Chen Guo urges revaluation of China's carbon-based leaders with 5 reasons

China's carbon-based economy — spanning financials, real estate, consumer cyclicals and materials — is approaching a revaluation window as leading indicators turn positive, strategist Chen Guo wrote in a note Sunday, challenging the consensus that only silicon-based AI stocks deserve premium pricing.

"The market is overly pessimistic on China's carbon-based economy, ignoring that leading indicators are already improving," said Chen Guo, chief strategist at a Chinese securities firm, in the note published on his WeChat channel.

Manufacturing PMI has held at or above 50.0 for three consecutive months through May, while tier-1 city second-hand home transactions jumped 31% year-over-year in Beijing and 31% in Shenzhen. April CPI rose 1.2% and PPI climbed 2.8%, ending the deflation narrative that had weighed on traditional sector margins.

The revaluation thesis matters because A-share capital has been overwhelmingly concentrated in silicon-based AI hardware names — communication and electronics sectors — whose extreme valuations now face a reckoning after the Philadelphia Semiconductor Index's recent selloff. If Chen is correct, a rotation into undervalued carbon-based leaders could reshape portfolio flows for months.

Manufacturing and property show synchronized improvement

China's economic data is telling a different story than the one priced into markets. The official manufacturing PMI averaged 50.2 in the March-to-May period, up from 49.2 in the first two months of 2026, signaling a broadening industrial recovery. New orders sub-indices have tracked the headline higher, providing demand-side support for carbon-based sectors that had been written off as structurally impaired.

The property market — long the biggest drag on China's traditional economy — is showing its first genuine signs of stabilization. Beyond the transaction volume surge in first-tier cities, home prices in Beijing and Shanghai have turned positive on a month-over-month basis in early 2026, with second-hand prices approaching a 0.5% sequential gain. Because first-tier city prices are a leading indicator for the national market, the trough may already be in place, Chen argued.

Price recovery broadens beyond energy

The reflation story is not limited to energy-driven PPI gains. China's push against "involution" — the destructive competition that has crushed margins across industries — is gaining traction. The Ministry of Industry and Information Technology convened a battery industry forum in January to address overcapacity, while food-delivery platform Meituan reported in its first-quarter 2026 results that reduced subsidies were stabilizing average order values. These micro-level shifts, combined with an 80% probability of an El Niño event this summer that could lift agricultural commodity prices, suggest CPI and PPI could rise in tandem in the second half.

Why China's AI path protects the carbon economy

A key pillar of Chen's thesis is that the US experience of AI-driven labor displacement does not apply to China. American technology giants including Amazon, Microsoft and Salesforce have announced layoffs as they redirect budgets from human capital to AI infrastructure, creating what Chen described as a "silicon inflation, carbon deflation" dynamic. China, by contrast, is pursuing an AI-for-empowerment model: state-owned enterprises and government agencies adopted DeepSeek's models en masse in 2025, while ByteDance's Doubao chatbot surpassed 100 million daily active users by year-end. The 2026 government work program explicitly prioritizes "high-quality full employment," and Beijing's policy toolkit — including 2.5 trillion yuan in ultra-long-term special treasury bonds for consumer trade-ins this year alone — provides a fiscal backstop that the US lacks.

Valuation asymmetry creates opportunity

The structural case for rebalancing is reinforced by positioning data. Communication and electronics sectors now account for a historically extreme share of A-share turnover, while carbon-based sectors — financials, real estate, consumer cyclicals and materials — trade at near-record valuation discounts. Chen noted that the asymmetry between these sectors' contribution to A-share earnings and their weight in institutional portfolios creates a setup for mean reversion.

Looking ahead, the strategist identified five near-term catalysts that could accelerate the rotation: the US May CPI release and Federal Reserve guidance; the potential Space X listing and its impact on tech risk appetite; US-Iran nuclear negotiations affecting oil prices; South Korea's response to equity leverage risks; and the distraction effect of the World Cup on global trading volumes.

"From a fundamental perspective, the A-share market does not face systemic risk," Chen wrote. "But the external environment carries uncertainty. Investors should adopt a counter-cyclical mindset and look beyond the crowded high-growth trades toward quality value blue chips at depressed valuations."

This article is for informational purposes only and does not constitute investment advice.