MVC Perspective: A-Shares Have Reached the Inflection Point of the Clearing Cycle

Dear Valued Readers,

We have previously shared our views on Bitcoin's new asset attributes following its all-time high. At a time when the China-U.S. competitive landscape is undergoing dramatic shifts, we believe it is necessary to share our perspective on RMB-denominated assets.

Our core thesis is: We are about to enter the largest synchronized fiscal and monetary easing cycle between China and the United States since 2008. The dominant theme of this easing cycle will be the simultaneous economic recovery of both nations and their most intense competition over currency influence and global standing.

Within this context, RMB assets — and A-share equities in particular — are set to receive a triple tailwind from liquidity, policy, and fundamentals. After more than a decade of prolonged consolidation, A-shares now offer a risk/reward profile comparable to Bitcoin at $28,000. For the foreseeable future, the primary battleground between China and the United States will be the global share of their respective currencies — and this will be the defining theme of our era.

As of the time of writing, the total market capitalization of RMB equity markets (including H-shares) stands at approximately RMB 120 trillion, while U.S. equity markets are valued at roughly USD 50 trillion. The gap between the two may be smaller than most people's initial impression. Yet when compared to the relative size of the two economies (the U.S. GDP is approximately 1.5x that of China), a significant valuation divergence remains. Standing at this moment, the facts we observe are as follows:

On the political front, the United States is making a full pivot toward populist right-wing nationalism, with its global strategic footprint continuing to contract. The core pillars of American influence — NATO, the Asia-Pacific alliance system — are inevitably weakening further. The decline of U.S. global influence is already visible in the Middle East and the Russia-Ukraine conflict. The downward trend in dollar hegemony since the Iraq War may now be entering a new phase of accelerated decline, while domestic division and political strife in the U.S. have entered a new period of turbulence.

On the monetary front, while the U.S. dollar's sustained easing cycle has propelled American equity assets, China has been undergoing various deleveraging cycles since 2015, accumulating significant space for future monetary and fiscal policy action. Meanwhile, the U.S. debt problem has grown increasingly acute and has become the most critical asset issue of the next decade. After going all-in on technological innovation, the U.S. will increasingly need to trade global influence for monetary and fiscal headroom in the near term.

On the trend front, RMB assets have already received clear bottom signals over the past two months across net liquidity (as represented by M2), fundamentals (as represented by CPI and property prices), and policy (the series of high-level political meetings since September).

We believe that within this easing cycle, clear inflection points exist across the political, monetary, and fundamental dimensions described above. The decade-long divergence between Chinese and U.S. equity assets and their respective liquidity conditions may be approaching a convergence. Increasing exposure to the RMB system will enhance our firm's resilience to external shocks and provide a margin of safety for our long-term vision of becoming a family office for high-net-worth LPs.

Our Understanding of the A-Share Market and Investment Framework

I. Understanding the A-Share Market and Chinese Assets

The A-share market is a quintessential policy-driven market denominated entirely in RMB. Since 2015, it has undergone a sustained decade-long deleveraging and capacity-clearing cycle, compounded by a seven-year China-U.S. capital decoupling cycle beginning in 2018, and a confidence-eroding period of centralization that began in 2022. It is fair to say that A-shares have undergone an extreme, full ten-year clearing process, and China's economic growth trajectory has been decelerating since 2015.

At this juncture, we believe the enormous opportunity facing A-shares — and Chinese assets broadly — stems from the following facts and inferences across the policy, fundamental, and liquidity dimensions:

On the factual level, our assessment is as follows:

From a policy space perspective, China's fiscal deficit ratio (fiscal deficit as a percentage of GDP) has, since 2008, been constrained to a narrow 3% ceiling, calibrated to GDP size and growth rate. This is far below the fiscal and debt pressures of other major economies such as the United States (approximately 7%, with several recent years exceeding 10%) and Japan (typically around 6%, recently approaching 8%).

From an economic fundamentals perspective, China possesses the world's only complete industrial manufacturing system, along with the cheapest and most comprehensive power infrastructure and resource base.

From an A-share liquidity and positioning perspective, the capital market has long occupied a peripheral role in China's political priorities. The September 2024 speech marked the first time since the current leadership took office that explicit requirements were placed on the capital market.

From a national power development perspective, China's military capabilities in near-sea and near-air domains, as well as its global influence, have undergone transformative changes compared to a decade ago.

The divergence in economic growth since 2015 and the divergence in equity market performance between China and the U.S. since 2022 ultimately stem from a monetary cycle mismatch. The core short-term economic problem in China is CPI deflation.

On the inference level, under general assumptions, we believe:

China can print RMB 50–200 trillion over the next decade (simply considering a shift in the deficit ratio toward U.S. and Japanese levels — and indeed, recent statements from the Ministry of Finance have explicitly signaled a willingness to relax the narrow deficit ratio ceiling).

The Chinese government's governing capacity can guarantee the occurrence of at least one to two industrial cycles within China.

China's global influence, short of a proxy war or direct military escalation, will trend upward with volatility — and the two ongoing regional conflicts will accelerate this trend.

In the medium term, the probability of a direct China-U.S. hot war is near zero.

In the near term, a reversal of CPI deflation is virtually certain to succeed. Local government debt and real estate issues are not the primary contradictions under assumptions (a) and (b) and are readily solvable. China's social culture and the characteristics of its people — easily motivated, eager for prosperity — mean that rebuilding social confidence will not be difficult.

In summary, we believe that before any China-U.S. hot war erupts, we will witness the simultaneous takeoff of both economies. China's capital market, in particular, faces a triple tailwind from policy, fundamentals, and liquidity — a situation nearly identical to what Bitcoin faced in 2023. The key difference is that A-shares have already undergone 10–15 years of base-building and consolidation.

A-shares have now completed the first liquidity recovery at the index level. The subsequent trajectory is expected to follow the natural rhythm of economic cycles, broadly: commodities/premium consumption → industrial trends/domestic unified market consumption → industrial trends. We expect the core capacity targets in each industrial trend and sector rally to offer 3–5x upside, while reversal/high-growth targets may offer approximately 10x. From a technical standpoint, the current gap levels on the A-share index are 2,889–2,863 and 3,017–3,000 (using the Shanghai Composite Index as reference). As of the date of this report, the Shanghai Composite is trading around the 3,400 level.