Eliza Wong
Executive Summary
Key insights from China’s cyclical sector resurgence:
– China’s cyclical sectors have rebounded strongly with metals and chemicals indices gaining 57% and 32% respectively since April lows
– ETF flows show significant rotation from technology to cyclical sectors with 19.2 billion yuan entering chemical ETFs and 13.7 billion yuan into metal ETFs
– Anti-involution policies are reshaping supply dynamics while AI and新能源 demand create new growth drivers
– Fundamental shifts suggest this isn’t temporary rotation but structural repricing of traditional sectors
– Multiple fund managers see sustained outperformance potential in carefully selected cyclical names
The Quiet Revolution in China’s Cyclical Landscape
While technology growth stocks dominated market attention through much of the recent cycle, a significant transformation has been unfolding at the other end of the investment spectrum. China’s traditional cyclical sectors, particularly metals and chemicals, have been staging a remarkable comeback that suggests more than just temporary sector rotation. This movement represents a fundamental reassessment of value in segments long considered mature or stagnant.
The cyclical sectors comeback isn’t merely about price recovery—it’s about rediscovering relevance in a changing economic landscape. As technological advancements create new demand patterns and policy shifts reshape supply dynamics, these traditional industries are finding themselves at the intersection of multiple powerful trends. The convergence of anti-involution policies, emerging technology demand, and global manufacturing cycles creates a compelling investment thesis that sophisticated investors cannot ignore.
Data from Wind Information shows compelling evidence of this shift. Since their April lows, the CSI Nonferrous Metals Index and CSI Segmented Chemicals Index have rallied 57% and 32% respectively, ranking among the top performers across CSI secondary industry indices. Individual stocks like Northern Rare Earth (北方稀土), Shenghe Resources (盛和资源), and Kingfa Technology (金发科技) have delivered 100%+ returns, capturing investor attention and capital.
Capital Rotation Signals Deeper Transformation
The flow of capital often provides the clearest window into market expectations. Recent ETF flow data reveals a dramatic shift in institutional positioning. Over the past three months, substantial capital has moved into cyclical sector ETFs, with chemical-focused funds attracting 19.2 billion yuan in net inflows and metal ETFs gathering 13.7 billion yuan. This movement from technology to cyclical sectors represents what market participants call ‘high-to-low switching’—rotating from elevated valuations to undervalued opportunities.
According to Huang Daoli (黄道立), portfolio manager at Neuberger Berman Resource Selection Fund, ‘Market capital has a natural need for high-to-low rotation and is actively searching for the next phase of investment opportunities.’ He notes that recent heavy positioning in upstream resource sectors aligns with current macroeconomic cycle patterns and represents forward-looking capital allocation anticipating future opportunities.
From a capital perspective, since the policy shift of September 24th last year, overall market activity has accelerated rapidly. However, the transmission from policy implementation to economic improvement requires time, causing initial concentration in small-cap growth and technology sectors. As valuations in these areas reached elevated levels, capital naturally sought new valuation opportunities in undervalued segments.
Fundamental Drivers Behind the Cyclical Renaissance
The cyclical sectors comeback finds strong support in improving fundamental conditions. Domestic exports have demonstrated unexpected resilience in the first half, while midstream manufacturing shows early signs of bottoming and recovery. Simultaneously, global manufacturing PMI indicators are beginning to show oscillating upward trends, with particularly noticeable improvements in the Eurozone and Southeast Asia.
Li Wenhai (李文海), portfolio manager at Rongtong Industry Trend Selection Fund, notes from a supply-demand perspective that the previous capital expenditure peak in traditional cyclical industries has passed. Two years of unfavorable pricing conditions have triggered market-driven supply-side adjustments in some sectors. Combined with anti-involution policies and enhanced industry self-discipline, as the domestic economy bottoms and rebounds, traditional cyclical industries are showing signs of fundamental reversal.
‘Adding to this attractiveness, traditional cyclical sector stock prices are generally at low levels, offering high layout value for long-term investment, which explains why long-term capital is beginning to position in these sectors,’ Li Wenhai states.
Metals Sector Breakdown: Multiple Drivers Converge
Zhang Mingye (张明烨), fund manager at Cinda Australia Asia, provides detailed analysis of specific metal sub-sectors driving capital inflows. In precious metals, Federal Reserve Chair Jerome Powell’s unexpectedly dovish stance and significantly weaker July non-farm payroll data have pushed gold prices higher again. The long-term logic of continued central bank gold purchases and weakening US dollar credibility remains intact.
For industrial metals, copper mine supply and demand remain in tight balance throughout the year, with terminal demand generally stable. Aluminum benefits from limited global capacity increases, with rigid supply providing strong price support. Among minor metals, cobalt faces supply constraints due to export restriction policies in the Democratic Republic of Congo, while rare earths experience tightened supply-demand balance due to upgraded domestic regulatory policies and overseas inventory replenishment demand.
These varieties maintaining high price levels or possessing upward price expectations continue to attract capital allocation. The cyclical sectors comeback thus reflects both tactical positioning and strategic recognition of changing fundamentals.
Anti-Involution Policy: Reshaping Sector Dynamics
If capital rotation and improving fundamentals provide the technical and market-based factors igniting this rally, then top-down anti-involution policies have opened new imagination space for the depth and height of the current metals and chemicals rally. This policy direction represents a critical variable that differentiates the current environment from previous cycles.
Ye Yong (叶勇), equity investment department fund manager at Wanja Fund, believes anti-involution carries enormous macroeconomic significance, particularly against the backdrop of accelerating property price declines, multi-year commodity price decreases, and macroeconomic cycle bottoming. The significance of anti-involution becomes even more pronounced in this context.
On one hand, anti-involution will significantly raise domestic production factor prices, increasing the proportion of commodity surplus value retained domestically, thereby boosting domestic demand. Prices of production factors including raw materials, equipment, labor, and financial capital have significantly underperformed real estate over an extended period, possessing substantial price repair potential.
On the other hand, using anti-involution as an entry point can significantly improve corporate balance sheets across numerous upstream, midstream, and downstream industries, repairing profit margins and ROE. Anti-involution industries include numerous traditional sectors that employ large numbers of workers. Profit improvement and price increase expectations will gradually boost consumption and corporate reinvestment, further promoting inflation recovery and corporate profit improvement, thereby boosting domestic demand and forming a virtuous cycle.
Policy Differentiation from Previous Cycles
Latest data from the National Bureau of Statistics shows that in August 2025, PPI fell by 2.9% year-over-year, with the decline narrowing by 0.7 percentage points from the previous month. The month-over-month change turned from a 0.2% decline to flat. This inevitably draws comparisons to the 2015 supply-side reform, but interviewed fund managers generally believe the current anti-involution era background, policy connotations, and long-term impact differ fundamentally from the previous round.
Li Wenhai contrasts the two periods, noting that the previous supply-side reform focused more on eliminating backward capacity through more mandatory measures. The current anti-involution covers broader areas, with policies emphasizing industry standard leadership and self-discipline, while also stressing marketization and fairness. ‘Therefore, compared to the previous supply-side reform, this round’s impact on prices will be more moderate but effects will be longer-lasting,’ Li Wenhai anticipates.
This round of anti-involution is expected to guide chemical and metal enterprises to treat inefficient, repetitive capacity expansion more cautiously while directing more resources toward industrial upgrading and cost efficiency improvements, thereby bringing more stable returns to the industry.
‘Anti-involution may trigger a new round of supply-side reform, but it’s absolutely not a simple replication of 2015,’ emphasizes Huang Daoli. Whether considering domestic growth momentum, industrial structure, or international competition environment, the current timing differs significantly from 2015. He believes the previous reform mainly addressed overcapacity in some traditional industries following the retreat of the ‘four trillion’ stimulus policy. The current situation faces new-type problems including industrial structure adjustment, industry technology iteration, international competition environment changes, and supply chain system reconstruction.
Emerging Demand: AI and新能源 Reshape Value Propositions
If anti-involution reshapes industry ecology from the supply side, then emerging technologies represented by AI and new energy are injecting unprecedented new momentum into traditional cyclical industries from the demand side, profoundly changing their value chains. This demand transformation represents a critical component of the cyclical sectors comeback thesis.
Zhang Mingye points out that AI brings substantial new demand to chemical and metal industries, including strong copper demand from artificial intelligence big data center construction, directly exacerbating copper tightness. Additionally, AI-driven power infrastructure upgrades (such as grid reconstruction) also support copper demand. In materials, AI-related technologies are expected to drive demand for liquid cooling upstream fluorinated liquids and PCB-related resins, with extended other material demands offering further exploration potential.
Li Wenhai believes new energy demand already accounts for significant demand proportions across multiple cyclical industries, including phosphorus, electrolytic aluminum, and copper, where new energy demand occupies approximately 20% or higher shares. Comparatively, solid-state batteries and AI currently hold smaller proportions, but given these industries’ growth rates and application prospects, one can reasonably speculate these new demands might replicate the previous new energy demand explosion, potentially becoming traditional cyclical industries’ main growth drivers in the future.
Quantifying the New Demand Impact
Ye Yong quantifies this trend’s importance using copper as an example. He notes that continuous development of new energy and AI these emerging industries has become the largest ‘marginal variable’ on copper demand side. These emerging demands already account for over 20% of global total copper demand and continue growing rapidly. Beyond copper, a series of minor metals including rare earths, tungsten, tin, and antimony also benefit from their critical roles in emerging technology industries, with demand pushing prices higher and creating excellent investment opportunities.
‘Technological innovation, materials first.’ Huang Daoli succinctly summarizes the relationship between upstream resources and downstream industry trends. Using copper and aluminum—two basic metals—as examples, fifteen years ago, real estate and infrastructure were core drivers of China’s economy, accounting for over 30% and 50% respectively in copper and aluminum demand structures. With recent economic structure transformation and new energy industry rise, real estate and infrastructure demand proportions have significantly declined, while new energy industry’s proportion in copper demand exceeds 15% and in aluminum demand exceeds 20%. ‘Industrial demand drivers have undergone tremendous changes,’ Huang states.
Looking further into the future, Huang Daoli believes AI’s influence will extend beyond demand creation. ‘AI development will likely become materials science’s intelligent engine,’ he envisions. ‘Through computing power empowerment, reconstructing material research paradigms, enhancing future material research efficiency and innovation boundaries.’ This means AI not only finds new pathways for traditional materials presently but may also催生全新的材料体系 in the future, thereby opening a new round of industrial revolution.
Investment Implications and Sector Opportunities
The cyclical sectors comeback presents specific opportunities across different segments. In metals, upstream mining generally shows strong profitability with less urgent anti-involution needs, but severely overcapacity copper smelting areas will face focus. The chemical industry experiences more direct and far-reaching impacts, with industry capital expenditure peaks passed. Under anti-involution environments, backward capacity will continue elimination, some industry new capacity may face suspension, and heavy chemical industries will enter continuous capacity reduction stages, with capacity value有望得到重估.
For investors considering positioning in this cyclical sectors comeback, several factors warrant attention. First, differentiate between companies benefiting from anti-involution policies versus those leveraging new demand drivers. Second, assess management quality and capital allocation strategies—companies directing resources toward innovation and efficiency will likely outperform. Third, consider global exposure, as international manufacturing recovery could provide additional tailwinds.
The cyclical sectors comeback also suggests broader market implications. As Ye Yong notes, ‘We expect significant PPI turning points in fourth quarter 2025, with asset price recovery indicating macroeconomic stabilization and rebound, also meaning major market expectation changes triggering significant style switching: if inflation bottoms and rises, this represents new macro cycle initiation, warranting comprehensive optimism toward pro-cycle styles.’
Strategic Positioning for the New Cycle
The transformation unfolding across China’s cyclical sectors represents more than temporary market rotation—it signals structural changes with long-lasting implications. The convergence of policy support through anti-involution initiatives, demand creation from emerging technologies, and improving global manufacturing cycles creates a powerful investment thesis that demands attention from sophisticated market participants.
Investors should recognize that the cyclical sectors comeback differs fundamentally from previous cycles in duration, drivers, and potential magnitude. While tactical opportunities exist, the more significant potential lies in strategic positioning in companies positioned to benefit from both supply-side discipline and demand-side expansion. The companies that will ultimately create the most value are those that balance traditional operational excellence with adaptation to new technological realities.
As global investors reassess Chinese assets amid evolving economic conditions, the cyclical sectors comeback offers compelling opportunities for those willing to look beyond surface-level narratives and understand the deep structural changes occurring. The traditional map of cyclical industries is being redrawn onto new coordinates, creating potential for substantial value creation for discerning investors who position themselves appropriately for this new investment landscape.
