Market Overview Last week, major A-share indices recorded gains, while trading volume experienced a marginal decrease. Weekly performance (%) of major A-share indices.

Data source: Wind; Statistics period: 2026/2/23 - 2026/2/27 Weekly performance (%) of Shenwan primary industries.

Data source: Wind; Statistics period: 2026/2/23 - 2026/2/27

Macroeconomic Analysis The People's Bank of China has decided to reduce the foreign exchange risk reserve ratio for forward foreign exchange sales from 20% to 0, effective March 2, 2026. This move aims to moderately curb the Renminbi's appreciation trend. Recently, the Lunar New Year holiday effect led to a surge in exports and the release of pent-up foreign exchange settlements, accelerating the pace of Renminbi appreciation. Raising the risk reserve ratio increases costs for banks engaging in forward sales (as banks must freeze a portion of reserves, costs which are passed on to enterprises), thereby discouraging corporate forward foreign exchange purchases to counter depreciation pressure. Conversely, lowering the ratio reduces bank costs, facilitating corporate foreign exchange purchases to alleviate appreciation pressure. Given robust external demand and the increasing contribution of exports to economic growth, tempering rapid Renminbi appreciation helps protect exporters and export data. Should the weak US dollar narrative persist alongside China's economic improvement, the Renminbi's appreciation trend is expected to continue, with the PBOC utilizing various tools to manage the exchange rate. PBOC's exchange rate management tools.

Data source: The People's Bank of China

Equity Strategy Outlook Last Week Summary Market sentiment was characterized by caution. Trading volume increased moderately, while financing levels continued to decline from a liquidity perspective. Short-Term Perspective The primary market influences are currently the Iran conflict and the "HALO Trading" sentiment in US stocks (favoring companies with Heavy Assets and Low Obsolescence rates, which hold advantages amidst technological progress). While Chinese equities are relatively less affected, they are not immune. Post-holiday, A-shares showed a muted response to long-term tech catalysts, whereas inflation expectation trades across various cyclical sectors remained active, likely linked to the HALO sentiment. Beneficial sectors from the Iran situation largely overlap with those favored by HALO trading. In the short term, sentiment towards these directions—such as precious metals, industrial metals, chemicals, oil, oil shipping, and domestic pro-cyclical sectors with supply-side logic—is expected to persist. Coupled with the approaching key domestic political meetings, cautious sentiment may intensify, leading to a predominantly range-bound market. Medium to Long-Term Perspective Medium-term, technology and growth sectors remain favorable, although expectations for an improving economic fundamentals are gradually building. No fundamental shifts have occurred in the core economic or tech narratives, and the US remains in a rate-cutting cycle, sustaining the long-term logic for the tech sector, which continues to be a priority for allocation increases. Conversely, on the other side of the rotation from high to low valuation, many dividend-defensive and pro-cyclical sectors face fundamental challenges or lack compelling long-term narratives. For these sectors to see sustained rallies or become market leaders, significant catalysts are needed—such as policy support for investment/consumption if exports weaken, or accommodative policies following the US rate cuts. Current determination to boost domestic demand is firm, with improving indicators like PPI, while intensified competition in some domestic demand-related sectors suggests potential catalysts for stimulating domestic consumption and anti-internal competition measures may be nearing. Supported by a relatively accommodative monetary policy and low-interest-rate environment, ample market liquidity continues to foster thematic opportunities. Long-term, the trend of deepening strategic competition between the US and China continues. As US policy boundaries become clearer amidst persistent deficit increases, international capital markets have begun questioning US governance and institutional credibility. However, the US dollar's credibility remains largely intact for now, and US Treasuries do not currently pose significant risks. Monitoring changes in US capital markets is crucial to see if strategic opportunities arise for China. Presently, amid US economic uncertainty and the Federal Reserve's rate-cutting cycle, the Renminbi has appreciated against the dollar. Sustained foreign capital inflows could provide support to China's equity market. Furthermore, driven by multiple regulatory policies, trends like the passivization of public fund products and the lengthening of investment horizons for insurance capital and securities proprietary funds may strengthen. For instance, five large listed A-share insurers hold stocks worth 1.8 trillion yuan, up 28.7% year-on-year, with allocations to stocks and funds both above 10%. Policies such as potentially reducing risk factors for insurance capital's stock holdings are expected to continue. From a household perspective, improved profitability in equities could encourage the flow of excess savings (approximately 55 trillion yuan, with only about 22% of household financial assets currently allocated to stocks and funds) into the market, suggesting potential medium to long-term inflows of allocation capital.

Sector Views Regarding defensive, dividend-oriented sectors, a moderate increase in allocation can be considered short-term. If growth-oriented sectors continue under pressure and market sentiment deteriorates further, dividend sectors might attract capital. For growth sectors, continued focus is advised on technology. Despite short-term pressure from international skepticism over AI overinvestment and high valuations, the US-China AI race persists, making tech a sector with a strong combination of short-term performance and long-term narrative, especially in the current market and macro environment. Positive catalysts for China's broader tech sector continue to emerge, warranting medium-term optimism. Key areas include robotics, domestic computing power, aerospace with ongoing policy support, and sectors with high industry景气度 like memory, optical fiber, and overseas computing chains. Domestic demand and high-growth sectors benefiting from international tensions and HALO trading—such as industrial metals, chemicals, oil, oil shipping, and domestic pro-cyclicals with supply-side logic—are also noteworthy. While fundamentals for domestic pro-cyclicals remain relatively weak, their valuation uptrend could persist until more earnings reports and economic data emerge around March-April. Certain segments like some new energy areas and machinery (e.g., internal combustion engines) show advantages under the HALO trading theme. Weak US dollar trades, including precious and industrial metals, see short-term liquidity impacts subsiding, with long-term logic intact and new catalysts from the Iran conflict. Risk Warning: The information in this material is sourced from publicly available data, and no guarantee is made regarding its accuracy, completeness, or reliability. The views and analysis represent only the research team's opinions and under no circumstances constitute actual investment results or investment advice or guarantees for investors. No media, website, or individual may reproduce this content without authorization.

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