Guotai Haitong Strategy: Expanding domestic demand ushers in a historical turning point; recommend sectors with both low valuation and low holdings that are valuable for domestic demand

The expansion of domestic demand marks a historic turning point. China’s economic focus is shifting toward domestic demand as the primary driver and prioritizing it as the top task. Since the 1990s, expanding domestic demand has been an important tool for China to respond to external crises and promote industrial restructuring and upgrading. Under increasingly complex international circumstances and domestic pressures to stabilize growth, the expansion of domestic demand has officially transitioned from a short-term, ad hoc policy to a medium- and long-term national strategy spanning over the next decade. As the marginal effects of traditional infrastructure investment and export-driven growth diminish, domestic consumption as a “stabilizer” and “new engine” of economic growth is becoming increasingly prominent. By 2024, China’s final consumption expenditure accounts for approximately 56.6% of GDP, significantly lower than the 66%-83% levels seen in developed economies such as Japan, South Korea, Europe, and the United States. Looking ahead, we believe the policy path for expanding domestic demand is becoming clearer: first, emphasizing “investment in people,” focusing on addressing shortcomings in people’s livelihoods and promoting income growth; second, improving and expanding service consumption to meet the trend of consumption upgrading and optimize industrial structure; third, stabilizing real estate price expectations, smoothing economic cycles, and further stabilizing residents’ wealth effects and income confidence.

Signs of a recovery in the domestic demand structure have emerged, with price increases facilitating the circulation of demand. Currently, China’s domestic demand shows a pattern of low total volume stabilizing and notable transformation highlights. On one hand, consumer confidence is no longer declining, per capita disposable income growth has improved, and the crowding-out effect of precautionary savings on consumption is gradually weakening. The resilience of first-tier cities and high-end consumption is beginning to show. On the other hand, new drivers such as service consumption, intelligent green consumption, and emerging consumption are accelerating China’s demand transformation and upgrading. More importantly, it is crucial to recognize the key catalytic role of “driving a reasonable rise in prices” for the recovery and structural upgrading of domestic demand, creating a positive feedback loop. Price increases can not only guide positive expectations and stimulate consumption demand but also improve corporate profitability and boost residents’ income. Additionally, price signals can guide enterprises to shift from low-price competition to quality improvement, promoting supply-side upgrades to meet demand for services, intelligent green consumption, and other sectors, alleviating structural contradictions of excess low-end supply and insufficient high-end supply, and achieving synchronized upgrades of consumption and industry.

The policy tone is shifting positively, and stabilizing real estate plays an important role in expanding domestic demand. After years of decline, the real estate industry has completed a deep adjustment and entered a bottoming phase. As of Q4 2025, the sales area has fallen about 51% from its peak, new construction area has declined approximately 74%, and residential investment as a share of GDP has decreased by 5.6% from its peak—values and declines close to those seen in the US, Japan, and South Korea. By the end of 2025, housing price declines in first-, second-, and third-tier cities had narrowed by 22%, 30%, and 30% respectively from their 2021 highs, approaching the levels of small-scale global real estate bubbles. Capital expenditure and fixed asset investment related to the real estate chain have fallen below the 30th percentile, indicating substantial de-leveraging. Recently, policy attitudes are also turning more positive: relaxed financing policies are easing the debt pressure on developers, stock housing policies are optimizing supply and demand, and urban renewal is promoting investment stabilization, forming the “new three arrows” for real estate. The industry now has a solid foundation for stabilization and recovery, with valuation repair underway.

Industry recommendations: We suggest focusing on undervalued domestic demand sectors with low valuations and holdings. Valuations and holdings across the domestic demand chain are at historic lows, reflecting a widespread market pessimism after years of decline. However, policies aimed at expanding demand and raising prices are gaining momentum, and profit expectations for related industries are beginning to stabilize. We believe that the decline in market value of demand-related real estate over the past two years has been much greater than its share of GDP, and as expectations stabilize, valuations are likely to recover first. Recommendations include: 1) stabilizing real estate expectations to clear tail risks in property companies, favoring high-quality developers with PB ratios below 1; 2) deep de-leveraging in cyclical and consumer manufacturing industries related to domestic demand, with signs of price turning points under expansion policies—such as building materials, chemicals, food and beverages, agriculture; 3) policy-driven supply quality improvements and demand releases, with a recovery in consumer services and aviation sectors.

Risk warnings: Unexpected overseas economic recession, uncertainties in global geopolitical situations.

(Source: Guotai Haitong Securities)