CITIC Securities: Stay committed to China's advantageous manufacturing industry, awaiting April's decisive moment. The recovery of market sentiment and liquidity may also take several months.

Source: CITIC Securities Research

By| Qiu Xiang, Gao Yusong, Chen Zeping, Zhang Mingkai, Chen Feng

After Trump’s TACO, the situation in the Middle East may show a delicate balance in which both sides deter each other while also preventing the situation from getting out of control. The fact of supply chain disruption has still not been reversed, but until a ceasefire agreement is reached, there is a possibility of intermittent shipping. In an environment where global rules and order are gradually eroding, countries with resources, geographic advantages, and manufacturing advantages will fully leverage these comparative advantages to survive and develop. In the context of the Middle East war, intermittent closures of the Strait of Hormuz may be a tool for the U.S. to be counterbalanced by action. The probability of continuous and repeated energy supply disruptions is rising. However, the impact of disruptions in energy and resource supply on industrial demand may differ from the 1970s and 1980s, when the U.S. and Europe were already at the beginning of deindustrialization, outsourcing production, and moving into early-stage globalization. The two oil crises actually accelerated that process. Now, the major difference in the backdrop is that many countries around the world are in a process of heightened insecurity and are pushing for reindustrialization, which also affects the analytical framework for the future. From the perspective of direct event impact, the three directions worth paying attention to are: the acceleration of global electrification, overseas orders shifting to domestic production, and more “supply chain diplomacy.” In the short term, the capital markets are still in a phase of cooling sentiment; a loss-avoidance mindset may create some demand to reduce positions. In terms of allocation, it is recommended to continue to hold fast to China’s advantage in manufacturing and wait for the April decision.

**　The Middle East outlook after Trump’s TACO:**

**　　Maintaining deterrence, a delicate balance**

1）U.S. Treasury yields have reached a critical chokepoint, and there is still a chance that TACO is carried out in time before the situation spirals out of control. This week, Trump postponed the so-called final ultimatum twice in succession and, through repeated calls and messaging, sought to ease market concerns about the Middle East situation and the risk of energy supply disruptions. Although the market has gradually become desensitized to these verbal messages, objectively they still show that the possibility of TACO remains. Since last year, whenever the 10-year U.S. Treasury yield reaches the 4.4%~4.5% range, financial market pressure has surged, and Trump seems to have taken TACO-related actions. On April 9 last year, Trump announced a 90-day delay in implementing “reciprocal tariffs” for most countries; on that day, the 10-year U.S. Treasury yield was 4.40%. On May 25, Trump announced approval to postpone the threat of imposing an additional 50% tariff on the European Union, and extended the trade negotiations between the two sides to July 9; on that day, the 10-year U.S. Treasury yield was 4.51%. On July 7, Trump signed an executive order extending the reciprocal tariff postponement period originally set to end on July 9 to August 1; on that day, the 10-year U.S. Treasury yield was 4.40%. On July 22, Trump announced a trade agreement with Japan, lowering the tariff rate on U.S. exports to Japan from the originally planned 25% to 15%; on that day, the 10-year U.S. Treasury yield was 4.40%. Currently, the 10-year U.S. Treasury yield has once again reached this critical chokepoint.

2）The fact of supply chain disruptions has still not been able to reverse course, and there is a possibility of intermittent shipping before a ceasefire agreement is reached. Data from Ship Vision Bao shows that, over the past four weeks, the average number of oil tankers entering the strait each week was only 11 voyages, with an average loaded tonnage of 4.05 million tons (the average for the prior 10 weeks before the war was 420 voyages and 36.391 million tons; currently, they have recovered to 2.6% and 1.1%, respectively). Over the past four weeks, the average number of oil tankers leaving the strait each week was only 18 voyages, with an average loaded tonnage of 11.1 million tons (the average for the prior 10 weeks before the war was 421 voyages and 35.919 million tons; currently, they have recovered to 4.3% and 3.1%, respectively). Supply chain pressure has already begun to spread to European and Asian countries—from upstream to midstream manufacturing links—while phenomena such as tight product availability and a pause in quoting begin to appear more frequently. Although both the U.S. and Iran have proposed ceasefire conditions, there are at least five major core disagreements between the two sides, making it extremely unlikely that consensus will be reached in the short term. Rapid increases in economic costs mean that intermittent shipping remains possible before negotiations are completed. But Iran may use the blockade more frequently as an economic weapon to counterbalance U.S. actions.

**　The probability of ongoing energy supply disruptions is rising, but**

**　　The impact on demand is different from the 1970s and 1980s**

In the 1970s, the U.S. and Europe had already been on the way to deindustrialization, pushing production outsourcing and the long-term trend toward supply chain globalization. Oil crises and rising costs accelerated that process. But this time, the backdrop is one of deglobalization, with the U.S. and Europe seeking reindustrialization, and countries increasingly demanding supply chain self-reliance, controllability, and security. According to World Bank data, the share of global trade in GDP fell from its post-pandemic peak of over 62% to around 57% in 2024. However, U.S. manufacturing construction spending grew from $98.32 billion in 2021 to $280 billion in 2024. AI infrastructure, energy resource infrastructure, broader category storage demand, and autonomous and controllable critical production links—all of these will generate robust industrial demand. This conflict will only push major countries to further upgrade their industrial capabilities to cope with the consumption from modern war conflicts, further pursue diversification and stability of supply chains, and further enhance industrial capacity. At the same time, it will also drive smaller countries to do everything possible to leverage their own resources, energy, and geopolitical advantages in order to survive in competition between China and the U.S. This backdrop means that even if energy costs rise, global industrial demand will not be weak. Supply-side disruptions may be sustained, and gaps between supply and demand may appear from time to time. When security considerations replace efficiency as the dominant factor, limited resources are directed toward industrial sectors. In the end, higher costs squeeze the consumption sector (AI substitution is another force). In such an environment with strong industry and weak consumption, it is difficult to simply apply a “stagflation” framework, and it is also hard to judge whether monetary policy is tight or loose. Domestically, in 2021, China experienced a similar environment.

**　Electrification accelerates, orders shifting from overseas to domestic,**

**　　And supply chain diplomacy are the directions worth watching next**

There are three areas that need close attention going forward. First is the acceleration of the global electrification process. This is a direction already shared by the market and starting to be priced in. China’s supply capability and scale advantages across the entire electrification industrial chain—such as in solar PV, wind power, lithium batteries, power equipment, and more—are expected to gradually show up after short-term oil price shocks fade, allowing China to capture a stronger dividend from overseas demand. Second is overseas orders shifting to domestic production. In Europe, some traditional advantaged industries (such as chemicals) that are shutting down capacity due to high energy costs and carbon mechanisms have already evolved from isolated cases into a trend. After this round of supply chain disruption, some of China’s competitors in the Asia-Pacific region have also started shutting down capacity. In recent times, cases of downstream buyers requesting quotes from domestic manufacturers have also increased noticeably. For China, cost buffers in the coal-chemical route across products such as methanol, urea, PVC, and MDI, as well as structural substitution of oil demand driven by electrification, make midstream manufacturing’s cost resilience even more pronounced in an environment where the oil price “center” rises. Overseas orders shifting to domestic production will be an important line of observation going forward. Third is supply chain diplomacy. According to a March 24 report by Bloomberg, in an interview, Philippine President Marcos said that given the energy crisis the Middle East conflict has brought to the Philippines, he is willing to restart negotiations with China on joint oil and gas development in the South China Sea. According to a March 12 report by Bloomberg, as the Middle East conflict expands and disrupts liquefied natural gas supply—forcing some Indian fertilizer plants to stop production—since India is the world’s largest importer of urea, Indian officials have requested that the Chinese side consider easing urea export restrictions. By leveraging its export control capabilities in fertilizers, rare earths, and key minerals, China effectively builds high-value diplomatic bargaining chips. Companies that receive additional quotas in targeted supply are expected to benefit substantially in this process.

In the short term, the market is still in a phase of cooling sentiment,

A loss-avoidance mindset may create some demand to reduce positions

Judging from derivative indicators, the most panicked stage may already be over, but sentiment is still cooling. On March 23, the MO options (CICC 1000 index options) showed extreme panic characteristics such as “volatility skew widening with a large rise in implied volatility,” which was the first signal of sentiment release during this round of declines since March. However, this week, over the following four days, MO options IV (implied volatility) fell sharply, and extreme panic sentiment has clearly eased. Nevertheless, derivative indicators show that sentiment is still continuing to cool. We constructed an MO sentiment indicator based on MO options trading volume, open interest, IV, skewness, and other metrics. Over the past two weeks, this indicator has remained below the 30% percentile level of the previous nearly 100 trading days. The sample private fund positioning and investor sentiment indicators also show cooling signals. As of March 20, the latest sample private fund positioning through the CITIC Securities channel was 79.3%, the lowest level since February. Since March, tool-type ETFs favored by absolute-return funds (industry ETFs and theme ETFs) have seen significant net redemptions. As of March 26, net outflows of tool-type ETFs (MA5) were RMB 3.12 billion, at the 2.0% percentile level over the past one year, or reflecting a demand for absolute-return-oriented funds to reduce positions. Because the Middle East conflict is difficult to resolve quickly, funds with low patience or loss-avoidance tendencies often tend to reduce positions on rallies to avoid volatility. Referring to the A-share market after the April 2025 reciprocal tariff shock: from the implementation of the April 2025 reciprocal tariffs and the intensification of the China-U.S. tariff war, to the China-U.S. Geneva talks in May and the London talks in June, the process took more than two months. The A-share market only began to emerge from a structural rally in July, with the rally accelerating in August. The recovery of market sentiment and liquidity this time may also take several months.

In terms of allocation, it is recommended to continue to stick to China’s advantageous manufacturing industries,

waiting for the April decision

The current recommended bottom-positioning is still in industries where China has a share advantage, overseas capacity reset costs are high and difficult, and supply flexibility is easily affected by policy—based on chemicals, non-ferrous metals, power equipment, and new energy. The recent liquidity shock has pushed many products’ valuations back into “cheap” territory again. Extreme negative narratives and interpretations are somewhat similar to the overseas-facing products after April 7 last year. They have once again brought large expectation gaps and low valuations. On top of the above bottom positioning, it is recommended to further increase exposure to low-valuation factors, with a focus on insurers, brokerages, and power. Considering a framework driven by short-term cyclical signals, price increases are still the sharpest “spear.” The probability that PPI trading will become the main line for the full year is rising, and April to May is the decision period. There are multiple leads and structural opportunities worth prioritizing: 1）In chemicals where there are second substitution raw material / process routes under an oil price shock (for these China-specific products, the “coal content” is typically higher than that of overseas competitors), the increase in the first raw material (crude oil) will bring a high price spread. 2）For products where Middle East / Western Europe capacity share was previously high, supply disruptions are expected to create additional supply-demand gaps and thus trigger price-increase expectations. 3）Products whose substitute prices rise due to cost impacts, and whose demand improvement brings about supply-demand gaps. 4）Products that are already in a price-increase channel, where cost increases provide a favorable window for supply-demand being tightly matched as prices rise. In addition, innovative drugs have recently shown some desensitization characteristics to liquidity shocks, but since the industrial trend itself has not changed, they are also worth watching.

**　Risk factors**

Escalation of friction in China-U.S. technology, trade, and financial sectors; domestic policy intensity, implementation effects, or economic recovery not meeting expectations; global and domestic macro liquidity tightening beyond expectations; escalation of conflicts in regions such as Russia-Ukraine and the Middle East; failure of China’s real estate inventory to be digested as expected.