Summary:

• As the US government shutdown persists, its negative impact on its economy will gradually become evident. Firstly, many government investments and subsidy payments are being postponed, putting downward pressure on US household income and consumption. Secondly, due to the shutdown, the U.S. TGA fiscal deposits continue to increase, leading to a decline in the reserve balances at US commercial banks, thus causing tight interbank liquidity. At the same time, the government shutdown delays the release of economic data, further increasing the risk of future market uncertainty.

• China’s Q3 data shows a strong probability of meeting the annual target of 5% GDP growth rate this year. However, overall economic growth shows a steady quarterly slowdown, and the nominal growth rate reminds significantly lower than the real growth rate, indicating that China has not yet shaken off the pressure of economic deflation. Since corporate revenues, household incomes, and fiscal revenues are more closely correlated with the nominal GDP growth rate, the persistent deflation has further exacerbated insufficient domestic demand and the economy's increased reliance on exports for growth. It has also exerted further downward pressure on domestic house prices. Accordingly, further policy measures remain necessary to support household income growth and reinforce domestic economic stability.

• However, we believe that an economic slowdown does not change the continuation of a "slow bull" uptrend in the stock market. Firstly, the overall direction of loose macro policies globally remains unchanged. Secondly, with domestic housing prices declining, and returns on investment in the real economy and bank deposit interest rates decreasing, incremental money will still be allocated more to the stock market. Thirdly, policymakers have increased their attention to the rise in stock prices in the secondary market. In particular, by restricting new share offerings and insider selling, the supply of new shares has been sharply reduced, which is the biggest driving force behind this round of the A share bull market.

• Once the US stock market continues to decline, the urgency and willingness of the two parties to reach an agreement will increase significantly. Then there will be a chance to buy on dips.

• Overall, commodities may underperform relative to equities due to the potential risk of a further deceleration in global economic growth. Relatively speaking, we still have a relatively optimistic view on base metals, while we are more cautious about ferrous metals and energy/chemical products. We believe that once the US government shutdown ends, the gold price is likely to rise again.

Previous Views:

AI related investment in the US has boosted the country's economic growth rate, but at the same time, it puts pressure on employment. Our overall view of the US stock market remains neutral, though we remain optimistic about A-share market’s performance. From the perspective of liquidity and household asset allocation, there is still significant room for the A share market to rise. However, policymakers may adopt hedging measures to curb excessive rises in the stock market and leverage levels. Therefore, it is not advisable to chase after rapid rises in the A share market. But if there is a pullback, it presents a good buying opportunity.

Views in November:

I. Prolonged Government Shutdown’s Negative Impact on the US Economy Will Gradually Emerge

Since the beginning of the new fiscal year on October 1, due to the inability of the two parties in the US Congress to reach an agreement on the budget for the new fiscal year, the US government has been forced to shut down. The shutdown has now exceeded one month, surpassing the previous record of 35 days, making it the longest in U.S. history. At the same time, because the two parties still have a large gap in their views on cutting Medicare spending, Democratic lawmakers strongly oppose the expenditure budget for the new fiscal year that includes any cuts to ACA spending. The Republican Party currently holds 53 seats in the 100 - seat Senate but still cannot reach the 60 votes required to amend the medical welfare spending bill. Therefore, unless the Republican Party takes the initiative to give up cutting off the ACA next year, the government shutdown is likely to continue.

As the US government remains shut down, its negative impact on the US economy will gradually become evident. First, the ongoing U.S. government shutdown has resulted in over 500,000 federal employees not receiving their full monthly salaries. This includes not only staff in government departments but also those in related commercial service departments managed by government employees, such as the aviation management department. Second, due to the government shutdown, a large amount of discretionary government fiscal outlay has been suspended, including various subsidy payments and funds for government investment projects. For example, in the case of food subsidy programs in the US, currently about 42 million people in the US receive food stamps from the government each month to buy food. This payment is a discretionary fiscal outlay, so it has been suspended during the government shutdown, affecting the consumption and living conditions of a large number of US households that receive this subsidy, especially low-income families. In FY2025, total outlays for food stamps in the US totaled $106.3 billion, or about $9 billion per month on average.

In addition to the reduction in various subsidies, the prolonged shutdown of the US government has also led to a tightening of inter-bank liquidity. This is because the government shutdown is reducing fiscal spending, while fiscal cash inflows from government bond issuance and tax revenues continue as usual, leading to a steady buildup of fiscal deposits. Based on Treasury General Account (TGA) deposit figures released by the US Treasury Department, TGA fiscal deposits have continued to rise since July. After entering Q4, due to the government shutdown, fiscal deposits continued to increase, reaching a historical high of around $1 trillion (Figure 2).

At the same time, since the Fed is still conducting quantitative tightening and the reverse repurchase on its books had been basically exhausted by the end of Q3, the continuous increase in TGA fiscal deposits has led to a continuous decline in the reserves in US commercial banks’ at the Federal Reserve (Figure 3). The reserves dropped from $3.4 trillion at the beginning of Q3 to $2.85 trillion at the end of October. This level is lower than the lowest level before the outbreak of the SVB crisis in early 2023.

The decline in the reserve level at commercial banks has had several impacts. Firstly, it has led to an increase in the spread between the SOFR (Secured Overnight Financing Rate) in the US inter-bank market and ON-RRP. At the same time, it has also caused a tightening of dollar liquidity, thus supporting the US dollar exchange rate. The tightness of inter-bank funds has a relatively indirect impact on US stocks. This is mainly because the main funds driving the rise of US stocks currently do not come from the inter-bank market. Instead, they mainly come from retail investors entering the market and leveraging up, as well as from stock buybacks by listed companies. These funds are not directly impacted by inter-bank financing.

At the same time, from the perspective of stock investors' expectations, since the debt ceiling issue does not trigger this shutdown of the US government, there is no risk that it will prevent the government from issuing or repaying U.S. Treasury bonds at maturity. Therefore, the shutdown will not directly trigger panic selling in the US stock and Treasury bond investment markets. However, this does not mean that the government shutdown poses no risks to the stock market. Precisely because this government shutdown will not immediately trigger panic and selling in the financial market, the willingness of the two parties in the US Congress to compromise and reach an agreement is not very high.

Economic decline is more long-term and uncertain risk factor, so neither party feels an urgent need to reach an agreement due to this. But as the government shutdown continues, the economic losses it causes will gradually accumulate, and the tightness of inter-bank funds it causes will gradually affect more asset prices. From another perspective, precisely because of the US government shutdown, a large number of US economic statistics have been postponed for release since October. Therefore, the financial market is unable to immediately assess the extent of the government shutdown’s impact on the real economy. It may be several months before the impact of the government shutdown is reflected in corporate revenue data.

Moreover, currently, the core of US stock trading does not focus on the revenue status of most enterprises, but rather on a few leading AI related stocks. Capex and computing power investments in AI do not consider short-term revenue status, so they are basically not affected by the US government shutdown or the slowdown of economic growth. This structural dynamic helps explain why, despite the historically extended duration of the current U.S. government shutdown, major stocks indices, especially those concentrated in AI-related segments—have continued to trend upward.

II. Deflation Remains a Major Challenge Facing the Chinese Economy in Q4

Data released by China shows that the country's GDP grew by 5.2% in the first three quarters, with a yoy growth of 4.8% in Q3 alone. Based on this calculation, the Chinese economy only needs to achieve a yoy growth of 4.6% in Q4 to meet the GDP growth target of 5% set at the beginning of this year. Therefore, although the Chinese economy has shown signs of slowing since the Q3, the possibility of achieving the annual economic growth target remains relatively high.

However, on the one hand, China’s yoy GDP growth rate of has shown a significant trend of slowing each quarter this year. The yoy growth rates in the first to third quarters were 5.4%, 5.2%, and 4.8% respectively. On the other hand, China's nominal GDP growth rate has continued to be lower than real GDP growth rate. That means, the Chinese economy has not yet shaken off the pressure of deflation. In fact, since Q2 of 2023, China's GDP deflator has been negative for 10 consecutive quarters, meaning that the nominal GDP growth rate is lower than the real GDP growth rate (Figure 4).

Compared with real GDP growth rate, the performance of corporate revenues, household incomes, and fiscal revenues is more closely correlated with the nominal GDP growth rate. Therefore, the failure to reverse the deflationary situation has led to a further widening of the gap in insufficient domestic demand, and China's economic growth has become more reliant on exports. Since early 2024, net exports contribution to GDP growth has remained above 1.5 percentage points per year. In contrast, the contribution rate of domestic consumption has dropped below 3 percentage points (Figure 5).

Another significant impact of deflationary pressure is that the domestic property market remains in a downturn. Since the second half of the year, both transaction volume and transaction prices in large and medium-sized cities have shown a further downward trend (Figure 6).

Therefore, alleviating deflationary pressure and restoring the growth expectations of corporate and household incomes remain important policy focuses for observing whether China's economic growth rate can start to pick up in the coming period. With the implementation of the 15th Five-Year Plan in 2026, the Chinese government is likely to introduce more measures to ensure people's livelihoods and promote the growth of household incomes.

III. Economic Slowdown Doesn't Change the Continued "Slow Bull" Trend of the stock market

Earlier, several challenges and adverse factors affecting both domestic and global economic growth were identified. Therefore, both China and the US face pressure from a further economic slowdown in Q4. However, we believe this does not change our view that global stock markets, especially the A - share market, can continue to maintain a "slow bull" uptrend.

Firstly, we believe that the rise of domestic and foreign stock markets since last year has been driven more by loose fiscal and monetary policies than by improvements in the economic situation. From the current point of view, the Fed's rate cut cycle is far from ending. If the US government shutdown further pressures the US economy and consumption, there may be more room for the Fed to cut rates. At the same time, to ease liquidity pressure on banks caused by the increase in fiscal deposits, the Fed has announced it will end quantitative tightening in December. That is, it will fully reinvest funds from maturing Treasury debts into new bonds. Therefore, there is still room for continued loose policies in the US in the future. In China, given the current situation where the downward trend of the domestic property market and the slowdown of consumption remain unchanged, it is difficult to change its loose fiscal and monetary policy stance.

Secondly, due to the continuous decline of property prices in China, low return on investment in the real economy, as well as the bank deposit interest rate having dropped to a historical low of 1%, a large amount of incremental money lacks other investment channels and will further flow into the stock market. From the perspective of policymakers, the rise of the stock market can also.

Help offset the loss to some extent of household wealth caused by the decline in housing prices, which is conducive to boosting consumers' confidence. Therefore, they are not willing to see a significant decline in the stock market. In fact, many governments globally this year have become increasingly dependent on the "wealth effect" created by rising stock markets to maintain consumption and investment. They are thus willing to offer more favorable conditions to sustain further gains.

In terms of specific practices, since 2024, the Chinese government has significantly increased its attention to the rise in secondary-market stock prices. To this end, it has restricted the speed of new stock share supply and insider selling (Figure 7). This reflects that Chinese policymakers are paying more attention to protecting secondary market stock prices rather than just raising money from stock markets.

Figure 7.

New share supply and inside selling were sharply reduced in China since 2024

Therefore, since 2024, the growth rate of new stock supply in the overall A share market has continued to slow, while the domestic money supply growth rate has picked up due to lose fiscal and monetary policies. With an increased money supply, slower growth in stock share issuance, and limited alternative investment channels in the domestic market, average A-share prices have risen. We believe this is the most important factor enabling the share market to maintain a sustained upward trend despite the economic slowdown and the ongoing decline in house prices.

IV. Market strategy

If the US stock market does not decline, it's likely that the two parties in the US Congress still won't be able to reach a compromise quickly to pass the fiscal budget for the new fiscal year and end the government shutdown. However, once the stock market continues to decline, the urgency and willingness of both parties to reach an agreement will increase significantly. Therefore, although the US economy and interbank liquidity are under short term pressure in the short term due to the government shutdown, once the shutdown ends, fiscal funds will resume disbursement, and the Fed may further cut rates amid weakening economic growth and consumption. At that time, the US stock market may rebound rapidly. So, although the US stock market is under short-term pressure, the downside space is still relatively limited. And if the US stock market experiences a deeper decline due to the government shutdown, there will be opportunities to buy on dips.

The A share market is expected to maintain a slow bull uptrend. Against the backdrop of a domestic economic slowdown and a decline in house prices, relatively loose domestic fiscal and monetary policies are unlikely to be withdrawn quickly. At the same time, policies will be more in need of maintaining the stock market’s relative rise to boost consumer confidence. Therefore, the overall macro policy environment remains favorable for the A share market.

Overall, we think commodity performance will be weaker than the stock market’s because there is a risk of a further slowdown in global economic growth rate. We still have a relatively optimistic view on base metals, while we are more cautious about ferrous metals and energy/chemical products. The trend of gold will be more similar to that of the US stock market. In the short term, it is also negatively affected by the US government shutdown and the tight interbank liquidity. However, once the government shutdown ends, the gold price is likely to rise again.