo for China, I think a key focus for next year is how we can accelerate the transformation, mitigate risks, and improve quality.

Of course, reform may be the most important main line here, especially in terms of fiscal and tax reform at the local government level, how to achieve a long-term sustainable balance between fiscal expenditure and revenue. Technology is also an important topic for China, improving production efficiency through high-quality development, thereby moving out of the current situation.

The U.S. and China are mirrors of each other, facing the question of how to emerge from stagflation. The U.S. deficit and debt have risen sharply since the pandemic, but it is difficult for the U.S. to break the habit of continuously rolling over deficits to promote fiscal expansion and support short-term economic prosperity.

Of course, with Trump coming to power, especially with the emergence of Musk, it is also in response to the situation of stagflation, aiming to reform the bloated federal bureaucracy. By relaxing regulations and reducing taxes, economic efficiency can be improved, while also promoting technological progress, manufacturing return, and production efficiency through technology. Only by doing these can the U.S. emerge from stagflation.

This is my view of a major contradiction between China and the U.S. next year. Asset allocation is actually responding to this main contradiction or main line. If inflation in the U.S. rebounds and intensifies, the pressure on bonds will be significantly larger, while stocks will become more traditional, leaning towards stagflation-type, defensive, and protective assets.

For China, if we can emerge more quickly from the transformation and local government fiscal and tax reform, and achieve high-quality development and new productive forces more rapidly, stocks will perform relatively better. Bonds, at the current valuation level, are relatively safe, but obtaining significant excess returns may be quite difficult. This is my overall view for next year.

Li Guanyun: Okay, thank you, Professor Song. Next, we will continue to consult you on some specific issues regarding the macro trends and global major asset classes in 2025. First, regarding U.S. dollar assets, how do you view the interest rate trend of the Federal Reserve in 2025? Will it pause or terminate the rate-cutting pace?

Song Xuetao: Today, there is no consensus. Some people think there may still be a rate cut in December, or that there may be more room for rate cuts next year, especially some foreign banks have such predictions. But some people believe that there will be no rate cut in December, nor next year, because Trump's return will lead to a rebound in inflation.

My view is different from all of this. I think next year may see a deep V-shaped interest rate policy, meaning there will be a cut first, followed by an increase. There are two reasons for the initial rate cut. The first reason is that, for Trump, his return may put significant political pressure on Powell (the Federal Reserve Chairman).

During the interest rate meeting at the end of July, the employment data that came out the next day was actually very poor, and then Powell insisted on not moving (not cutting rates). By September, all the data was very good. He then used the July data to argue that it should have been cut long ago, and then made a large cut all at once. This behavior is largely related to political direction, because at that time, the change of presidential candidates on the Democratic side and the rise in Harris's approval ratings gave Powell some courage to act. Therefore, I think if Trump comes back, it will be difficult for Powell to maintain the independence of the Federal ReserveIn fact, in my view, Powell no longer has any real independence, so I think the first reason for a rate cut in the first half of next year is that Trump will put pressure on Powell to lower rates. Second, there are indeed reasons for a rate cut in the first half of next year, which is the rebound of inflation. Of course, since July and August, we have seen core inflation gradually bottoming out, reaching a range of 3% to 3.5%. Therefore, one reason for the first half of next year is the base effect, and the U.S. CPI may fall again.

From recent developments, Trump will definitely increase oil drilling when he comes to power. His campaign slogan was "drill baby drill," which means to let traditional oil and gas companies loosen licensing restrictions to extract more oil and gas. Additionally, with the end of the war, whether it's the re-entry of Russian oil into the international market or the potential end of geopolitical disruptions to oil transport pipelines due to the Israel-Palestine conflict, I think these may happen in the first half of next year. Whether from the supply side or other aspects, this could lead to a drop in oil prices, which also provides a reason for a rate cut for the CPI.

However, I think the pressure for rate hikes will actually increase in the second half of next year. For example, tariffs may gradually start to take effect after the end of 2024. Tax cuts, according to the current legal process, may also not happen until the second half of next year, so these inflationary factors may all emerge after the second half of next year. Coupled with the high base effect of the CPI passing, the CPI may rebound, so I estimate that next year may see a pattern of first cutting rates and then raising them, forming a deep V shape with significant volatility. This is actually quite similar to the Fed's decision-making in the 1970s, where they also made aggressive cuts and hikes without much pause in between.

The Key to U.S. Stock Market Fluctuations Lies in AI Narratives, Watching "Shadow President" Musk

Li Guanyun: You believe there will be a rate cut in the first half of next year and a rate hike in the second half, which is quite a novel perspective. Based on this judgment, does it mean that from a market operation strategy, we should first go long on U.S. Treasuries and U.S. stocks in the first half, and then reverse in the second half?

Song Xuetao: Yes, the current pricing of the U.S. dollar may be a bit excessive, right? The dollar has basically returned to the previous high of 107, so from an investment perspective, U.S. Treasuries (yields) at or above 4% or around 4.5% basically incorporate the expectation of no rate cuts in December and a rebound in inflation. However, inflation may rebound, but before that, there might be a decline, so this could be the case from a short-term U.S. Treasury perspective.

The U.S. stock market will be more complex because it has to account for liquidity premiums, which are related to interest rates. The second aspect may also relate to the stimulating effects of Trump's policies on the economy. Of course, the most important factor for the U.S. stock market is actually related to AI, because the entire U.S. stock market is basically driven by large companies, tech companies, and AI companies, especially the top seven companies (Mag 7) that are pulling up the valuations of U.S. stocks, which is the backbone for the U.S. stock marketLi Guanyun: When it comes to the U.S. stock market, we noticed that after Trump swept Harris and won the U.S. presidential election on November 5, the U.S. stock market has actually experienced a very strong rally. What is your view on the trend of the U.S. stock market in 2025?

Song Xuetao: Regarding the U.S. stock market, I think the most important driving factor, in order of significance, is still AI. Because looking at the entire structure of the U.S. stock market, it's actually large companies outperforming small companies, technology outperforming non-technology, and AI technology outperforming non-AI technology. Then the "Mag 7" (the seven tech giants) outperform others, and within the "Mag 7," NVIDIA stands out. So, I think the most important thing for the U.S. stock market is whether the narrative around AI can continue.

This narrative has mainly consisted of three parts: the first part is models, the second part is computing power, primarily from NVIDIA, and the third part is applications, which include both software and hardware applications. Recently, some companies focusing on software applications have started to see stock price reactions, but the most important hardware applications are actually from Apple and Tesla. So how do the audience view Apple and Tesla's applications in AI agents? I think this is very important for pricing in the U.S.; it maintains the integrity of the narrative. If this narrative cannot continue, it could be a fatal blow to the U.S.

The second aspect is the economy. After Trump comes to power, I think there will be short-term uncertainties for the economy. Because tax cuts and such measures have a process, including deregulation, which also takes time. However, increasing tariffs might be easier; it can be implemented through presidential executive orders or some investigations, allowing for partial and targeted tariff increases.

As for dismantling the federal bureaucracy, we do not know what impact this will bring. It may ultimately lead to layoffs that do not happen, but will increase a lot of chaos and federal government shutdowns, which could add some uncertainty to the U.S. economy. This is something I think may not have been fully priced into the U.S. stock market today.

I don't know the direction of the U.S. stock market next year, but I believe it will definitely be more volatile. Its trend may still be determined by AI, but the volatility could include tariffs, tax cuts, deregulation, and uncertainties brought about by dismantling the government, as well as U.S.-China relations, etc. All of these factors will have an impact on the specific rhythm of the U.S. stock market next year.

Li Guanyun: You mentioned that the U.S. stock market will have greater volatility next year. Does that mean we might see some volatility emerging soon? With Trump's victory, this round has already been fully reflected. Will we see a situation similar to his first term, where before he takes office in January, we experience a "good news fully priced in is bad news" scenario?

Song Xuetao: There is such a possibility because I think the market is overly optimistic about Trump's return to the 2.0 era, believing that it will all benefit the economy, whether through tax cuts, deregulation, etc. However, they may not have seen the risks that this could bring on the other sideBecause this is different from 1.0, the U.S. economy during the 1.0 period had its own recovery momentum. At that time, Obama actually left a relatively good foundation, and by the end of 2015 and in 2016, the global inventory cycle had already bottomed out. So by the second half of 2016, the overall U.S. economy was still in a restocking cycle, and the economy itself was doing well. Plus, Trump initially gave everyone a bit of a scare, leading to a market correction.

However, this time is different. The U.S. economy is already doing very well, to the point where it might be a bit too good, and many structural issues are tearing apart. Whether it can continue to do well depends on fiscal policy and the deficit. Trump wants to cut the deficit and tighten fiscal policy, which could potentially lead to deflation. If he succeeds, there will be short-term pain, but long-term benefits. But if he fails, the deficit may still be high, and the chaos in the economy will increase. I think these are issues that the U.S. stock market has not considered, so I believe that after Trump officially takes office on January 20, the market will realize that it may first experience chaos, then pain, and even a decline in economic demand and inflation. So I think this is where there is a discrepancy in expectations for the U.S. stock market.

Li Guanyun: The tariffs, immigration, and fiscal policies after Trump takes office may change somewhat from his campaign promises. Will his policy implementation first lead to high inflation or high growth? How will the market react?

Song Xuetao: I estimate that it will first lead to chaos. Tariffs are relatively easy to implement; in terms of sequence, the easiest to implement now is tariffs, followed by deregulation, which can also be done through some executive orders, but some require legislation.

Another relatively easy thing to implement is redefining the federal government's bureaucratic system, reallocating responsibilities, and layoffs. This is executed by Musk's government efficiency department, and these are relatively easy or can be done first.

What is slower is tax cuts, and of course, generally increasing tariffs is also relatively slow. Increasing tariffs generally requires legislation, which takes at least seven to eight months, because he does not fully control both houses; at least the advantage in the House of Representatives is very slim, only a single-digit margin, and there are many establishment figures in the Republican Party, with some opposing Trump, not to mention the Democrats.

So if you ask what will happen in the first half of the year, it may first bring some threats of increased tariffs, leading to rising prices of imported goods, and a situation where federal employees are not working. As for layoffs, I think we can only wait and see, but I believe that the situation of not working and chaos may happen first. So will inflation rise in the first half of the year? It's possible. It may also be that there is no work, chaos, and the economy declines first, and with oil prices, inflation may decline first. In the second half of the year, tax cuts may gradually take effect, and inflation may stabilize or rise againIt is possible that interest rate cuts in the first half of the year will lead to inflation rising again in the second half, so I think it is possible that inflation will also go down first and then up. However, overall, the economy may experience chaos first, and after the chaos, it may slightly improve, which could also have an impact on the U.S. stock market.

Li Guanyun: Can we say that under the current circumstances where the U.S. stock market is at historical highs, we still need to pay more attention to risk prevention in the first half of 2025?

Song Xuetao: Yes, from several aspects, first, there will be chaos, tariffs will rise, inflation will rise, and of course, it may not be inflation caused by tariffs, but rather a decline in production efficiency caused by tariffs. So this will create a discrepancy with market expectations. I estimate that it will be slightly better in the second half of the year, of course, this is all assuming that the AI narrative does not encounter problems. If the AI narrative encounters issues, then the underlying logic will be problematic, and whenever the narrative has problems, the U.S. stock market will experience a significant pullback.

Li Guanyun: Among all the members of Trump's cabinet, the most prominent person may be Musk. What is the short-term and long-term impact of his "joining" the cabinet on the U.S. stock market? He is now advocating for deficit reduction and fiscal tightening, which seems unfavorable for the market in the short term?

Song Xuetao: Yes, this is a short-term pain. However, long-term reforms will lead to efficiency improvements, allowing the U.S. to truly avoid relying on a rolling annual deficit of 7-8% from the government, maintaining economic prosperity at around 3%. According to Scott Bessenet (Trump's nominee for the new U.S. Treasury Secretary), there is a 3% growth and a 3% deficit in the 333 plan, which could be a long-term benefit.

I think Musk is very important; no one in the cabinet can compare to him. I believe his status in the U.S. is like the second-in-command, like a vice president or a shadow president. Of course, he is a businessman, not a public official. He said he is a volunteer, and both he and Vivek Ramaswamy are volunteers, doing this work voluntarily. So whether it can be accomplished is a huge test. After all, managing a company, like cutting 80% of Twitter's staff, is completely incomparable to cutting 20% of the three to four million federal employees.

So I think Musk is very important; his ideas align well with the reality that the U.S. economy needs to overcome stagflation. Without him, Trump cannot overcome stagflation. Only through Musk's reform of the deep government and the enhancement of efficiency through technology and AI can the U.S. possibly overcome stagflation. Both of these rely on AI. Governance relies on AI, technological revitalization relies on AI, and manufacturing return relies on AI. But whether it can be accomplished, I personally have a huge question mark.Li Guanyun: Since AI is so important, what leading indicators do we have to observe its development trends? Should we look at the future capital expenditures in AI from the "Seven Sisters" of technology? Or should we look at the revenue growth that AI brings to them?

Song Xuetao: This depends on whether you are looking at the issue from the industry perspective or the investment perspective. The industry is certainly more concerned about whether the algorithm models continue to maintain exponential growth. Is there an exponential improvement in capability? Recently, many people have been discussing whether there is a "wall" in the Scaling Law. Many have started to talk about it, including the former CTO of OpenAI, Ilya Sutskever, who mentioned that no matter how much computing power we invest, we may not be able to improve the accuracy of the models. What you might get is a linear, rather than a nonlinear, improvement in capability, which is what is referred to as hitting the wall of the Scaling Law. We may need to enhance the model's other capabilities or completely change the algorithm.

However, if you look at it from the investment perspective, people are not concerned about these issues, or even if they know about them, so what? After all, positions are already in place, and I don't want to be the one who exits early on the left side. Everyone knows there is a bubble, and up to today, there hasn't been a commercial application that can sustainably cover its Capex. Today's investments are just to enjoy the bubble as much as possible, and they won't care about those front-end issues, but rather whether the big companies will withdraw from the arms race. If the big companies withdraw from the arms race, it will reflect that future Capex may decrease. A decrease in future Capex corresponds to a decline in Nvidia's future performance.

For Nvidia, its performance is actually based on orders from previous years, but the key is whether its valuation can be maintained. So this is perhaps from an investment perspective. Even if people are already skeptical about this, they won't choose to exit too early because of FOMO (Fear of Missing Out); they are all worried about leaving too early, until they see someone unwilling to engage in the arms race. The arms race ends as soon as someone withdraws. Just so far, you see that the big companies are still gritting their teeth to maintain the growth of Capex, so this is the leading indicator.

Li Guanyun: So is the risk of missing out still far greater than the risk of being hurt?

Song Xuetao: I don't know. Risk is something that is hard to visualize; it always exists, and human nature is to fear missing out more.

The US Dollar Index is expected to shift from strong to weak by the end of 2024 or early 2025

Li Guanyun: You just mentioned your judgment on the Federal Reserve's policy direction for next year, which is to lower interest rates in the first half and raise them in the second half. What impact will this have on the US Dollar Index? Currently, the US Dollar Index is at a high of 106 or 107. Will it continue to rise next year, or will it maintain a high level until 2025?Song Xuetao: I estimate that there is a high probability that it will weaken next year. One reason is that before Trump takes office, everyone may have many positive expectations, such as tax cuts leading to economic prosperity, deregulation leading to economic prosperity, etc., or his policies causing inflation, which would prevent interest rate cuts or even lead to rate hikes, supporting the strengthening of the dollar, among other reasons. However, after Trump takes office, it will be found that some things cannot be done, and the deviation between what can be done and what is executed may become very large. Therefore, there will be a policy gap; the previous strong dollar was priced based on his policies, and the subsequent weakening will be a repricing of his policies that may not meet expectations. This is the first point.

Of course, the second point also mentions that inflation may be V-shaped, with interest rate cuts to rate hikes potentially being V-shaped as well. From the perspective of real interest rates, this will also affect the movement of the dollar. Thirdly, the dollar index is ultimately a comparison; it compares the U.S. with other countries, especially Europe. I estimate that the economic difference between Europe and the U.S. will narrow a bit next year because, in the past few years, Europe’s actual growth and long-term investment have been quite mediocre. This is also related to the Russia-Ukraine war, geopolitical risk uncertainties, energy prices, and the stability of supply chains.

After Trump takes office, I believe there will still be significant motivation to push for the end of the Russia-Ukraine war, or at least to maintain a ceasefire, which will actually bring about a restoration of energy supply for Europe, a restoration of energy prices, a restoration of manufacturing costs, and long-term certainty, leading to some long-term investments. Therefore, for Europe, its economy may catch a breath next year after Trump returns.

This will also allow the U.S. and Europe to maintain the critical line of 1.05 for the dollar against the euro, so conversely, this is also an external factor that increases the probability of the dollar weakening next year. When looking at these factors together, it may be similar to 2016 when Trump came to power, the dollar strengthened, and then in 2017, the dollar began to decline again; this trend may be quite similar.

Li Guanyun: Will the turning point of the dollar index from strong to weak appear in 2025?

Song Xuetao: It could be at the end of 2024, or early 2025, or around the time he takes office. It will gradually be inferred through cabinet formation what he will do, and then it will be found that we may have over-priced some factors. The Russia-Ukraine conflict may also be nearing its end, the risk appetite in Europe may begin to recover, the economic expectations in Europe may start to improve, and the euro against the dollar may begin to strengthen again, leading to a weakening of the dollar index. Factors such as inflation and oil prices are also expected to gradually be recognized by the market, and these will likely be reflected in the dollar pricing at the end of this year and the beginning of next year.

Li Guanyun: So, does that mean you judge that the turning point of the dollar index from strong to weak may come soon?

Song Xuetao: YesLi Guanyun: So if we look at a longer time frame, for example, during Trump's four-year term, how do we view the strength and weakness of the overall US dollar index?

Song Xuetao: It may be a strong first, then weak, then strong again, and then weak again. Overall, the trend may still lean towards weakness.

After all, Trump pursues isolationism, which means he doesn't want to interact with anyone. He has cut off relations with family and relatives, and he doesn't want to do business with others. Of course, as a hegemon, he still hopes others will use his currency. If you don't use my currency, I will impose higher tariffs on you. He maintains this mindset, but his actions have distanced him from many countries, which certainly harms the underlying credit of the dollar. If there are no economic interactions, then why should we still use the dollar?

Initially, the dollar may have flowed back to the US, leading to a stronger dollar, but later, when it becomes a relatively more regional currency rather than a global one, it will have an impact on the dollar's fundamentals. Of course, Trump himself also has a tendency towards low interest rates and hopes that the US can increase exports to improve the trade deficit, which actually requires the dollar to be somewhat weaker. So I think, given this overall background, along with Trump's subjective inclination, the overall trend during his term, if he can complete four years, is likely to be a stronger trend of a weakening dollar index. However, there may be fluctuations, such as being strong initially, weak next year, and possibly strong again the year after due to other factors, and then weak again in the end.

Li Guanyun: You mentioned earlier that during Trump's first term, the dollar index actually fell by 10.3% over the four years, while the RMB appreciated by 6.3% against the dollar. Will we see a similar situation in his second term?

Song Xuetao: Yes, the RMB appreciated overall during his first term, partly because the dollar was weakening, as I mentioned earlier. His isolationism actually harms the credit system of the dollar; he no longer provides protection to allies, so why should allies pay protection fees in the form of seigniorage? The same goes for the RMB, with Trump in office, I think the internationalization of the RMB may progress further.

In fact, during Trump's first term, our relationships with Europe and Japan and South Korea were quite good because he treated allies equally by imposing tariffs, which pushed us closer to his allies and allowed the RMB to strengthen somewhat. So I think the next four years may be similar.

Trump's ideology has not changed. From his underlying logic, it is quite clear; I think his actions are generally consistent with his ideology. He claimed to have fulfilled about 75% of his promises during his first term, so I think he may fulfill even more in his second term because his entire cabinet is composed of young and loyal people. I believe these individuals will have stronger execution capabilities than the establishment officials from the first term. Therefore, based on this inference, there is still a significant probability that the RMB will appreciate, which is a good thing. We will internationalize further, and a weakening dollar index will also allow the RMB to strengthen relatively

Gold continues to rise in the long term, its opposite is AI

Li Guanyun: You judge that the US dollar index is in a long-term downward trend, and even say that this downward turning point may appear as early as the end of 2024 or the beginning of 2025. This seems to be a positive signal for gold? In 2024, gold actually experienced a bull market with a 30% increase, which investors are paying close attention to. How do you view the gold trend in 2025? Some international investment banks have predicted that the gold price will exceed $3,000 by the end of 2025. What is your perspective on this?

Song Xuetao: Recently, the gold price trend has been relatively weak. After Trump came to power, there will be a ceasefire, and there will also be a ceasefire agreement between Israel and Lebanon, so the overall geopolitical risk has decreased, which has short-term weakening momentum for gold. I don't know if these foreign banks have changed their views recently because they are completely following the trend; when it rises, they start to shout for a rise, when it reaches 2,200, they shout for 2,500, and when it reaches 2,500, they shout for 3,000. I don't know if their views have changed now that it has dropped back to 2,600. However, we clearly stated at the beginning of the year that we are optimistic about gold, and that gold will reach a historical high this year.

I believe this fundamental judgment will not change in the coming years because the intrinsic value of gold is no longer significantly related to the strength of the US dollar index. In the past, gold and the dollar were equivalent substitutes; you could hold dollars or gold, and they were equal. However, since the Russia-Ukraine war, they are no longer equivalent. Gold is now worth more than the dollar; you can't use dollars in Russia, and in many places, you may not be able to buy anything with dollars, or the US Treasury bonds you hold may be frozen, but gold cannot be frozen. If the entire monetary system and trade system ultimately collapse, gold is a currency recognized by everyone. I don't know if Bitcoin can take on this role, but at least gold has historically played this role, which is a factor behind the continuous rise in gold prices.

The world's trade system, credit system, and settlement system are being dismantled, and there is no longer trust between each other. Of course, with Trump coming to power, I think this will exacerbate the situation, whether it is towards allies or China, intensifying the dismantling of the credit and trade systems. This actually has the greatest impact on the credit currency system established by the US dollar, so I believe Trump coming to power is definitely good for gold. Although in the short term, the ceasefire and the strengthening of the dollar have put pressure on gold, in the long term, it will definitely continue to rise until the US emerges from stagflation.

Of course, this depends on Musk, so the opposite of gold is AI, and AI is currently being shaped by Musk, so this depends on Musk. Therefore, looking ahead to next year, I believe gold still has the opportunity to rise. However, gold is very interesting; when everyone is optimistic about it, it will definitely fall, and it will only rise when no one is optimistic about it. Because gold does not yield interest, not yielding interest means you cannot hold it for a long time. You can only make money in the short term, while in the long term, gold always underperforms; only in the short term does it outperformSince the 1980s, the increase in gold prices has mostly occurred in a very short period. Most of the time, gold does not rise and experiences a downward trend, so if everyone is optimistic about gold at this time, I think gold may not be able to rise, and there is even a greater possibility of a decline. If one day foreign capital does not look favorably on gold anymore, starts to short it, and believes that Bitcoin will replace gold, or that the gold story has burst, I think the opportunity for gold will return.

Li Guanyun: You mentioned that the factors affecting gold pricing have actually changed somewhat. Looking ahead to the gold price trend in 2025, which do you think is the most critical factor? You just mentioned one is geopolitical issues, and the other is the trend represented by AI, or even Bitcoin?

Song Xuetao: Bitcoin is certainly relatively independent; it has a direct relationship with Trump's endorsement. Therefore, the most influential factor on gold is still AI. I believe AI represents the opposite of U.S. stagflation. Whether we can end stagflation depends on Musk's left hand of AI governance and right hand of AI Agent applications, one of which reduces costs and the other improves efficiency.

For gold, if this (AI) is successful, then of course the U.S. dollar will become a new important asset, and the U.S. stock market may show a long-term trend. Conversely, if this does not materialize next year and becomes even more chaotic, gold prices will continue to rise dramatically. So if I were to find the most important indicator to watch, I think AI may be the most crucial and realistic determining factor for whether gold has long-term potential.

RMB Expected to Appreciate, 7.3 Threshold Will Not Be Easily Broken

Li Guanyun: Okay, given that the current U.S. dollar index is at 107, a strong dollar position, and with Trump threatening to impose tariffs on Chinese goods, how do you foresee the RMB trend in 2025?

Song Xuetao: I still see the RMB appreciating. First, this is a mirror relationship with the expectation that the U.S. dollar will weaken. Second, Trump's arrival is actually a good thing for China; we can get closer to his allies, which is relatively beneficial for the internationalization of our RMB, at least making the path smoother. Therefore, I think the RMB is still somewhat biased towards appreciation from an external perspective. Of course, the RMB is often determined by internal factors as well. For example, have our own risks relatively diminished? So initially, we mentioned that the most important thing for China next year is how we can navigate the pains of this transformation process. (As for) how the U.S. can overcome stagflation, that is Musk's concern.

From our own perspective, I believe that a series of policy adjustments since July have actually been aimed at reducing long-term systemic risks, whether it is through different ministries coordinating policies to enhance the activity and long-term confidence of the financial market, stock market, and real estate market, or through debt reduction to lower local government debt risks, allowing local governments to be unshackled and accelerate transformation. These factors all play a positive role in stabilizing the value of the RMB, so I think the previous level of 7.3 will still not be easily broken.There are external factors, such as the weakening of the US dollar, as well as internal factors. We have improved the resilience of our long-term economic growth through reforms and reduced our long-term systemic risks. I believe that7.3 is still a very important psychological level, especially for the long-term internationalization of the renminbi. If we want the renminbi to go further, we indeed need to maintain this position as much as possible.**

Li Guanyun: You believe that the 7.3 level will hold, and that there is a possibility for the renminbi to appreciate further by 2025?

Song Xuetao: The trend is appreciation.

Li Guanyun: However, we also hear another viewpoint in the market. If Trump imposes very high tariffs on China, one possible response from China could be to devalue the renminbi to offset the impact of the tariffs?

Song Xuetao: Whether this is effective is a question. Devaluation may not necessarily benefit our exports. The impact of exchange rate appreciation or devaluation on exports is actually based on a very traditional trade system. For example, if my costs are entirely domestic and I sell at a dollar-denominated price. However, today many of our costs come from abroad; for instance, some raw materials and components are imported, and some of our sales are also to foreign markets. Therefore, it is difficult to calculate whether devaluation will necessarily lead to a relative decrease in export prices. This is not certain because devaluation may also lead to higher import prices. Ultimately, this depends on our added value and our competitiveness in exports, which is key.

If exports are competitive, you are less concerned about the price changes brought by appreciation or devaluation. Therefore, from the perspective of responding to trade wars, I do not agree with the idea that we should devalue. The second point is that from the perspective of financial stability and security, next year will definitely present a more complex external environment with greater psychological pressure. When there is significant psychological pressure, we must first focus on doing our own things well, solving our own problems, and preventing our own risks. Finance is certainly one of the most important risks. So if the exchange rate breaks down and there is even a possibility of accelerated devaluation, does this make the financial system safer or more dangerous? I believe different people have different views on this issue, so I have always thought that the logic of actively devaluing to respond to trade friction has significant problems.

Li Guanyun: If you expect the renminbi to appreciate by 2025, what impact will this have on the performance of our A-shares?

Song Xuetao: The exchange rate is a result, and A-shares are also a result. If the exchange rate appreciates, for foreign capital, at least some funds will flow back due to the appreciation of the exchange rate. Of course, the Hong Kong market will be more sensitive to the value of the renminbi, especially the offshore renminbi. This capital inflow may be due to perceptions that the US is chaotic, with civil service cuts, tariff increases, and immigration expulsions, which may be influenced by these factors, or it could be due to fluctuations in US stocks or the release of inherent risksThe economy in China is relatively stable, with stable policies, a significant margin of safety in the exchange rate, and ample fiscal space. Many companies still show long-term growth potential, and their competitiveness continues to improve. This may be a reason for the appreciation of the exchange rate and a part of the capital inflow. Of course, these factors also have a positive side for the domestic market. For instance, if our economy is relatively stable and we have room to maneuver in our policies, the market at least won't feel panic.

The "Japanization" cloud has been blown away, and the A-shares can maintain a reversal trend

Li Guanyun: How do you view the overall trend of A-shares in 2025? I remember on July 31, when A-shares were still below 3,000 points, you wrote an article titled "Why Am I Optimistic About the Market?" After that, we had a good rise due to the 924 new policies, and even on October 8, it touched 3,674 points at the opening. However, it later fluctuated downward. Do you still remain optimistic now?

Song Xuetao: The underlying change in A-shares is actually reform. After the full text of the decision from the Third Plenary Session on July 21 was released, we could see a long-term transformation plan aimed at reducing long-term systemic risks. This has also led to the appreciation of the RMB exchange rate starting from the end of July. Looking back, Hong Kong stocks, especially the Hang Seng Technology Index, did not just start rising at the end of September; they had already entered a new round of upward momentum in late July and early August. Of course, Hong Kong stocks have been in an upward channel this year, with significant rises in February and September, but they began to gradually rise in late July, and foreign capital started to return.

The underlying reason for this is reform. Subsequently, a series of favorable developments due to the continuous advancement of reforms emerged. For example, on September 24, the most significant visual impact was that ministries could jointly, collaboratively, and purposefully introduce two policies and tools for the capital market. This brought a strong emotional boost to A-shares.

Then, on November 8, the Standing Committee of the National People's Congress announced 12 trillion yuan for debt relief, which is also part of the reform. This is to allow local governments to accelerate their transformation by easing their burdens from past hidden debts. So, all these factors, after a series of market fluctuations, ultimately point to reform, which is addressing various issues in our development and transformation process to enhance the long-term efficiency of economic growth.

Therefore, for next year's A-shares, I believe this remains unchanged: reform will continue to release the potential for economic growth, mitigate risks during the growth process, solve problems encountered in economic growth, and accelerate the transformation of local governments' development models and fiscal systems, continuously releasing favorable policies that allow the A-share market to maintain this reversal trendOf course, the market's rise is definitely not a stable upward trajectory heading northeast; it is a tortuous process of taking three steps forward and two steps back. However, each time it comes back, the bottom will be better than the most pessimistic state. This is the underlying logic that makes me optimistic about the market next year, and this underlying logic has not changed, which is reform.

Li Guanyun: The underlying logic has not changed, and many policies have started to be introduced. Are you relatively more optimistic now?

Song Xuetao: I think it has been validated. From the debt resolution announced on November 8 to the previous policies regarding real estate and the capital market, there have been some recent policies related to reform, such as the cancellation of export tax rebates for certain goods. I think this actually aligns with our logic. We need reform, and we need to keep more fiscal revenue, especially those related to exports and manufacturing, within the country to improve the welfare level of Chinese residents and consumers. Instead of subsidizing exports and giving this fiscal revenue to foreign consumers, this is also integrated with our fiscal and tax reform. So I think behind many policies in this process, there is reform; it's just that everyone interprets it from their habitual perspective, but in my view, these things are actually unified.

Li Guanyun: Many brokerage analysts have now clearly described the current state of A-shares as a bull market. Do you think A-shares are in a bull market now?

Song Xuetao: A bull market is hard to define. If you say that a 20% rise from the bottom counts as a bull market, then it indeed qualifies as one. However, the bull market that everyone imagines is one that rises steadily northeast without any pullbacks, which obviously does not align with our national conditions. Because fundamentally, we need to look at the improvement in the performance of listed companies, and before that improvement, the market valuation recovery is likely to rely on continuous policy support, safety nets, and risk prevention. So different people may have different definitions of a bull market; I think it can be described in various ways. But in my view, it has already reversed because the underlying logic has emerged.

Li Guanyun: The overall trend has reversed, but in terms of specific strategies or timing, should we currently focus more on the risks represented by economic downturns and the pressures on foreign trade due to Trump's tariffs, or should we pay more attention to the opportunities represented by important future national policy stimuli?

Song Xuetao: If the overarching logic has reversed, or to describe it differently, the dark cloud hanging over the A-share market, the so-called "Japanification" cloud, has actually been blown away. Because in the past year or two, many people have been comparing Japan to us. I have always believed that this comparison is very inappropriate because I think we have no similarities with Japan in most aspects. Unfortunately, this has become a mainstream narrative. Therefore, for A-shares, I think the most important change is that this narrative has changed; we no longer apply Japan's experiences to China but are willing to believe in a new narrativeOr even without a narrative, I think this is the most important pricing logic for the A-share market next year.

In terms of investment, I believe it is fundamental, which is the "demise of the old narrative of Japanization," and it brings about a fair valuation for those Chinese companies that have long been undervalued but actually have global competitiveness. We cannot apply Japan's zero interest rates, negative interest rates, or zero growth, or long-term recession, balance sheet recession, and consumption downgrade—this "lost decade or two"—to China, as these are completely different countries with different economic growth models and states. Firstly, I think the change will occur in those Chinese manufacturing companies and competitive Chinese consumer companies that have the lowest valuations but visible competitiveness and sustainable growth.

Li Guanyun: After we break the narrative of "China's economy becoming Japanized," our new narrative is actually very focused on our expectations for the strong policies that the country will introduce. Regarding the upcoming Central Economic Work Conference in December and the two sessions in March next year, what important policies do you think we can look forward to?

Song Xuetao: The Central Economic Work Conference in December will deploy economic work for the entire year ahead, but there are many uncertainties for the whole year. For example, after January 20, how will the tariff policy be implemented after Trump takes office? It is used as a tool to threaten us; what is the goal he wants to achieve? Secondly, if the U.S. economy shows signs of chaos or even a slight recession in the first half of next year, how will it affect our policy deployment?

So I think the December Economic Work Conference may set a more uplifting goal and provide a range and scale of policy tools with relatively more room for choice. However, regarding how we specifically respond or the specific segmented goals, I think we may still maintain composure and take it step by step, depending on the external environment's pressure on us. But I believe there will be more hedging policies and reserve policies discussed at the December Central Economic Work Conference. As for next year's two sessions, that will be after Trump’s new government has taken office. By that time, I estimate that some policy scales, such as new bond issuances related to finance and limits, will become clearer.

Li Guanyun: In your previous article reviewing the impact of the 924 new policy on the A-share market, you mentioned that it is not reliant on a single policy, but rather a series of cumulative effects of policies that trigger a qualitative change. Can we continue to expect some sustained favorable policies from the end of this year to the first quarter of next year that will continue to drive this qualitative change?

Song Xuetao: Yes, this is the logic behind the A-share market, which is that policies are still somewhat short-term if viewed individually. However, when viewed together, there is a long-term logic, and that long-term logic is reform.Reform is supporting the valuation recovery of the market and the reversal of long-term logic on different dimensions.**

No market rises solely based on daily policy announcements, nor can a single policy change the market. Therefore, I believe the most important factor for next year is still reform. The Third Plenary Session has already seen some aspects of reform implemented, such as the fair competition regulations and the adjustments related to export tax rebates that we mentioned earlier. Next year, there may be more focus on consumption tax, the reform of the fiscal and tax system between local governments and the central government, and possibly reforms in marketization of factors such as the household registration system and land system. I think these are the underlying factors that will allow the market to see a continuous main line next year. Of course, these short-term policies may provide a main line for fluctuations up and down.

Li Guanyun: You just mentioned some opportunities for A-shares next year. Let's now focus on the risks. As we approach the end of this year and the beginning of next year, on one hand, A-shares have already priced in many policy expectations, which are quite strong. However, at the same time, a series of economic data may not be particularly ideal. Could this lead to a situation of "strong expectations but weak reality" again, affecting the overall trend of A-shares? Similar to what happened when the pandemic ended?

Song Xuetao: I think people's expectations for economic data have come down now, after two years in 2023 and 2024. When the re-opening was just announced, there was certainly a feeling that the pandemic was over and many impacts had disappeared. However, it turned out that there were scar effects, and local governments had fiscal holes to fill. People, especially those with less property income and more labor income, also had debt holes to fill. So, during that time, there was actually a high rate of early loan repayments and savings.

That period was a calibration process. I believe by 2024, the expectations for the economy will be much closer to reality, so the "strong expectations but weak reality" situation will be much less. There won't be such high expectations for reality, but rather some marginal changes can be seen. I think this will be even more the case next year; people won't have particularly high expectations for a short-term improvement or reversal in the economy, especially in the real estate market. If it can stabilize, that would be good, but if it declines, it can be accepted as long as it doesn't accelerate.

So, regarding risks, I think the probability of them emerging is relatively low, as expectations are already very low. For risks to emerge, it would mean that things are worse than expected, for example, if real estate doesn't just decline slightly but significantly, or if the decline in real estate accelerates again. If consumption declines again, such as growth dropping below 2%, or if real estate sales drop below -20%, or if CPI turns negative again, or PPI falls to -3% to -4%, then it could lead the market to believe that the economy will have a second bottoming out or that risks will be released againI believe that in the current A-share market, everyone trusts that the policies can mitigate risks and provide a safety net, and that the RMB exchange rate can be defended if necessary. There is a belief that China's overall credit risk is under control, and the government has the means to address today's issues; it's just a matter of time. Therefore, I think it will be relatively difficult for the market to experience panic and fear again. Compared to 2023 and 2024, when psychological expectations have not fully adjusted, or when the reality may indeed be under significant pressure, I believe that 2025 will be better in both aspects.

2025 Market Main Line: Manufacturing and High-Quality Consumer Enterprises Welcome Valuation Repair

Li Guanyun: Regarding the overall trend of the A-share market, you should believe that the opportunities outweigh the risks. We would like to hear your suggestions on specific styles. Recently, many brokerage analysts have begun discussing a market style switch, believing that the previous speculation on small-cap stocks will come to an end, and the overall market style will shift towards undervalued blue-chip stocks with performance support. What do you think of this statement?

Song Xuetao: Generally, at the end of the year, the market tends to switch styles a bit, as there needs to be a layout for the main line of the next year. Up to now, there hasn't been a clear main line in the A-share market since 924; basically, everything has risen, or whatever was cheap has been rotated through. Currently, consumption has relatively risen less, but other areas have seen significant valuation repairs, especially small-cap stocks like the CSI 1000 and 2000, which have risen quite a bit because they have no fundamental requirements and institutional holdings are relatively low.

However, looking ahead to next year, some main lines may emerge. First, there may be a greater inclination towards domestic demand over external demand. Second, between high valuation risk preference support and low valuation with performance repair, there may be a choice for relatively undervalued stocks, but with performance that is at least clear. So I think these actually point to the fact that the A-share market has been continuously adjusting over the past three years, but with the collapse of old narratives, the valuation has repaired, and these manufacturing-oriented, mass consumer-oriented companies in China that are truly competitive may become the main line of the market next year.

In addition, there may be fluctuations in risk preference. For example, when risk preference declines, people may choose undervalued blue chips, leaning towards a dividend style. Then, when risk preference rises, people may speculate on opportunities in small-cap stocks related to technology based on current policy themes or market main lines. I see next year's market as having this major main line, which also includes two smaller main lines.

Li Guanyun: You just provided two clues for finding next year's main line: one is domestic demand, and the other is undervaluation. Can you elaborate on the industries and sectors you are most optimistic about next year based on these two clues?Song Xuetao: Of course, in my view, the real estate market may still need to continue to decline next year to digest valuations and excess inventory. Domestic demand may still be more focused on consumption, as exports are somewhat volatile, although our long-term outlook for exports is very positive. I believe that even with a trade war and a 60% tariff, it will not harm China's long-term export competitiveness; instead, it will be beneficial. This is a kind of tempering for us. Of course, we may also need to cope with short-term fluctuations, and the main method to address these fluctuations may rely on domestic demand policies, especially in consumption, as there is still elasticity that can be released.

For example, trade-in programs, subsidies for durable goods consumption, and certain forms of transfer payments for specific residents. I think that next year, when facing significant fluctuations in exports, there will be related policies introduced, and consumption itself has considerable elasticity. Because it has performed relatively poorly in the past two to three years after the pandemic, with factors such as the downturn in real estate and residents paying off loans early, these pressures should be much smaller by 2025, as the major downward pressure risks have basically been released in the past few years. Therefore, with the combination of policies and fundamentals, I believe if we look at elasticity, domestic demand, especially the elasticity of consumption, may be relatively larger.

Li Guanyun: From the perspective of durable consumption, does this mean that the new energy vehicles and home appliances sectors will have relatively good opportunities?

Song Xuetao: But they have already reacted somewhat in advance for 2024. For example, home appliances have shown good growth throughout this year, as the policy subsidies for home appliances have been significantly effective since July. Of course, the automotive sector has also seen noticeable effects after the trade-in subsidy policy, especially in the sales of new energy vehicles. I expect that the policies will continue next year, but for the market, it often still needs to see some new things—those that have not been repaired or have not had policies before will react more strongly in the market next year.

Li Guanyun: Currently, from a global perspective, overseas funds are still in a wait-and-see attitude towards A-shares. When we look forward to the A-share market trends for next year, should we continue to regard foreign capital movements as an important reference indicator?

Song Xuetao: Foreign capital is certainly still very important. In fact, retail investors tend to follow risk preferences, and some institutions also follow risk preferences. Insurance will be a marginal change because it is relatively long-term, with some strategic allocation needs and long-term pension funds. Additionally, foreign capital is one of the important incremental and marginal funds. Foreign capital is at least an important indicator when the market is relatively extreme, but when the market is in a relatively stable state, foreign capital may not necessarily be that important variableI think if the market is as pessimistic as it was in July and August of this year next year, foreign capital will be important. Or if the market rises to a relatively high position again, like at the end of September or early October, when it has gone up, foreign capital actually started to release some relatively pessimistic expectations during the National Day holiday, and it left. So in extreme situations, foreign capital still plays a role as a leading indicator; after all, it is relatively flexible and may serve as an important marginal force that affects the balance of market chips.

Real estate prices will continue to bottom out in 2025

Li Guanyun: What is your view on the real estate market in 2025? Will real estate prices be able to bottom out and stabilize by 2025?

Song Xuetao: When looking at real estate, I have two indicators. One indicator is to use the rental yield as a valuation metric. It is similar to stocks; you need to compare its cash flow to its market value to assess its current valuation level. From this perspective, housing prices have not fully bottomed out yet, as the current national rental yield is 2.2%, and it is lower in first-tier cities, around 1.6%.

After observing the process of real estate bubble deflation in various countries, it is generally found that in the end, the rental yield minus the holding costs will be slightly higher than the long-term government bond yield, such as the 30-year treasury yield. Today, our rental yield is still somewhat lower than the 30-year treasury yield, so in terms of price, there may still be some adjustment space in 2025, and the overall direction has not yet entered a rising phase; at most, it is just bottoming out or on the left side of the bottom. The cost-effectiveness of investing in real estate has not yet surpassed that of buying wealth management products and long-term bonds.

The second indicator is to look at quantity. Overall, the second-hand housing market is continuously releasing inventory, squeezing out new homes. Therefore, the previous reference for the bottom of new home sales is no longer meaningful. What is now meaningful is the proportion of second-hand homes in the transaction volume of second-hand and new homes. The proportion of second-hand homes may not increase further after reaching a certain level because new homes need to provide updates and meet the demand for good housing. Thus, for China, the transaction proportion of new homes needs to drop to a certain level before the overall transaction volume in the real estate market can stabilize.

Currently, the proportion of second-hand home transactions in China is about half, while in Hong Kong, it is about 70%, in the U.S. it is 90%, and in many European countries, it is around 80%. This is also an observation indicator for us to monitor the sales of the Chinese real estate market, which is that the proportion of second-hand transactions needs to reach at least 60-70% for the real estate market's sales to stabilize.

So based on these two indicators, there is still a bit of downward space in 2025, but it should be said that it is not significant anymore, at least not a rapid decline. However, whether the market has already bottomed out and started to rebound varies from person to person, depending on their perspective, time scale, or the samples they are looking at. From a national perspective, I believe it may not have bottomed out yet; at most, it can be considered the left side of the bottomLi Guanyun: The effect of the new policy 929 in the second half of the year should be significantly stronger than that of the new policy 517 in the first half. Can we also expect that with the continuous introduction of real estate policies, it will allow transactions to continue to expand? Or is it just a pulse-like recovery in transactions?

Song Xuetao: From the results, indeed since 929, the transaction volume of second-hand houses in first-tier cities has remained high for two months. During 517, the transaction volume basically dropped within a month, and in Shenzhen, it might have dropped in three weeks. Now, the four first-tier cities are still maintaining a high level, and the transaction volume has not decreased.

As for the future trend, I think it’s hard to say, and everyone can have their own views. I believe we should look at two points. One is whether the prices have rebounded month-on-month, which is an important indicator of the bottoming out of housing prices and the real estate market. If we see a continuous rise in the prices of second-hand houses, then it is indeed likely that the bottom has appeared.

The second point is the volume. Currently, the transaction volume has increased, but the listing volume is also rising. More homeowners, who previously thought that housing prices were falling and did not want to sell their houses, are now finally seeing that prices are not falling or that transactions are happening relatively quickly, so they are starting to list their houses.

In fact, if this is the case, then it is possible that for a period of time, housing prices will be a trade-off for volume, meaning prices may drop but transaction volume will increase because more people want to take this opportunity to sell their houses, indicating they are bearish. If the transaction volume shrinks and the listing volume also shrinks, and prices do not fall, then I think we may have truly seen the bottom. So right now, it seems that the situation is still one of trading price for volume, with listing volume increasing, which means I also don’t know how housing prices will move in the future, but I think there may still be some room for price declines and some room for negotiation, just not as much as before. However, if the listing volume shrinks, the transaction volume shrinks, and there are no houses to sell, then if prices rebound, I think we really need to be cautious.

Li Guanyun: In fact, the process of the real estate market bottoming out is strongly correlated with the policies introduced by the state. What can we expect in terms of national policy in the next 3 to 6 months?

Song Xuetao: First-tier cities have not fully lifted the restrictions on real estate purchases, which leaves some room for imagination. Now, the changes in ordinary housing and non-ordinary housing, including deed tax and value-added tax, have already shown significant changes. I think that the policies that can be released have basically been released, and there are indeed not many policies that can be introduced on the demand side. Of course, many people have some expectations for policies on the supply side, and perhaps there are such policy reserves, but whether they can be implemented, I think there are still considerable difficulties.

Li Guanyun: What do you think about the storage policy? Do you believe that the advancement and implementation of the storage policy will be a key supporting factor for stabilizing housing prices in 2025?

Song Xuetao: Yes, this is what I mentioned regarding supply-side policies, which is how to reduce the supply of houses, because it has been said that we need to digest the existing stock and strictly control the increment, but the existing stock is very large. Some are under construction, and some have been built but not sold, so previously it was said to let local governments collect, but where the funds come from is a big issueSo far, the funds have to be borrowed by local governments themselves, either through special bonds or through the central bank lending to commercial banks, which then provide matching funds to local governments. For local governments, the motivation to borrow money to acquire properties is not very strong, because this money has to be repaid and it incurs interest.

Secondly, after acquiring the properties, they are likely to either rent them out or sell them. If they want to sell, the premise is that the properties must be cheap enough; if they want to rent them out, the rental yield must be higher than the interest. Local governments are not particularly skilled in property management, which involves operational costs, personnel costs, and vacancy costs.

Therefore, from a purely economic logic perspective, the current storage policy is quite difficult to implement. Unless the central government steps in to provide the funds, local governments actually lack strong motivation, and it doesn't significantly help the real estate market. Because storage merely changes the landlord from individual buyers to the government, and after the government buys the properties, they will rent them out or resell them to individuals, which does not reduce the total supply in the real estate market; it just allows property developers to receive payments earlier, effectively alleviating their cash flow pressure.

Especially for a property developer that is a state-owned enterprise or a city investment company, local governments have the motivation to use special bonds or bank loans to convert the inventory held by city investment companies into cash, providing them with funds to alleviate their current pressures. Apart from this, I believe that from an economic logic standpoint, it is difficult for local governments to have a strong reason to execute this policy. So I estimate that eventually, when housing prices drop sufficiently, investors will naturally appear to buy properties, rent them out, or renovate them, and there may not be a need for local governments to engage in storage.

Li Guanyun: Does this mean we should not have too high expectations for the advancement of the storage policy in 2025 and its stabilization and improvement of the real estate market?

Song Xuetao: Yes, this policy has been discussed for a long time, starting from the three major projects in 2023. Up to now, everyone has seen that there are many micro-level obstacles and many detailed issues, including the imbalance of responsibilities and rights, which have proven that this is quite difficult to implement.

Or it requires a very strong risk bearer and a very strong policy promoter for this to be possible. However, the current situation is that the responsibility still falls on local governments, and it is still being done based on market principles and resource autonomy, so I think we should not have too high expectations and let the market clear itself and find its bottom.

Li Guanyun: If you judge that the real estate market will continue to bottom out in 2025, what is the relationship between this and the A-share market trends?Song Xuetao: It should be said that the relationship between A-shares and real estate is no longer that significant. The relationship between A-shares and the economy itself is not that strong; A-shares are often driven by expectations. For example, if the economy is poor, but policy expectations become stronger, A-shares may rise. Of course, if the economy is bad and there are no policy expectations, then A-shares may face more pressure, or only speculative concepts may remain.

Currently, the relationship between real estate and the economy has also weakened. In the early stages, especially in 2021 and 2022, the decline in real estate had a significant impact on the economy, whether in terms of consumption, investment, upstream resources, or local government investments and related public services purchased by local governments. These were initially the burdens that the decline in real estate placed on the economy and A-shares.

However, at this stage, I feel that A-shares are increasingly less affected by the economy, and the economy is also less affected by real estate. Therefore, finding a connection between real estate and A-shares is not as strong as it used to be. There is still some connection; many listed companies derive their main business income from real estate or local governments. If local governments lack funds to pay for these services, it may still have an impact, which is certain, but the influence is weakening. This may gradually become a less important pricing logic for A-shares.

The Best Students Should Not Crowd into the Financial Industry for Short-Term Benefits

Li Guanyun: Thank you very much, Teacher Song, for sharing your views on the global asset trends in 2025, which is a topic of great concern to all of us. Next, I would like to ask you about some issues that young people are most concerned about. For a long time, being a securities researcher has been a popular career choice among top students from prestigious universities. However, in recent years, not only the sell-side but the overall external evaluation of the financial industry has changed, and this profession is no longer regarded as a "golden bowl" by many excellent students. Currently, the score lines for some finance majors may not be as high as before. How do you view this situation?

Song Xuetao: From the perspective of the financial industry, this is a good thing. The best students, top scorers, indeed should not consider short-term benefits after starting work.

Many students actually do not study economics or finance; they initially study engineering. You can see that the income growth curves of different industries are different. For those who study engineering, the accumulation of income is relatively slow at the beginning after graduation, but later there will be an acceleration period and a growth curve. In finance, the income is relatively high right after graduation, but the growth slows down later. So I think this is a good thing, allowing everyone to see a full lifecycle growth curve and wealth accumulation curve, which may lead high-scoring students to choose to do more challenging things. Overall, finance still emphasizes compliance and risk control, and the challenges are not that great. Of course, investing is another matter, but most of the financial industry is relatively focused on risk managementI think it will instead encourage students to take on greater risks, to choose to pursue science or engineering-related fields. From the industry's perspective, this is a good thing, as it allows the highest-scoring individuals not to cluster in the financial industry, but to engage in something they find interesting in the long term, rather than just focusing on how much they can earn in their first job after graduation.

From the perspective of the financial industry, being a securities analyst is still a very good job. First, this job does not require too many connections or accumulated resources; it relies entirely on one's own abilities to produce results. Second, it serves as a great first job and stepping stone for career development, as it involves accumulating insights into various industries, macro knowledge, and experience in communicating with listed companies. This will be beneficial for future career transitions, whether in primary investments, secondary investments, or returning to the industry to empower it from a financial perspective.

Indeed, for young people just entering the field, I believe that working as an analyst can provide significant training, which is advantageous for their long-term development in the financial industry. Overall, the financial sector may not be as attractive as it once was, but being a securities analyst remains a very good first job within the financial industry.

Li Guanyun: What you emphasize is that young people should not choose to enter the financial industry and become securities analysts solely for short-term benefits, but rather consider long-term development and their interests. For those young people who are genuinely interested in entering this industry, what career development advice do you have for them? As one of China's top securities analysts, I hope you can provide some career development advice for young people.

Song Xuetao: Everyone's path into this industry is slightly different. From observing many excellent analysts, I believe the first point is that one should have a broad vision and a wide range of knowledge, as we need to engage with various industries. Particularly from a macro perspective, all industries are part of the macro picture, which includes political policies, industrial aspects, and grassroots investigations. Therefore, this requires a very broad knowledge base or strong learning ability.

Even if there are gaps in this field, one can quickly gain a general understanding of what the industry is doing, what the business model is, how it operates, what impact it has on other upstream and downstream industries, and what trend it is in within the macro industry. So the first point is that one's vision should be broad, and interests should be diverse; it’s okay not to delve deeply, but one should have a wide range of exposure.

The second point is that many outstanding talents ultimately delve deeply into a specific field. We may have many shortcomings, but the key is to have strengths. Being a securities analyst does not mean we need to fill every gap; rather, it is crucial to have a strength that allows for differentiated and in-depth research. For a specific industry, sector, or company, or even macroeconomics, one should have long-term thoughts and insights on a particular issue, and the ability to understand it differently from othersThis is very important for this industry, I believe.

The third is diligence. Of course, everyone possesses diligence, but how to reduce the fatigue that comes from diligence is through passion. When you love a job, you won't feel tired from it; instead, you will continuously receive positive feedback and motivation from the work, making you better and better at it.

Li Guanyun: Thank you very much, Teacher Song, for sharing many sharp insights with us today. We also look forward to inviting you to attend and speak at the Alpha Annual Summit held by Wall Street Insights from December 20th to 21st, to share more profound insights with our audience. Thank you very much