In the previous market outlook, it was argued that interest rate cuts serve as a catalyst for oversold bounces but do not represent the core allocation theme. Recent investor concerns over elevated US Treasury yields and the yen's slide against the dollar essentially reflect technical maneuvers within the closed "dollar-Treasury-bond-equity" framework. While framing these as precursors to a financial crisis is not entirely alarmist, it is premature. For both the US and China, the dominant allocation factor remains growth—covering both its aggregate scale and structural composition. For China, the latest macro data reveals persistent weakness in domestic demand and structural divergence, which is now weighing on the market rebound and raising the difficulty of igniting a second leg of the rally.

Aggregate economic output acts as the stage, but the real protagonists driving the narrative are structural dynamics. The stage environment defines the outer boundaries of constraints, yet it is the structural players that determine the direction of travel. The old problem in China's economy can be summed up as follows: despite profit recovery, corporate expansion intentions have yet to materialize. According to statistics bureau data, industrial enterprise profits for the first half grew 18.7% year-on-year, with the operating revenue margin reaching 5.70%—a cyclical high since 2024. However, manufacturing investment fell 1.2% in the first half and further declined 1.7% in the January-July period, indicating capital expenditure has actually contracted rather than expanded.

In July, the producer price index (PPI) retreated to 3.5% after an earlier peak, with upstream production materials and raw material purchase prices declining in tandem. The marginal contribution of prices to profit growth is weakening. Much of the first-half profit increase stemmed from PPI-driven price gains; as industrial goods price momentum fades, earnings immediately face pressure. This demonstrates that the current profit repair is heavily reliant on pricing power rather than end-demand expansion, making its sustainability questionable. Combining PMI data, production-sales ratios, finished goods inventories, accounts receivable, and high-frequency industry indicators, it can be estimated that cumulative profit growth for January-July will decelerate compared to the first half. July's monthly profit is likely below last year's level, with a high probability of year-on-year contraction. This implies that profit improvement has not translated into capacity expansion momentum—book profits are not equivalent to operating cash flow. When entities become profitable, their first priority is repairing balance sheets damaged in prior downturns—repaying legacy debt and replenishing working capital—rather than investing in new capacity. Profits are functioning as a cushion for healing, not ammunition for a new round of capital expansion.

This phenomenon is corroborated by second-quarter earnings reports. First, upstream resource companies have seen temporary gross margin expansion benefiting from industrial goods price increases. Second, midstream and downstream manufacturers show marginal revenue improvements, but inventories and accounts receivable are expanding in tandem, with operating cash flow improvements significantly lagging net profit growth. Third, some manufacturers report double-digit revenue growth yet maintain persistently negative operating cash flow, with profits increasingly trapped in receivables and inventory. Fourth, high-prosperity companies display strong revenue and profit growth, but the ratio of accounts receivable to revenue is rising, collection cycles are lengthening, and earnings quality raises concerns. Fifth, traditional industries exhibit pronounced profit pulse characteristics—once the pricing environment shifts, earnings quickly come under pressure, leaving enterprises with little confidence to pursue large-scale expansion.

Why do corporate expansion intentions remain sluggish? The root cause lies in the mismatch between production and end-demand, with insufficient effective demand widely recognized as the economy's primary contradiction. On the household side, constraints on residents are the core of weak domestic demand. In the first half, per capita disposable income grew 4.2% in real terms, but consumption spending expanded only 2.7% in real terms—consumption significantly lagging income, forcing savings upward. In the first seven months, household loans contracted by 827.1 billion yuan, indicating residents are actively deleveraging, trapped in a negative cycle of asset shrinkage, weakening expectations, rising savings, and contracting consumption. July retail sales grew just 0.6% year-on-year, with goods consumption weak and only services supported by summer tourism showing modest recovery. This demand softness transmits upstream to the industrial sector: the manufacturing PMI fell from 50.3% in June to 49.2% in July, with new orders contracting notably and industrial production slowing marginally.

There is also a divergence between macro and micro perceptions. First-half GDP grew 4.7%, and industrial production demonstrated resilience, yet output does not equal sales. Finished goods inventories and accounts receivable have both risen, while household property income growth remains weak—creating a reality where macro data appears acceptable but micro-level sentiment feels cold. This gap complicates policy trade-offs and further suppresses micro-entity expectations. Aggregate market liquidity is not tight; M2 and outstanding social financing growth exceed nominal GDP, but credit structure skews toward short-term turnover and bill financing. Medium- and long-term capital expenditure credit improvement is limited—monetary supply is ample, but households and enterprises lack the willingness to leverage. Liquidity is also stratified across entities. While social financing aggregates have improved, funding conditions differ sharply among participants. Upstream and leading high-tech firms enjoy ample cash flow, while numerous midstream and downstream SMEs face significant collection pressure. The continuous expansion of accounts receivable essentially represents passively generated commercial credit along supply chains—goods delivered without cash settlement, profits booked on paper, yet capital trapped in inventory and receivable chains, squeezing bank credit creation. Enterprises lack incentives to expand production, which explains why benchmark rate cuts have failed to stimulate medium- and long-term investment credit.

Some investors continue to speculate on large-scale stimulus, but the policy logic during this transition period has been proceeding methodically—flood-like easing is unlikely to materialize. Policy does not aim to resolve transformation contradictions through aggregate demand stimulus; instead, it focuses on consolidating the development foundation, securing safety bottom lines, resolving legacy risks, and nurturing new quality productive forces as leading industries. The government is advancing the construction of six networks—water networks, new-type power grids, computing power networks, next-generation communication networks, urban underground pipeline networks, and logistics networks—collectively forming a modern infrastructure foundation. In the third quarter, progress on these six networks is accelerating; since June, at least seven provinces have listed them as key priorities for H2 economic work. The available new special bond quota and ultra-long-term special treasury bond scale for H2 exceeds 3 trillion yuan, supplemented by new policy-oriented financial instruments, providing more ample funding support than the first half. The six networks are not traditional stimulus tools—they emphasize forming physical workload incrementally rather than pursuing short-term pulse effects. Capital deployment aims not to spike aggregate demand but to act as patient capital matching the long-cycle requirements of infrastructure and technology industrialization. Policy provides a bottom line but does not substitute for demand; eventual recovery awaits the endogenous repair of micro-entity forces.

Why does policy favor new industries? The key factor is that new momentum generates new prosperity. In July, high-tech manufacturing value-added grew 16.9% year-on-year, accelerating 2.8 percentage points from the previous month; equipment manufacturing grew 12.3%, up 1.3 percentage points; digital product manufacturing grew 17.3%. Integrated circuit manufacturing value-added surged 109.3%, while sensor, memory chip, and optical fiber production grew 35.3%, 30.2%, and 21.1% respectively. On the investment front, high-tech industry investment grew 5.0% in January-July with continued acceleration; electronic circuit manufacturing investment rose 57.7%, and lithium-ion battery manufacturing investment grew 23.0%. At the industry level, the fault line between new and old sectors is now fully exposed. In July, the electronics industry's value-added grew 19.1%, contributing 43.7% of total industrial growth—ranking first among all industrial sectors. Railway, ship, aerospace, special equipment, and general equipment industries maintained double-digit or near-double-digit growth. On the old momentum side, coal mining value-added fell 10.8%, non-metallic mineral products declined 3.3%, non-ferrous metal smelting dropped 2.5%, chemical raw materials fell 1.2%, and ferrous metal smelting grew just 0.3%. Traditional industries are not merely slowing—they are contracting outright. New momentum sectors now contribute approximately half of the value-added growth in industrial enterprises above designated size for January-July, up about 3 percentage points from the first half. Within the aggregate growth rate of 4.5%, the contribution between old and new momentum is undergoing a historic transition.

Aggregate pressure constrains rebounds, yet structural clues are becoming clearer. At the strategic level, the linear fantasy of aggregate strong recovery should be abandoned. This economic cycle is not a simple cyclical recovery but a structural repair under the transition of old and new growth drivers. Strategy should anchor on leading industries, adhere to the new momentum direction, and focus on sectors and companies capable of achieving a complete cash flow loop of orders, sales, collections, and reinvestment. Distinguish between temporary profit rebounds driven by price dividends and long-term growth driven by genuine demand. Upstream resource commodities are more of a cyclical play; hard tech, high-end equipment, and the six networks industrial chain represent the long-term direction of industrial evolution and constitute the main allocation battlefield.

At the tactical level, cyclical repetition must be acknowledged. Even confirmed long-term tracks will encounter order pulse fluctuations, supply chain receivable pressure, and earnings quality disturbances—passive holding is not viable. Time structure matters; one must harvest in autumn and store in winter, alternating between offense and defense. When macro-level order, collection, and inventory indicators show marginal weakening signals, moderately contract and defend. When the cash flow loop is validated and order sustainability is confirmed, intensify offensive positioning. In earnings analysis, profitability quality screening deserves paramount attention—listed companies should not be evaluated solely on net profit growth but must be tracked in tandem with operating cash flow, accounts receivable, and inventory turnover. In an environment of weak domestic demand and constrained credit expansion, the interest rate center lacks systematic upside risk, and low-risk assets retain allocation value. However, structural credit risks warrant caution, with particular avoidance of entities exhibiting continuously deteriorating cash flow and elevated receivables.