Zhongjin: The expansion of dollar liquidity is undergoing a "big switch", and assets in the direction of advanced productivity are expected to rise with the momentum.

CICC released a research report stating that the engine of US dollar liquidity expansion is undergoing a "major switch". With inflation transitioning from hidden to visible, and the new Fed Chair Powell advocating balance sheet reduction, the era of external currency driven by Fed balance sheet expansion and fiscal deficits post-pandemic may be coming to an end. At the same time, internal currency expansion, driven by AI capital expenditures, has taken shape - the engine of liquidity is moving from the policy end to the real economy end. Internal currency expansion strengthens economic resilience, deepens inflation stickiness, and also drives funds from traditional real estate and consumer sectors to accelerate towards technology frontiers with higher return expectations. In the future, asset performance may continue to differentiate: assets relying solely on external liquidity may face pressure, while assets representing advanced productive forces are expected to rise in the expansion of internal currency. Main points of CICC are as follows: External currency has peaked, the era of stimulus is coming to an end External currency refers to the act of injecting money through fiscal channels, typically through the government increasing transfer payments to the private sector, with the Fed expanding its balance sheet in conjunction with fiscal expansion. After the shock of the pandemic, the US government and the Fed implemented such monetary injections, injecting a large amount of liquidity into the global markets. However, with the new Fed Chair Powell at the helm, this logic is undergoing a transformation. Powell has always been against excessive expansion of the Fed's balance sheet and the normalization of QE. He advocates for orderly balance sheet reduction and returning to the core principles of monetary policy, a view also supported by key officials such as US Treasury Secretary Yellen and Fed Vice Chair Bowman. Faced with the rising risk of inflation, Powell's first task upon taking office is to quickly establish policy credibility, indicating that he will likely demonstrate determination to combat inflation in some way. There are two ways to show this determination: implying a possible future increase in policy rates, or controlling the money supply. Under current political and economic constraints, raising rates not only contradicts Trump's preference for low rates, but also would be hard to gain public support, which runs counter to Powell's desire to push rates down. In this context, it may be the optimal policy choice to control the size of the balance sheet and signal control over the total money supply, which means that the supply of reserves may move from the previous "unrestricted easing" to a "relatively scarce" regime, signaling the end of the era of stimulus. On the fiscal front, the liquidity impulses driven by the US fiscal deficit are also coming to an end. In the first half of 2026, the tax refund arrangements related to the "Build Back Better Act" provided temporary funding support to the market, but this is essentially a "lagging end effect" of existing policies. As we enter the second half of the year, with the phased completion of this act, the supply of new liquidity from the fiscal side will be limited. At the same time, the US federal debt is at historical highs, debt ceiling constraints, and rising interest payments all imply that the future fiscal stimulus space will be very limited. In fact, the core fiscal legislation of the Trump administration has been "preloaded". With the Republicans successfully controlling both houses of Congress after the 2024 presidential election, Trump took full advantage of this advantage in his first year in office, leveraging budget reconciliation procedures to quickly pass the "Build Back Better Act" and make the core tax reduction provisions permanent. Next, the Trump administration only needs to wait for the legislation to be implemented and take effect, with no major fiscal legislation plans in the short term. Rising internal currency, AI wave brings multiplier effects Internal currency refers to money derived from credit expansion in the private sector, mainly relying on bank loans, capital market financing, and the multiplier effects that come with it. Internal currency does not directly depend on monetary and fiscal policies, but on whether the real sectors have strong investment and financing needs, and whether financial institutions are willing to lend to them. Currently, the accelerated development of the AI industry is driving a significant expansion of enterprise capital expenditures, and the cycle of internal currency injection is taking shape. According to the latest financial data, the capital expenditures of the top five cloud computing companies in the US are expected to reach $735 billion by 2026, accounting for about 2.5% of US nominal GDP. At this stage, the source of capital expenditures is mainly the strong free cash flow of enterprises, which enables companies to act as a "quasi-fiscal" power - by releasing demand for hardware, data centers, power facilities, engineering construction, and software services in the upstream through the release of cash flows, driving an increase in the industry's business activity. In terms of scale comparison, the fiscal stimulus scale of the "Build Back Better Act" is around $300 billion, while the capital expenditures of the cloud computing companies exceed twice the size of the fiscal act. In the future, this model will also undergo a transformation: tech giants are shifting from consuming their own cash to issuing debt and equity financing. In the framework of internal currency analysis, this does not mean a tightening of financing conditions, but rather these tech giants, with high credit ratings, can more efficiently allocate idle funds and credit resources from the whole society to the AI sector, representing the future development of productive forces. Thus, the shift from cash flow to debt financing is not inherently a "bad thing", it rather represents the direction of financial resource allocation under the dominance of market forces. Credit data also shows that internal currency is expanding. Since the beginning of this year, there has been a "structural warming" in the growth rate of commercial bank loans in the US, with loans to non-bank financial institutions maintaining a high growth rate, and the growth rate of industrial and commercial loans showing the most significant rise since 2023. This may reflect the huge demand for funds in the AI industry chain and related industries driven by AI. In contrast, real estate loans and consumer credit growth rates are relatively low. Against the backdrop of persistently high 30-year mortgage rates and credit card rates, the traditional "real estate-consumption" credit chain continues to be suppressed. This difference indicates that the US economy is undergoing a structural transformation - financial resources are accelerating from traditional real estate and consumption sectors towards the technology sector, represented by AI, which has higher expected returns. The "internalization" of monetary injection is one manifestation of this transition, and the continuous expansion of internal currency also provides favorable conditions for the contraction of external currency mentioned above, such as balance sheet reduction. Market Implications: Structure and Differentiation On the growth front, the multiplier effects brought by AI capital expenditures help strengthen resilience. Although this process may exacerbate the economic "K-shaped" differentiation, as long as internal credit expansion continues, the US economy has a solid foundation, and its recovery momentum will continue to lead major developed economies, exerting spillover effects on the global economy. On the inflation front, the demand expansion brought by capital expenditures, combined with supply constraints from tariffs and geopolitical conflicts, will jointly push up prices and strengthen inflation stickiness. In the midterm outlook report, it is also judged that the biggest uncertainty in the second half of the year comes from inflation. This will not only constrain the policy space of the Fed but also mean that investors must adapt to a "higher for longer" interest rate environment. On the market front, enterprise financing needs and bank credit expansion will put pressure on the bond market, and the central US bond yield may rise. With rising rates, US stocks may bid farewell to the era of reliance on Fed and fiscal easing, driven by valuation expansion, and shift towards a new stage driven by high profitability and the efficiency of capital expenditure transformation. Whether tech companies can turn their substantial capital expenditures into actual profits will replace interest rate expectations as the core variable of pricing. Optimistic expectations for the technological revolution may continue to drive funds from interest rate-sensitive traditional sectors to the AI-related industrial chain benefiting from internal credit expansion. In contrast, assets that rely solely on liquidity, benefiting from the narrative of US dollar oversupply, may face ongoing pressure. Non-income-generating assets such as gold and Bitcoin have shown clear signs of correction in the past six months. This reflects the market's foresight pricing shift in liquidity sources. Therefore, future asset performance may continue to differentiate, and the criteria for differentiation lie in whether they represent an advanced direction of production forces and can benefit from the expansion of internal currency.