YCC CAPITAL Emerging Markets & China Strategy August 19, 2026 China’s July data tell a remarkably consistent story: the economy is producing more effectively than it is consuming, exporting more convincingly than it is investing, and generating industrial momentum without generating comparable confidence at home. The result is an increasingly pronounced K-shaped economy. Export-oriented technology and AI-linked manufacturing remain energetic, while property, private investment, household credit demand, and discretionary consumption remain weak. For investors, the distinction matters. Strong headline trade numbers should not be mistaken for a broad-based domestic recovery. China can continue winning export orders while households remain cautious, developers retrench, and private businesses hesitate to borrow. That is exactly what the July data suggest. Manufacturing Momentum Slips Below the Surface China’s manufacturing PMI fell to 49.2 in July, down 1.1 percentage points from June and below the 50 threshold separating expansion from contraction. The deterioration was broad-based. PMI readings for large, medium-sized, and small enterprises stood at 49.5, 49.7, and 47.4, respectively. The production index declined to 49.9, while new orders fell more sharply to 48.5, a 2.7-point monthly decline. Raw-material inventories remained subdued at 48.3. Employment improved modestly to 49.0, but that was not enough to offset the broader weakening in demand. Non-manufacturing activity was similarly soft. The business activity index fell to 49.0, with construction at 47.0 and services at 49.3. This is the central tension in China’s economy today: factories retain significant productive capacity, but the domestic order book is not keeping pace. It is the economic equivalent of a restaurant with a fully staffed kitchen and plenty of ingredients, but too many empty tables. Inflation Is Being Imported More Than Created at Home Consumer inflation remained subdued. July CPI rose 0.5% year over year and declined 0.1% month over month. Food prices fell 1.5% from a year earlier, while non-food prices rose 0.9%. Services inflation was firmer at 0.7%, but goods pricing remained restrained. Pork prices fell 13.3% year over year, contributing to a 6.0% decline in livestock-meat prices. Housing-related consumer prices declined 0.3%. Producer prices told a different story. PPI rose 3.5% year over year, although it declined 0.7% sequentially, while industrial input prices increased 5.5% from a year earlier. Energy, petrochemicals, coal and non-ferrous metals provided much of the inflationary lift, while AI-related investment supported pricing in electronics, computers and communications equipment. The gap between stronger producer inflation and muted consumer inflation is revealing. China does not currently have a classic demand-driven inflation problem. Instead, higher upstream prices are colliding with weak downstream pricing power. Companies can face rising costs without having sufficient consumer demand to pass them on. Trade Remains the Brightest Part of the Picture China’s external sector remained exceptionally strong in July. Total imports and exports reached $683.2 billion, up 25.3% year over year. Exports rose 23.9% to $397.85 billion, while imports increased 27.5% to $285.35 billion, producing a trade surplus of $112.5 billion. Technology-linked trade was particularly powerful. Integrated-circuit exports increased 116.6%, following a 121.9% rise previously, while exports of automatic data-processing equipment and components climbed 67.4%, accelerating from 53.1%. Exports to major markets also remained firm. During the first seven months of the year, exports to the United States increased 17.0%, exports to the European Union rose 16.0%, shipments to ASEAN economies expanded 38.4%, and exports to Japan advanced 14.0%. We remain cautious about extrapolating this strength indefinitely. China’s export performance is increasingly dependent on global capital expenditure, especially the AI infrastructure cycle, while its domestic economy remains unable to provide an equivalent second engine. Our base case for the United States remains cautiously constructive, which should support external demand, but any moderation in U.S. or global technology investment would expose how dependent China has become on foreign rather than domestic momentum. Credit Data Show a Confidence Problem At the end of July, outstanding aggregate social financing reached RMB463.27 trillion, up 7.4% from a year earlier. Yet the composition remains weak. During the first seven months of 2026, aggregate social financing increased by RMB22.25 trillion, RMB1.74 trillion less than during the same period last year. RMB loans to the real economy increased by RMB10.17 trillion, but that was RMB2.14 trillion less than a year earlier. Household borrowing was particularly weak. Household loans fell by RMB460.3 billion in July, including a RMB340.0 billion decline in short-term loans and a RMB120.2 billion decline in medium- and long-term loans. That combination points directly to soft consumer borrowing and weak mortgage demand. Corporate lending was also subdued. Corporate loans declined by RMB130 billion during the month, including declines in both short- and medium-to-long-term borrowing. Money growth reinforces the message. M2 increased 7.7%, while M1 rose only 4.0%, leaving an M1-M2 gap of -3.7 percentage points. Liquidity exists, but willingness to deploy it remains limited. Consumption and Investment Continue to Lose Altitude Industrial value added increased 4.5% year over year in July and 5.3% during the first seven months. Consumption was far less impressive. Retail sales rose just 0.6% in July and 1.2% during January-July. Weakness was concentrated in economically sensitive categories. Automobile sales fell 17.0%, building materials dropped 14.2%, furniture declined 8.8%, petroleum products fell 7.6%, and household appliances decreased 1.9%. Fixed-asset investment fell 6.7% during the first seven months. Private investment declined 9.4%, manufacturing investment fell 1.7%, infrastructure investment declined 3.6%, and investment in electricity, heat, gas and water supply contracted 5.3%. These are not the fingerprints of an economy entering a vigorous private-sector expansion. They are the fingerprints of businesses and households still protecting balance sheets. Property Is Stabilizing Only in the Loosest Sense Property remains the most important domestic drag. Real-estate development investment fell 19.2% during January-July, with residential investment down 19.1%. New-home sales area fell 11.8%, while sales value declined 13.1%. Construction activity remained even weaker: floor space under construction dropped 12.7%, new starts fell 24.0%, and completions declined 23.2%. Inventory offered one modestly better signal. Commercial housing available for sale totaled 759.11 million square meters at the end of July, down 0.8% year over year.

YCC CAPITAL Emerging Markets & China Strategy August 17, 2026 China’s housing market is beginning to show a familiar late-cycle pattern: transaction activity is trying to stabilize before confidence has truly recovered. Beijing’s latest round of property easing is therefore important, but investors should distinguish between a stabilization of turnover and a genuine repair of the housing system. The former is increasingly plausible. The latter remains a much higher bar. For households, this distinction is intuitive. A family may decide to attend more apartment viewings because mortgage terms improve, but that does not automatically mean it has regained confidence in future income, home prices, or the broader economy. Housing markets usually turn first in activity, then in pricing, and only much later in sentiment. Beijing appears to be entering that first stage. New-Home Weakness Is Moderating, While Resale Activity Finds a Floor During August 1–7, new-home transaction area across 47 tracked cities totaled 2.181 million square meters, down 34.6% from the previous week and 18.4% from a year earlier. The headline remains weak, although the pace of deterioration appears to be slowing. The divergence between city tiers remains significant. First-tier cities recorded a 31.8% year-over-year increase in transaction area, while second-tier and third-tier cities declined 32.5% and 23.2%, respectively. That contrast reinforces a broader theme we have emphasized for China: national averages increasingly conceal a highly uneven housing economy in which stronger cities can stabilize while lower-tier markets remain burdened by excess supply, weaker demographics, and poorer household confidence. The resale market is somewhat more constructive. Across 22 cities, secondary-home transaction area fell 10.5% week over week during August 1–7 but still increased 5.1% from a year earlier. Transaction volumes remained near the strongest seasonal levels seen over the past five years. Supply pressure is also easing marginally. Since the beginning of August, resale listings have declined 0.04% from end-July levels and are 0.5% lower than a year earlier. The move is small, but direction matters. A market cannot stabilize sustainably when new listings continually overwhelm transaction demand. The recent moderation suggests that the pace of forced or precautionary selling may be losing momentum. Higher-frequency activity looks stronger still. From August 1 through August 9, real-time secondary-home transactions across 26 major cities increased 19% year over year, an improvement from July’s overall performance. Source: Bloomberg, YCC Capital Beijing’s Policy Package Lowers the Friction of Buying On August 7, Beijing introduced seven measures covering purchase restrictions, housing transfers, and the housing provident fund system. The measures are designed to reduce the practical cost of entering the market rather than attempting another broad credit-driven property boom. One of the most consequential changes concerns non-Beijing households. The required period of social-security or individual-income-tax contributions for purchasing a home in the capital has been standardized at one year, eliminating the previous distinction between properties inside and outside the Fifth Ring Road. Beijing also substantially increased maximum provident-fund mortgage limits. For households in which both spouses contribute to the housing provident fund, the maximum first-home loan has doubled from RMB1.2 million to RMB2.4 million. The maximum second-home loan has risen from RMB1.0 million to RMB2.0 million. The city also adjusted the relationship between contribution history and borrowing capacity. For dual-contributor households, a contribution period of five years and one month can now qualify the borrower for the full RMB2.4 million ceiling. This matters because mortgage affordability is not an abstract variable. Imagine a young Beijing couple considering a RMB3 million resale apartment. Under the previous framework, the gap between the maximum subsidized provident-fund loan and the purchase price could feel prohibitively large. Raising the subsidized borrowing ceiling does not make the apartment cheap, but it can materially change the monthly-payment calculation. Housing decisions are often made at the kitchen table, not on a macroeconomic spreadsheet, and reducing that monthly burden can convert hesitation into a transaction. Why Beijing May See a Meaningful Near-Term Response The policy architecture resembles the seven-measure easing package introduced by Shanghai earlier this year: relax restrictions for non-local residents while reducing financing costs through more generous provident-fund lending. The timing also matters. Beijing’s package follows the Politburo’s call for stronger countercyclical policy support and arrives before the traditional September–October sales season. That sequencing gives policymakers an opportunity to amplify the impact of seasonal demand. There are five reasons Beijing may respond relatively well. First, aggregate demand has already stopped deteriorating at the pace seen last year. During the first seven months of 2026, combined new- and secondary-home transaction area in Beijing was essentially flat from a year earlier, rising approximately 0.002%. That compares with a 6.1% decline in total demand last year. Flat growth is hardly a boom, but in a prolonged property adjustment, the transition from contraction to stability is meaningful. Second, resale supply has contracted. Listings at major brokerage platforms have fallen to roughly 118,000 units, down 17% year over year and 0.1% from the previous month. Reduced inventory pressure creates a better foundation for price stabilization. Third, Beijing’s provident-fund system has unusually broad coverage. Approximately 42.7% of the city’s permanent population is eligible for provident-fund lending, the highest coverage rate among major Chinese cities. The latest increase in household borrowing capacity—up by as much as RMB1.2 million—is also larger than the RMB800,000 increase previously introduced in Shanghai. Fourth, Beijing’s resale market is dominated by practical, lower-priced purchases rather than speculative luxury demand. In July, homes priced below RMB3 million represented 49% of secondary transactions, while homes between RMB3 million and RMB5 million accounted for another 28%. Nearly four-fifths of transactions therefore occurred below RMB5 million, with the median transaction price around RMB3 million. A RMB2.4 million provident-fund mortgage can cover a substantial portion of the financing requirement for the median buyer. Fifth, transaction prices have started to rebound. Although asking prices remain under pressure, actual resale transaction prices have recovered approximately 1.9% from their recent low. This divergence suggests that Beijing’s immediate problem may increasingly be one of confidence and liquidity rather than a complete absence of

YCC CAPITAL Emerging Markets & China Strategy July 27, 2026 Executive Summary A traveler can coast downhill for a surprisingly long distance even after stopping the pedals. China’s economy today resembles that rider. Export momentum continues to provide forward motion, industrial production remains resilient, and high-end manufacturing still attracts attention. Yet beneath the surface, the domestic engines that ultimately determine sustainable growth—household consumption, private investment, and property activity—continue to lose strength. China reported first-half GDP growth of 4.7% year-over-year, remaining technically within the government’s official target range. However, the composition of growth has become increasingly unbalanced. Second-quarter GDP slowed sharply to 4.3%, the weakest quarterly expansion in more than three years and below market expectations. While exports continue to surprise on the upside, domestic demand is clearly deteriorating. Consumption remains subdued, fixed asset investment has weakened further, manufacturing investment is fading, infrastructure spending is losing momentum, and the real estate downturn continues despite tentative stabilization in housing prices. At YCC Capital, we believe the headline numbers increasingly mask a deeper structural reality. China is becoming more dependent on external demand precisely when geopolitical fragmentation and trade tensions are making export-led growth less reliable over the medium term. The policy challenge is no longer simply generating growth—it is rebuilding confidence across households and private enterprises. That objective remains far more difficult than delivering incremental fiscal or monetary easing. Our base case is that Beijing will continue introducing targeted policy support during the second half of the year. However, because official GDP growth remains close to target, authorities are unlikely to launch another large-scale stimulus package comparable to previous cycles. Instead, policymakers will prioritize accelerating implementation of existing measures while attempting to stabilize consumption and investment. In our assessment, these measures are likely to soften—but not reverse—the underlying structural slowdown. Sources: Bloomberg, YCC Capital. China’s Economy Remains Within Target, But Momentum Has Clearly Softened According to the National Bureau of Statistics, China’s economy expanded 4.7% year-over-year during the first half of 2026. Quarterly data, however, reveal a much more concerning trajectory. First-quarter GDP grew 5.0%, while second-quarter growth slowed to 4.3%, with quarter-on-quarter growth of only 0.9%. Although the annualized pace technically remains within the government’s stated target range of approximately 4.5%–5.0%, investors should avoid focusing solely on the headline. Growth quality matters far more than the aggregate figure. The slowdown was primarily driven by weakening domestic demand. Since April, exports have remained exceptionally strong, but consumer spending and investment both deteriorated materially. As a result, external demand has increasingly become the economy’s primary growth pillar—a configuration that is difficult to sustain indefinitely. From our perspective, this imbalance represents one of China’s most important macro vulnerabilities. Economies ultimately cannot rely forever on selling more abroad while households become increasingly cautious at home. Sources: Bloomberg, YCC Capital. Services and Technology Continue to Offset Traditional Weakness Not every component of the economy weakened during the second quarter. One encouraging development was the continued expansion of China’s service sector. The tertiary industry contributed 66.1% of total economic growth during the first half, with its contribution reaching nearly 70% during the second quarter, representing a meaningful improvement over the previous year. At the same time, newer sectors—including advanced manufacturing, digital technologies, artificial intelligence, and modern services—continued expanding rapidly. Official estimates indicate that these emerging industries contributed more than 40% of overall economic growth during the first half. Another notable development was the recovery in nominal GDP growth. Supported by modest improvements in domestic pricing, higher global commodity prices, continued AI-related investment, and Beijing’s campaign against excessive industrial price competition, nominal GDP growth accelerated to 5.9% in the second quarter. Most importantly, China’s GDP deflator turned positive for the first time in roughly three years, reaching 1.5%. While encouraging, we view this primarily as a cyclical improvement rather than evidence that China’s broader deflationary pressures have been fully resolved. Industrial Production Continues to Benefit from Robust Export Demand Industrial production remains one of the economy’s strongest-performing sectors. Industrial value-added increased 5.3% year-over-year in June, exceeding consensus expectations and accelerating from May. During the first half of the year, industrial production expanded 5.4%. The explanation remains straightforward. China’s exports, measured in U.S. dollars, surged 27.0% year-over-year in June, while export deliveries by industrial enterprises increased 14.8%. Strong overseas demand continues providing manufacturers with sufficient orders despite weakening domestic conditions. This divergence has become increasingly visible across industrial sectors. Manufacturing output rose 6.0%, significantly outperforming mining, which contracted 2.2%, partly reflecting stricter mine safety inspections following recent accidents. Utilities continued expanding steadily. High-tech manufacturing remains especially impressive, growing 14.1%, substantially outperforming broader industrial production. Transportation equipment manufacturing accelerated sharply, while computer, communications, electronics, and automobile production all maintained relatively strong growth. The message is clear: China’s factories remain competitive internationally. The more difficult question is whether overseas demand can continue carrying the broader economy if domestic demand continues weakening. Consumer Spending Shows Only Modest Signs of Stabilization June retail sales offered a modest positive surprise but remained far from robust. Retail sales increased 1.0% year-over-year, improving from May’s decline and exceeding market expectations. First-half retail sales nevertheless expanded only 1.3%, highlighting the persistent weakness in household spending. Both goods consumption and restaurant spending improved modestly during June. Excluding automobiles, retail sales increased 3.0%, suggesting that vehicle-related weakness continues weighing heavily on aggregate consumption. Several discretionary categories—including cosmetics, tobacco and alcohol, office supplies, and communications equipment—recorded stronger growth, partly reflecting favorable base effects. However, major household purchases remained soft. Sales of home appliances continued contracting, jewelry sales remained negative, and automobile sales fell 16.1%, showing virtually no improvement. Household confidence continues to face significant headwinds. When families become uncertain about employment prospects, income growth, or housing wealth, they naturally postpone large purchases. China’s consumers appear to be behaving precisely this way. This cautious mindset represents one of the biggest obstacles to achieving a durable domestic recovery. Investment Is Becoming an Increasingly Serious Concern If consumption is weak, investment looks even weaker. Fixed asset investment fell 5.7% during the first

YCC CAPITAL Emerging Markets & China Strategy Date: July 24, 2026 Executive Perspective Every economy eventually reaches a moment when policymakers must decide whether to spend today to preserve tomorrow’s growth, or conserve resources at the risk of a deeper slowdown. China increasingly appears to be approaching such a crossroads. The latest June fiscal data reinforce a message that has been quietly developing throughout 2026: despite pockets of improvement in tax collections, the government’s overall fiscal impulse continues to weaken rather than strengthen. Beneath encouraging headline tax revenues lies a much more concerning story—persistent weakness in land-related revenues, slowing government fund expenditures, and a broad contraction in China’s consolidated fiscal position. At first glance, stronger corporate income tax receipts may suggest improving economic conditions. Yet a closer examination indicates that much of the improvement reflects cyclical price stabilization, stronger tax enforcement, and better profitability among a relatively narrow group of enterprises rather than a broad-based recovery in domestic demand. Meanwhile, the continued collapse of land-sale revenues—a cornerstone of local government financing for more than two decades—illustrates that one of China’s most important growth engines remains under severe structural pressure. These findings are consistent with the underlying source report’s emphasis on the divergence between the general public budget and the government fund budget. From YCC Capital’s perspective, this matters well beyond China. The country’s fiscal policy has become one of the primary determinants of commodity demand, regional capital flows, Asian corporate earnings, and global manufacturing activity. If fiscal policy continues to underdeliver, markets expecting a synchronized rebound in Chinese growth may once again be disappointed. Much like attempting to accelerate a vehicle while easing off the accelerator, fiscal policy is still providing forward momentum—but at a diminishing rate. Investors should therefore focus less on headline tax revenue improvements and more on whether government spending begins translating into real economic activity during the second half of the year. Fiscal Data Tell Two Different Stories June’s fiscal report presents an unusually sharp divergence between China’s two principal fiscal accounts. The general public budget—which captures ordinary government revenues and expenditures—showed noticeable improvement. Revenue growth accelerated, tax collections strengthened, and public expenditures returned to positive year-over-year growth after previous weakness. In contrast, the government fund budget, heavily dependent upon land sales and infrastructure-related financing, deteriorated considerably. Both revenues and expenditures contracted more sharply than in previous months, resulting in an overall decline in China’s broad fiscal support. This divergence is perhaps the single most important takeaway from the latest data. Investors focusing solely on improving tax receipts risk overlooking the far larger story unfolding within China’s financing model. The broad fiscal stance, which combines both accounts, therefore continued to weaken despite encouraging developments within the ordinary budget. According to the source report, broad fiscal expenditures fell while the fiscal policy intensity index continued to decline. General Budget Revenue Continues to Improve During the first half of 2026, China’s general public budget revenue reached approximately RMB 12.1 trillion, representing 4.7% year-over-year growth. June alone recorded an even stronger 8.7% annual increase, extending several months of steady improvement. Tax revenues grew even faster, increasing 10.8% year over year during June, marking the fourth consecutive month of robust expansion. Several factors contributed to this acceleration. First, producer prices have stabilized after prolonged weakness, mechanically lifting tax collections. Second, corporate profitability improved modestly across parts of the industrial sector. Third, tax administration and collection efforts appear to have become more effective, increasing compliance and boosting realized revenue. Importantly, these developments should not necessarily be interpreted as evidence of a broad domestic demand recovery. Tax receipts can improve for reasons unrelated to expanding household consumption or stronger private investment. Indeed, the composition of revenue growth suggests a recovery that remains highly uneven. Corporate Taxes Strengthen While Consumption Remains Uneven Among major tax categories, corporate income tax delivered the strongest improvement. Corporate income tax surged nearly 30% year over year, becoming the largest contributor to total tax revenue growth. Personal income taxes also remained relatively robust, reflecting continued labor income resilience among higher-income households. Securities transaction stamp duties likewise maintained elevated growth, supported by healthy trading activity in China’s equity markets. However, several consumption-related taxes painted a less encouraging picture. Value-added tax growth slowed compared with previous months, while consumption tax revenues continued to contract. Real estate-related taxes remained deeply negative, including property taxes and farmland occupation taxes, underscoring ongoing weakness throughout China’s property sector. This divergence illustrates one of the defining characteristics of China’s current recovery: isolated pockets of resilience coexist alongside persistent structural weakness. Corporate profitability may be stabilizing, but household demand and property-related activity continue to lag considerably. Government Spending Recovers—but Not Where Markets Want It On the expenditure side, June marked an improvement after previous softness. General public budget expenditures increased 4% year over year, reversing earlier declines. Yet the composition of spending deserves closer attention. The strongest gains occurred within social and livelihood-related categories. Education spending improved. Healthcare expenditures remained solid. Social security and employment spending accelerated significantly. These categories collectively accounted for most of June’s expenditure rebound. Infrastructure spending, however, remained notably restrained. Transport investment improved modestly. Urban development spending stabilized. Agricultural and water-related expenditures, traditionally important drivers of rural investment, continued to contract and remained among the largest drags on total spending. Environmental protection expenditures also remained weak. For investors hoping for an aggressive infrastructure-led stimulus similar to earlier cycles, the latest data offer limited evidence that such a strategy has yet materialized. The source report specifically notes that infrastructure-related spending had not yet become the primary growth driver despite improvement in overall expenditures. China’s Property Downturn Continues to Reshape Public Finance Perhaps no figure better captures China’s ongoing structural adjustment than land-sale revenue. Government fund revenue declined over 30% during June, while land-sale income itself plunged more than 40% compared with a year earlier. During the first half of 2026, land-sale revenues totaled approximately RMB 978 billion, falling below RMB 1 trillion for the first time since comparable monthly records began in

YCC CAPITAL Emerging Markets & China Strategy 22 July 2026 YCC Capital Perspective Every economic cycle eventually arrives at a moment when policymakers have to answer a deceptively simple question: if growth slows and the private sector refuses to borrow, who steps in? For China, the answer has increasingly become the government. Over the past five years, government borrowing has transformed from a supporting policy instrument into the dominant engine sustaining economic activity. What once served as a temporary counter-cyclical buffer has gradually evolved into a structural pillar supporting demand, infrastructure investment, local government finances, and financial stability itself. Yet debt is much like borrowing time from the future. Initially it creates flexibility. Eventually it begins to reduce it. Imagine a household repeatedly refinancing its mortgage while income stagnates. Monthly cash flow remains manageable for years, but each refinancing leaves less room to absorb future shocks. China’s public finances increasingly resemble this dynamic. Borrowing continues to stabilize the present, but each additional round delivers progressively smaller gains while future obligations quietly accumulate. This report examines China’s evolving government debt architecture, the shifting balance between central and local government borrowing, and the implications for investors across fixed income, currencies and global asset allocation. Our conclusion is straightforward. China still possesses significant fiscal capacity compared with many developed economies. However, expanding debt is no longer generating the economic multiplier it once did. Fiscal policy is increasingly preventing deterioration rather than creating sustained acceleration, implying that government leverage can stabilize the economy but is unlikely to restore the high-growth model of previous decades. Executive Summary China’s government debt has entered a new phase of expansion. Outstanding government bonds now exceed RMB 100 trillion, accounting for nearly half of China’s domestic bond market. By year-end 2026, total government debt is projected to approach RMB 110 trillion, with central government bonds reaching roughly RMB 47.5 trillion and local government bonds approximately RMB 62 trillion. The rapid increase reflects persistent weakness in private-sector demand. Household deleveraging, subdued corporate borrowing and a prolonged property downturn have forced fiscal policy to shoulder a growing share of economic stabilization. Government borrowing now contributes more than 40% of China’s total credit expansion. Yet despite its increasing scale, its effectiveness has steadily diminished. Every additional unit of government borrowing now produces less than one-tenth of a unit of incremental GDP, compared with more than one unit before 2015. The implication is clear: China is experiencing diminishing fiscal returns. Government Debt Has Become the Backbone of China’s Credit System China’s bond market has undergone a remarkable structural transformation. Government securities—including both sovereign and local government bonds—now represent approximately 49.8% of the entire domestic bond market, totaling approximately RMB 102.1 trillion as of June 2026. This expansion has not occurred accidentally. Fiscal revenues have weakened as land sales collapsed and domestic demand softened. Meanwhile, policymakers have remained reluctant to pursue large-scale household income transfers comparable to Western fiscal responses during recent crises. Instead, Beijing has relied on debt-financed investment. This approach has allowed authorities to sustain infrastructure spending, support strategic industries, stabilize employment and contain financial risks without fundamentally changing the country’s state-led development model. However, there is an important distinction between expanding balance sheets and expanding productivity. Debt can finance bridges. It cannot guarantee traffic. Fiscal Sustainability Is Becoming Increasingly Challenging China’s government leverage ratio has now climbed above 70% of GDP, continuing an upward trajectory that has accelerated since the pandemic. The underlying drivers are straightforward. Government revenues have struggled to keep pace with spending commitments. Property-related revenues have deteriorated sharply. Land-sale income, once the cornerstone of local government finance, has fallen by more than half from its 2021 peak. At the same time, infrastructure commitments, industrial policy initiatives and debt servicing obligations have continued expanding. As a result, borrowing increasingly determines fiscal spending capacity. Instead of tax revenues financing expenditures with debt filling temporary gaps, the sequence has effectively reversed. Debt issuance increasingly determines how much fiscal spending can occur. This marks an important institutional shift. Government financing is no longer simply supporting fiscal policy. It has become fiscal policy. The Declining Efficiency of Fiscal Expansion Perhaps the most striking development is the steady deterioration in fiscal efficiency. During earlier periods of rapid urbanization and infrastructure expansion, government borrowing generated substantial economic returns. Roads connected manufacturing hubs. High-speed rail improved logistics. Utilities expanded productive capacity. Today’s environment is fundamentally different. China already possesses one of the world’s largest infrastructure networks. Demographic aging reduces housing demand. Private-sector investment remains cautious. Consumer confidence has yet to recover meaningfully. Consequently, incremental borrowing increasingly finances refinancing, debt restructuring and maintenance rather than creating entirely new productive assets. According to the report, the GDP generated per unit of new government debt has fallen below 0.1, compared with levels exceeding 1 before 2015. This is perhaps the single most important statistic in understanding China’s current macroeconomic trajectory. The country is not running out of financing capacity. It is running into diminishing economic returns. Central Government Bonds Remain Beijing’s Primary Counter-Cyclical Tool Among China’s fiscal instruments, sovereign bonds continue to serve as the central government’s principal stabilization mechanism. For 2026, net sovereign bond financing is expected to reach approximately RMB 6.7 trillion. Issuance accelerated early in the year before slowing during the second quarter, suggesting heavier supply during the second half as ultra-long special sovereign bonds and recapitalization bonds are brought to market. Special sovereign bonds occupy a unique position within China’s fiscal framework. Unlike ordinary government bonds, they finance specific strategic objectives outside the standard fiscal deficit. Historically they have funded bank recapitalizations, sovereign wealth fund creation, pandemic response measures and national strategic initiatives. Today’s issuance continues that pattern. Ultra-long bonds finance national infrastructure priorities, advanced manufacturing and strategic modernization, while recapitalization bonds strengthen the financial system. From a market perspective, sovereign bond yields continue to reflect three primary forces: First, monetary policy determines short-term funding costs. Second, economic fundamentals shape long-term expectations. Third, structural demand—including persistent demand from banks, insurers and institutional investors—continues compressing

YCC CAPITAL Emerging Markets & China Strategy July 20, 2026 Executive Perspective Infrastructure investment has long been one of China’s most reliable macroeconomic stabilizers. When private demand weakens or the property cycle turns lower, Beijing has historically reached for infrastructure spending as its preferred countercyclical tool. It is tangible, politically visible, and capable of supporting employment across multiple sectors. Yet the first half of 2026 tells a different story. Instead of cushioning the slowdown, infrastructure investment itself has become another weak link in China’s economy. Official statistics show infrastructure investment contracting by 2.4% year-on-year during January–June, marking one of the weakest performances since the pandemic period. For investors accustomed to Beijing deploying massive infrastructure stimulus whenever growth falters, the disappointment has been striking. The immediate explanation is straightforward: fiscal spending has been slower than expected. But that interpretation misses the larger structural shift. At YCC Capital, we believe today’s infrastructure weakness reflects three overlapping forces rather than a simple policy delay. First, China’s local governments are operating under increasingly binding fiscal constraints after years of debt accumulation. Second, policymakers are gradually reallocating public resources away from physical construction toward social expenditure and human capital investment. Third, the country’s investment opportunity set is becoming less attractive as decades of rapid urbanization leave fewer genuinely productive megaprojects to pursue. Anyone who has watched a city mature understands the analogy. Building the first subway line transforms an economy. Building the twentieth extension often produces much smaller returns. China increasingly resembles the latter case. The encouraging news is that cyclical conditions should improve in the second half of the year. Project approvals are progressing, fiscal disbursements are likely to accelerate, and comparison effects become considerably easier. Nevertheless, investors should resist interpreting a second-half rebound as evidence that China’s traditional infrastructure-driven growth model has returned. It has not. Instead, the country appears to be entering a phase where infrastructure remains an important stabilizer but no longer serves as the dominant engine of economic expansion. Infrastructure Weakness Is Broad—but Not Uniform Headline figures paint a discouraging picture, yet the underlying composition tells a far more nuanced story. Infrastructure investment has not collapsed across every category. Rather, the sector has experienced what could best be described as a K-shaped divergence, with traditional local-government-led projects weakening sharply while nationally strategic sectors continue expanding at healthy rates. This distinction matters because it reveals where Beijing still possesses both fiscal capacity and political willingness to invest. The largest drags on overall infrastructure activity have come from three sectors: Road transportation Water conservancy Public facilities management Together these categories account for more than half of China’s infrastructure investment and collectively reduced overall infrastructure growth by roughly 2.7 percentage points during the first five months of 2026. Road transportation investment declined 5.7% year-over-year, reflecting slowing construction of highways, urban rail systems and conventional road networks. Public facilities—including municipal utilities, sewage treatment systems, street lighting, parks and urban public amenities—also weakened materially. Water conservancy experienced the sharpest deterioration, falling from rapid double-digit expansion last year into outright contraction. These sectors share one common characteristic: they depend heavily on local government finances. By contrast, infrastructure projects receiving stronger central government backing continue to display considerable resilience. Investment in: Water transportation increased 23.3% Aviation infrastructure rose 21.7% Railway investment remained positive at 5.1% Telecommunications, broadcasting and satellite infrastructure expanded 16.8% The difference is revealing. Projects considered nationally strategic—high-speed rail corridors, logistics networks, digital infrastructure and communications capacity—continue receiving funding despite broader fiscal pressures. Local projects with lower strategic priority have borne the brunt of budget tightening. This divergence increasingly defines China’s infrastructure landscape. China’s Fiscal Priorities Are Quietly Changing One of the least appreciated developments in China’s public finances is not simply the amount of spending but where that spending is being directed. For decades, China’s development model overwhelmingly favored investment in physical assets—roads, bridges, industrial parks and municipal expansion. That balance has gradually begun shifting. Budget allocations increasingly prioritize healthcare, education, social security and housing support rather than traditional infrastructure construction. By 2025, these people-oriented expenditures accounted for approximately 41% of total fiscal spending, nearly six percentage points higher than in 2013. Meanwhile, expenditure categories directly associated with infrastructure—including transportation, agriculture and water resources, urban community development and environmental protection—have steadily declined as a share of overall government spending. Recent budget execution reinforces this transition. During January through May 2026: Social security expenditure rose 6.7% Healthcare spending increased 5.7% Meanwhile: Urban community spending fell 5.0% Agriculture and water spending declined 13.2% Transportation spending slipped 0.7% This shift reflects a deeper strategic calculation. China’s demographic profile is deteriorating rapidly. An aging population requires greater healthcare expenditure, pension support and social welfare commitments. At the same time, diminishing returns from additional physical infrastructure make social investment relatively more attractive. The result is an economy where fiscal policy increasingly focuses on improving household resilience rather than simply constructing additional concrete. For long-term investors, this represents an important structural evolution rather than a temporary adjustment. Fiscal Money Has Become the Decisive Variable Infrastructure investment has always relied upon multiple funding channels. These include government budget spending, financing by state-owned enterprises—particularly local government financing vehicles (LGFVs)—and private investment. Historically, LGFVs provided the dominant source of infrastructure financing. Today that picture is changing. Although direct fiscal funding represents only around one-fifth of total infrastructure investment, its importance has increased significantly since 2020 as local financing platforms face tighter borrowing constraints. Between 2020 and 2024, budget-funded infrastructure financing expanded at an average annual pace of 14.8%, almost double the average growth rate recorded during the preceding four years. This makes fiscal disbursement timing far more influential than before. Unfortunately, fiscal execution during the first half of 2026 was notably slower than planned. Infrastructure-related spending under the general public budget reached only 32.5% of the annual allocation by May, significantly below the expected schedule of 41.7%. New special bond issuance followed a similarly slow trajectory, with only 34% of the annual quota completed during the same period. The consequence was entirely

YCC CAPITAL Emerging Markets & China Strategy July 19, 2026 Executive Perspective Credit is often described as the lifeblood of an economy. When businesses are confident, households optimistic, and governments investing aggressively, financing flows naturally through the financial system. When confidence fades, however, even abundant liquidity struggles to find productive borrowers. China’s June financial data illustrates precisely this dilemma. Headline liquidity remains plentiful, yet the transmission mechanism from policy easing to real economic activity continues to weaken. Aggregate Social Financing (ASF) growth slowed again, corporate borrowing remained subdued, household leverage failed to recover meaningfully, and monetary aggregates softened after temporary strength earlier this year. The numbers do not point toward an imminent financial crisis. Rather, they reinforce a longer-running structural transition in which China is gradually moving away from the debt-intensive growth model that powered its economy for nearly two decades. The challenge is that no equally powerful replacement engine has fully emerged. For global investors, this distinction matters enormously. Slower credit expansion does not necessarily imply an abrupt collapse, but it does suggest that expectations for a broad-based Chinese economic reacceleration should remain restrained. While fiscal policy may cushion downside risks during the second half of the year, the underlying issues—property weakness, cautious private investment, and local government deleveraging—remain far from resolved. Just as an experienced sailor recognizes that calm seas can conceal strong undercurrents, investors should look beyond China’s headline liquidity figures to examine the quality and direction of credit creation itself. The June data suggest those undercurrents remain considerably weaker than headline policy rhetoric would imply. Aggregate Financing Continues to Lose Momentum China’s Aggregate Social Financing (ASF)—the broadest measure of credit supplied to the real economy—expanded by RMB 3.4 trillion in June, representing a decline of approximately RMB 861 billion compared with the same month last year. Outstanding ASF growth slowed further to 7.4% year-over-year, extending the gradual deceleration seen throughout recent quarters. The deterioration was not driven by a single category but reflected weakness across several major financing channels. Lower bank lending, slower government bond issuance and weaker trust lending collectively weighed on overall financing growth. Offsetting these declines only partially were stronger corporate bond issuance and increased use of bankers’ acceptances. The composition of financing is becoming increasingly important. Historically, China’s credit expansion depended overwhelmingly upon commercial bank lending. Today, direct financing through bond issuance is gradually assuming a larger role. Policymakers have repeatedly emphasized improving financing efficiency rather than simply expanding credit volumes, suggesting that slower loan growth is becoming an accepted feature of China’s evolving financial architecture. Nevertheless, structural improvement should not be confused with cyclical strength. The underlying demand for credit remains soft, indicating that both businesses and households continue to approach new borrowing with considerable caution. Corporate Credit Demand Remains Constrained Perhaps the clearest message from June’s data is that corporate confidence has yet to recover convincingly. Short-term corporate loans increased by RMB 820 billion, representing a year-over-year decline of roughly RMB 340 billion. At first glance, this may appear alarming. However, part of the decline reflects changing financing preferences rather than outright deterioration. Banks have continued aggressively purchasing commercial bills amid persistently low bill discount rates, encouraging companies to substitute traditional short-term loans with bill financing. Still, substitution explains only part of the picture. Medium- and long-term corporate loans increased just RMB 560 billion, falling approximately RMB 450 billion from the previous year. These longer-duration loans typically finance factory construction, infrastructure, equipment investment and capacity expansion. Their continued weakness therefore signals restrained corporate investment rather than temporary financing adjustments. Several structural forces continue suppressing borrowing appetite. First, local governments have adopted more conservative project approval standards under stricter accountability requirements. Infrastructure investment has consequently proceeded at a measured pace rather than serving as the aggressive growth engine seen during previous economic slowdowns. Second, China’s ongoing local government debt restructuring continues to absorb financial resources. Existing debt replacement programs have reduced immediate financial stress but simultaneously limit fresh credit creation. Third, corporate bond financing has become increasingly attractive amid relatively favorable funding costs. Many higher-quality borrowers now prefer issuing bonds directly instead of relying exclusively on bank loans. Taken together, these developments suggest that credit weakness increasingly reflects muted investment intentions rather than supply constraints. Banks remain willing to lend. Borrowers simply remain hesitant to borrow. Households Continue to Prioritize Balance Sheet Repair If corporate credit reflects business confidence, household borrowing provides perhaps an even clearer window into consumer sentiment. Here too, June’s data offered little encouragement. Household short-term loans increased by only RMB 106 billion, declining approximately RMB 156 billion year-over-year. Consumer credit demand has weakened despite multiple rounds of government stimulus. Trade-in subsidy programs for automobiles, home appliances and consumer electronics generated an initial burst of spending after their introduction. Much of that pent-up demand, however, now appears to have been exhausted. Employment conditions continue improving only gradually, while income expectations remain subdued. Under such circumstances, households naturally become more cautious about discretionary borrowing. This behavior mirrors what many families experience after purchasing a home or navigating a period of financial uncertainty. Rather than immediately taking on additional debt, households typically rebuild savings before expanding consumption once again. China appears to be experiencing this balance-sheet adjustment on a national scale. Property Market Stabilization Remains Fragile Longer-term household borrowing—which is dominated by residential mortgage lending—continued weakening as well. New medium- and long-term household loans reached RMB 158 billion, approximately RMB 177 billion lower than one year earlier. The weakness remains closely linked to China’s still-fragile housing market. Transaction volumes across thirty major Chinese cities declined 6.7% year-over-year during June. Breaking the figures down further reveals declines across virtually every tier of city: Tier-one cities: -2.2% Tier-two cities: -8.7% Tier-three cities: -8.2% While policymakers have introduced numerous measures to stabilize real estate markets, much of the initial recovery appears to have represented the release of previously delayed demand rather than the beginning of a sustained expansion. Earlier policy easing successfully encouraged first-time buyers and purchasers seeking relatively affordable homes to

YCC CAPITAL Emerging Markets & China Strategy July 17, 2026 Executive Summary China’s second-quarter economic data paints a picture that is simultaneously reassuring in the short term and increasingly concerning beneath the surface. Headline GDP growth slowed to 4.3% year-over-year, missing market expectations of 4.5% and decelerating sharply from 5.0% in the first quarter. While June activity indicators—including industrial production and retail sales—surprised positively, these improvements were largely cyclical rather than structural. The broader message is difficult to ignore. China’s economy is increasingly dependent on external demand and high-tech manufacturing while traditional domestic growth engines—property, private investment, and household confidence—remain deeply impaired. The divergence between resilient production and weak domestic demand continues to widen, creating an increasingly unbalanced recovery. For investors, this resembles a company that continues reporting respectable revenue growth while its underlying customer base steadily weakens. Strong exports and industrial output keep headline numbers respectable, but the foundations supporting long-term growth continue to erode. From YCC Capital’s perspective, the latest data reinforce our view that China’s economy is entering a prolonged period of structurally slower expansion. Additional fiscal easing may cushion the downturn, but policymakers appear increasingly constrained by rising debt burdens, demographic headwinds, and diminishing returns from traditional stimulus. YCC Perspective: The Recovery Remains Uneven Economic recoveries rarely move in straight lines. Instead, they resemble climbing a mountain in thick fog—occasional clearings create optimism before another steep ascent emerges. China’s latest macroeconomic data fit this pattern precisely. June’s stronger industrial production and modest rebound in consumption have understandably improved market sentiment. Yet focusing solely on one month’s figures risks overlooking the broader trajectory. The second-quarter GDP slowdown demonstrates that China’s underlying growth momentum continues to weaken despite numerous rounds of targeted policy support. Rather than signaling a new acceleration cycle, June’s improvements likely reflect temporary policy support, low-base effects, and resilient export demand. None fundamentally alter the structural challenges facing the Chinese economy. Our assessment remains cautious. While cyclical rebounds are likely over coming quarters, the probability of returning to the high-growth model that characterized previous decades appears increasingly remote. Growth Slows More Than Expected China’s economy expanded 4.3% year-over-year in the second quarter, below both consensus expectations and the previous quarter’s 5.0% pace. On a sequential basis, GDP increased 0.9% quarter-over-quarter, matching expectations but slowing from 1.3% previously. Although headline growth remains respectable by international standards, composition matters far more than the aggregate figure. The slowdown reflects persistent weakness across several domestic sectors: Property investment remains deeply negative. Fixed asset investment continues contracting. Private sector confidence remains subdued. Household consumption has yet to recover meaningfully. Government fiscal support has moderated following front-loaded spending earlier in the year. Meanwhile, stronger exports and resilient manufacturing production prevented an even sharper slowdown. This growing dependence on external demand leaves China increasingly vulnerable to shifts in global trade conditions. Unlike previous recoveries driven by synchronized improvements across investment, consumption, and manufacturing, today’s expansion resembles a stool balanced unevenly on a single leg. Industrial Production Continues to Outperform Domestic Demand One of the brightest spots within the June data was industrial production. Industrial output increased 5.3% year-over-year, comfortably exceeding expectations of 4.7%. The improvement reflects several supportive factors: Strong overseas demand. Inventory rebuilding among global manufacturers. Recovery in export-oriented industries. Improved factory utilization rates. High-tech manufacturing remains especially impressive. Industries including semiconductors, computing equipment, aerospace, transportation equipment, and advanced electronics continue delivering double-digit production growth. This divergence highlights one of China’s defining economic characteristics today. Rather than broad-based industrial expansion, growth has become increasingly concentrated in strategic sectors heavily supported by industrial policy. Traditional industries continue experiencing significantly weaker investment and profitability. The resulting “K-shaped” recovery—where advanced manufacturing thrives while conventional sectors stagnate—has become increasingly pronounced. For investors, this concentration creates opportunities in selected industries but raises broader macroeconomic concerns regarding employment, income growth, and domestic demand. Services Continue Recovering—but Momentum Is Moderating China’s service sector remained relatively resilient. The services production index increased 4.7% year-over-year during June. Information technology services, software, commercial services, and leasing activities continue outperforming broader economic activity. Digitalization, artificial intelligence investment, and cloud infrastructure remain powerful structural tailwinds. However, financial services growth moderated as equity market activity softened during June. Meanwhile, many consumer-facing service industries continue recovering only gradually. While service consumption remains considerably healthier than goods consumption, overall momentum has begun stabilizing rather than accelerating. This reflects an economy where households remain willing to spend selectively on experiences while remaining cautious regarding discretionary purchases. Consumption Is Improving—but Consumers Remain Cautious Retail sales surprised positively during June. Headline retail sales increased 1.0% year-over-year, outperforming expectations following several weak months. At first glance, this appears encouraging. However, much of the improvement stemmed from: Calendar effects. Low comparison bases. Provincial consumption voucher programs. Additional “trade-in” subsidies. These temporary supports should not be mistaken for sustained demand recovery. Several durable goods categories—including automobiles, household appliances, furniture, and construction materials—continue recording weak underlying demand. The fading impact of previous trade-in programs is becoming increasingly visible. Service consumption remains healthier than goods spending, supported by tourism, entertainment, restaurants, and leisure activities. Yet households continue displaying elevated precautionary savings behavior. The average Chinese consumer today resembles someone who recently experienced a financial setback. Even after receiving a pay raise, spending habits remain conservative because confidence—not income alone—drives purchasing decisions. Until household balance sheets improve more materially, consumption is unlikely to become China’s primary growth engine. Property Remains China’s Largest Structural Headwind No sector illustrates China’s challenges more clearly than real estate. Despite numerous policy adjustments, the housing market remains firmly in correction. June data showed: Property investment declining 26.0% year-over-year. New home sales remaining weak. Property developer financing continuing to deteriorate. Construction starts falling sharply. Housing completions weakening further. Although transaction volumes have stabilized modestly in certain major cities, this represents stabilization at depressed levels rather than genuine recovery. Developers continue facing financing constraints. Local governments remain highly dependent on land sales that have yet to recover. Households remain reluctant to purchase additional property amid uncertain price expectations. Unlike previous cycles,

YCC CAPITAL Emerging Markets & China Strategy Date: July 12, 2026 Executive Summary Walking through a port such as Shanghai, Ningbo or Shenzhen offers a useful reminder of how globalization has evolved. Twenty years ago, endless rows of containers were filled largely with toys, garments and inexpensive household products destined for American and European consumers. Today, many of those containers carry electric vehicles, industrial machinery, lithium batteries, semiconductor components, precision instruments and increasingly sophisticated intermediate goods that are embedded deep inside global manufacturing supply chains. That transformation tells a much bigger story than simple export growth. It reflects China’s steady migration from being primarily the world’s assembly line toward becoming one of the world’s largest suppliers of industrial capital goods and manufacturing inputs. Despite an increasingly hostile geopolitical environment—including tariffs, supply-chain diversification, technology restrictions and rising protectionism—China’s share of global merchandise exports has remained remarkably resilient. According to the latest WTO estimates, China’s global export share climbed from just 4.3% in 2001 to 14.8% in 2025, approaching historical highs despite years of escalating trade tensions. At first glance, this appears paradoxical. Conventional wisdom suggested that tariffs and “decoupling” would produce a sustained decline in China’s export dominance. Instead, China’s exporters adapted. They shifted toward higher-value manufacturing, expanded aggressively into emerging markets, strengthened regional supply chains, and increasingly supplied intermediate goods rather than only finished consumer products. Yet success has also generated its own vulnerabilities. As China’s manufacturing footprint expands, political resistance abroad is becoming increasingly intense. Industrial policies across the United States, Europe, India and parts of Southeast Asia increasingly seek to reduce dependence on Chinese manufacturing while simultaneously rebuilding domestic production capacity. Rather than disappearing, globalization is becoming fragmented into overlapping regional production networks. From YCC Capital’s perspective, this distinction matters enormously. The key question is no longer whether China can continue exporting large volumes of goods. Rather, investors should ask whether China’s expanding export sector can continue offsetting mounting domestic structural weaknesses—including property-sector contraction, demographic decline, soft household consumption, and declining private-sector confidence. Exports remain one of China’s strongest cyclical pillars. They are unlikely, however, to fully compensate for broader structural headwinds over the coming decade. YCC Perspective Financial markets often focus on quarterly export numbers, but long-term competitive dynamics resemble a marathon far more than a sprint. A runner who accelerates early eventually faces stronger competition from rivals who adapt their own strategies. China’s export sector has become that early leader. Decades of investment in infrastructure, logistics, manufacturing clusters and engineering talent created extraordinary economies of scale. Those advantages remain significant today. However, every competitive advantage eventually provokes a response. Governments increasingly view supply chains through the lens of national security rather than pure economic efficiency. Trade policy has consequently become an extension of industrial policy, making future export growth increasingly dependent on geopolitics rather than simply production costs. For investors, this means distinguishing between China’s manufacturing competitiveness, which remains formidable, and China’s macroeconomic outlook, which faces considerably greater challenges. China’s Rising Share of Global Exports (2001–2025) China’s accession to the World Trade Organization in 2001 fundamentally altered the structure of global commerce. Membership provided Chinese manufacturers with greater access to international markets while simultaneously encouraging unprecedented inflows of foreign direct investment. International companies relocated production to China, attracted by abundant labor, improving infrastructure, expanding supplier ecosystems and relatively low production costs. The results were dramatic. China’s share of global merchandise exports rose steadily from 4.3% in 2001 to 13.7% by 2015, representing one of the fastest expansions in modern trade history. During this period, China increasingly became the central manufacturing hub for countless multinational supply chains. Several episodes during this expansion deserve particular attention. First, China’s export share continued rising even during periods when global trade itself weakened. During both the Global Financial Crisis and subsequent cyclical downturns, China’s relative competitiveness improved despite slower worldwide demand. In other words, China was not simply benefiting from a larger global market—it was steadily capturing market share from competing producers. Second, the first meaningful slowdown in China’s export share occurred before the formal escalation of U.S.–China trade tensions. Between 2015 and 2017, China’s global export share slipped modestly from 13.7% to 12.8%, reflecting the gradual relocation of lower-value manufacturing industries toward lower-cost economies such as Vietnam, Bangladesh and Cambodia. Rising wages, land prices and environmental compliance costs made certain labor-intensive industries less competitive. This distinction is important because it demonstrates that structural upgrading—not tariffs alone—was already reshaping China’s manufacturing base. Trade friction accelerated an existing trend rather than creating it. Third, although the U.S. tariff campaign beginning in 2018 temporarily reduced China’s export share, the impact proved less durable than many observers anticipated. China’s export share dipped modestly during 2018 before recovering during 2019 as manufacturers adapted through supply-chain adjustments, transshipment routes, overseas assembly operations and broader geographic diversification. The COVID pandemic then created an extraordinary temporary boost. China reopened manufacturing earlier than most competing economies, allowing its factories to supply products while much of the rest of the world remained constrained by lockdowns. This temporary “supply substitution” effect pushed China’s export share to approximately 14.9% during 2021, the highest level on record at the time. Some normalization followed in 2022 as competing production capacity returned. However, beginning in 2024 China’s export share resumed its upward trajectory despite intensifying geopolitical pressure. This renewed strength reflected a structural evolution rather than another temporary pandemic-related distortion. Instead of relying primarily on inexpensive consumer products, Chinese exporters increasingly captured demand in higher-value industrial sectors where global investment remained strong. From YCC Capital’s perspective, this represents the single most important development in understanding China’s modern export performance. The composition of exports has become significantly more important than the absolute volume of exports. Traditional labor-intensive industries have gradually become less central to China’s external sector. In their place, advanced manufacturing, industrial equipment, renewable-energy technologies and sophisticated intermediate goods increasingly define China’s competitive advantage. This transition helps explain why trade restrictions have slowed—but not reversed—China’s export expansion. Unlike garments or footwear, complex industrial products

YCC CAPITAL Emerging Markets & China Strategy July 11, 2026 Executive Perspective There are moments in economic history when the indicators investors have relied upon for decades suddenly lose their predictive power. It is much like driving with an old map after an entirely new highway has been built—the landmarks remain familiar, but they no longer determine the fastest route. China may now be entering precisely such a phase. For more than twenty years, investors viewed Chinese credit growth as the country’s master economic indicator. When loan creation accelerated, growth typically followed. When credit tightened, activity slowed. The relationship was sufficiently reliable that global investors came to treat China’s “credit impulse” as one of the world’s most important macro indicators. That framework is becoming increasingly obsolete. Our analysis suggests that China’s economy is undergoing a structural transition in which traditional bank lending no longer serves as the dominant engine of investment or growth. The country’s old debt-intensive sectors—particularly real estate and infrastructure—are steadily giving way to technology manufacturing, digital infrastructure, artificial intelligence, and advanced industrial production. These industries require significantly less leverage, rely more heavily on equity financing and retained earnings, and therefore weaken the historical relationship between credit expansion and economic activity. The result could be an unfamiliar but increasingly plausible scenario: an economy capable of generating moderate growth without a corresponding acceleration in bank lending—a “creditless recovery.” This does not imply that China’s structural challenges have disappeared. Quite the opposite. The country’s property correction, demographic headwinds, local government indebtedness, and declining private-sector confidence continue to constrain long-term potential. Nevertheless, investors should recognize that the transmission mechanism of China’s economy is changing. Credit data alone may no longer provide sufficient insight into future growth. The End of China’s Credit-Led Growth Model Since 2021, China’s banking system has experienced a pronounced deceleration in lending growth. Outstanding medium- and long-term loans have slowed from annual growth exceeding 17% at the end of 2020 to below 5% by early 2026, the weakest pace in many years. New medium- and long-term lending has repeatedly surprised to the downside, while commercial bill yields have fallen toward historically low levels—clear evidence that underlying credit demand remains subdued. At first glance, these numbers appear deeply recessionary. Historically, such a collapse in loan growth would have signaled a sharp deterioration in economic momentum. Yet economic activity has proven considerably more resilient than traditional models would imply. The explanation lies not simply in cyclical weakness but in structural transformation. China’s economy is gradually replacing one financing model with another. Property No Longer Dominates Capital Allocation For much of the previous decade, property development and infrastructure investment absorbed the overwhelming majority of new credit creation. At their peak around 2017, these sectors accounted for roughly two-thirds of all new lending issued by Chinese banks, receiving well over RMB 8 trillion annually. The financial system effectively revolved around real estate, with developers, local governments, construction firms, and related industries serving as the principal borrowers. That era has ended. Following tighter regulatory oversight, the collapse of highly leveraged developers, and continued weakness in housing demand, real estate’s capacity to absorb credit has deteriorated dramatically. By 2025, our estimates suggest that infrastructure and property together accounted for only around 12% of newly created bank credit. Property-related lending alone has declined by approximately RMB 850 billion compared with previous years, becoming one of the largest drags on aggregate credit growth. Rather than representing a temporary downturn, this reflects a permanent adjustment in China’s capital allocation. The economy is no longer organized around building additional apartments. Direct Financing Is Replacing Bank Loans Another critical development is the rapid expansion of direct financing. Historically, bank lending dominated China’s social financing system. Credit represented more than three-quarters of total financing as recently as 2021. That share has steadily declined. Meanwhile, government bond issuance, corporate bond markets, and domestic equity financing have become increasingly important sources of capital. By early 2026, the proportion of total social financing represented by traditional bank credit had fallen to approximately 56%, while direct financing had nearly doubled its contribution to almost 40%. This evolution reflects the financing preferences of China’s emerging industries. Unlike property developers, technology companies rarely depend primarily on large bank loans. Software firms, semiconductor designers, cloud infrastructure providers, internet platforms, and AI developers typically finance expansion through retained earnings, venture capital, equity issuance, strategic investors, and public markets. Their balance sheets are fundamentally different. Consequently, weaker loan growth no longer necessarily implies weaker investment. AI Is Becoming Larger Than Real Estate Perhaps the most significant structural shift is occurring within China’s industrial composition itself. Using input-output analysis, we estimate that the combined AI ecosystem—including computing hardware, communications equipment, semiconductor components, software development, internet services, information technology services, power equipment supporting data centers, and related digital infrastructure—has expanded rapidly over recent years. Its direct contribution to GDP has risen from approximately 5.3% in 2020 to around 6.6% by 2023. Once upstream and downstream supply-chain effects are incorporated, AI-related industries may already account for nearly 15% of Chinese GDP by 2025. That compares with an estimated 12.7% for the broader real estate ecosystem. In other words, China’s new economy may now exceed its old economy in economic importance. This crossover represents far more than a statistical milestone. For decades, virtually every major cyclical upswing in China began with housing construction. Today, the country’s largest growth engine increasingly consists of data centers, semiconductor fabrication, industrial automation, robotics, software services, cloud computing, and artificial intelligence infrastructure. The nature of investment has fundamentally changed. New Industries Need Less Debt An equally important distinction lies in capital structure. Property developers traditionally operated with asset-liability ratios exceeding 70%. Many AI-related industries operate comfortably below 50%. Manufacturing firms have certainly increased borrowing since 2020, supported by industrial policy initiatives, but overall financing needs remain substantially smaller than those associated with nationwide property expansion. Likewise, information technology and software sectors continue to rely heavily on equity capital and internal cash generation. This difference carries profound macroeconomic

YCC CAPITAL Emerging Markets & China Strategy July 10, 2026 Executive Perspective Inflation is often described as the economy’s pulse. Sometimes it races, sometimes it slows, but what matters most is understanding why it changes. China’s June inflation report presents precisely this challenge. On the surface, the data appear mixed: consumer inflation eased while producer prices accelerated further. Yet beneath the headline numbers lies a more nuanced story—one shaped less by a resurgence in domestic demand than by fluctuations in global commodity markets and technological investment. For investors, this distinction is critical. A healthy inflation cycle is typically driven by improving household income, stronger consumption, and broad-based pricing power. China’s latest figures instead suggest that external commodity shocks and selective industrial upgrading continue to dominate price formation, while consumer demand remains subdued. At YCC Capital, we believe the June inflation report reinforces our broader macro view: China’s industrial sector is benefiting from pockets of technological upgrading and higher commodity costs, but the broader economy continues to struggle with insufficient domestic demand, weak property-related wealth effects, and cautious consumer behavior. Producer inflation may remain elevated for longer, yet consumer inflation is unlikely to develop into a sustained inflationary cycle. Key Takeaways June CPI declined 0.3% month-over-month while rising 1.0% year-over-year, slightly below market expectations. Core CPI also increased 1.0%, suggesting that underlying demand remains relatively stable but far from robust. Producer prices continued their upward trend. PPI increased 4.1% year-over-year, surpassing the 4% threshold for the first time in the current cycle, reflecting stronger industrial pricing driven by commodities, artificial intelligence investment, and manufacturing upgrades. The divergence between CPI and PPI illustrates a familiar pattern in China’s economy: industrial producers are benefiting from external pricing dynamics and policy-supported investment, while households remain considerably more cautious. Source: Bloomberg, YCC Capital Consumer Inflation: Imported Factors Dominate Headline CPI slowed modestly during June, but the underlying drivers reveal that domestic demand was not the principal cause. Instead, imported price movements accounted for much of the fluctuation. International gold prices corrected during the month, causing domestic jewelry prices to decline sharply. At the same time, lower international crude oil prices reduced gasoline prices across China. Together, these two categories alone reduced monthly CPI by approximately 0.22 percentage points, accounting for the majority of June’s decline. By contrast, services inflation remained remarkably steady. Service prices rose 0.8% year-over-year, essentially unchanged from May, suggesting that domestic consumption has stabilized but has not meaningfully accelerated. This is consistent with broader evidence seen across China’s retail sales, consumer confidence, and household savings behavior. Chinese households continue to prioritize balance sheet repair over discretionary spending, reflecting ongoing uncertainty surrounding employment, income growth, and the property market. Walking through many Chinese shopping districts today illustrates this reality. Restaurants remain open, shopping malls remain busy during weekends, yet spending per customer remains restrained. Consumers browse carefully, compare prices, and increasingly seek promotions rather than premium products. The economy is moving—but not with the confidence typically associated with a strong inflationary cycle. Food Inflation Remains Highly Uneven Food prices continued to provide a modest drag on headline inflation. Overall food prices declined 1.6% year-over-year, although the pace of decline narrowed slightly compared with May. Within the category, however, significant divergence emerged. Seasonal supply remained abundant for fresh vegetables and fruits, leading to further price declines as harvests entered the market. Pork prices also continued falling, although the rate of decline moderated compared with previous months. Egg prices moved in the opposite direction. Reduced laying capacity combined with unusually high summer temperatures constrained supply, pushing egg prices sharply higher during June. Such divergence highlights an increasingly important feature of China’s inflation dynamics: rather than broad demand-driven inflation, individual supply-side factors continue to dominate specific categories. Looking ahead, weather may become a more important variable than monetary policy. The Politburo has warned that El Niño conditions may increase the frequency of floods and droughts during the peak summer season. Extreme weather could temporarily disrupt fruit and vegetable production, creating short-term food inflation even as underlying consumer demand remains weak. Energy Markets Continue to Drive Inflation Volatility Geopolitical developments remain an increasingly important source of inflation uncertainty. Although oil prices softened during much of June, developments in the Middle East have once again increased supply risks. Recent military escalation involving Iran has renewed concerns regarding tanker traffic through the Strait of Hormuz, one of the world’s most strategically important energy corridors. Any prolonged disruption could rapidly reverse recent declines in crude oil prices. For China, which remains heavily dependent on imported energy, such developments directly affect transportation costs, industrial production, and consumer inflation. Unlike demand-driven inflation, imported inflation leaves policymakers with limited tools. Interest rate adjustments cannot increase oil production or reopen disrupted shipping routes. This explains why inflation forecasting has become increasingly dependent on geopolitical analysis alongside traditional macroeconomic indicators. Producer Prices Continue to Strengthen While consumer inflation softened, producer prices continued strengthening. June PPI increased 4.1% year-over-year, rising from 3.9% in May. Production materials increased 5.5%, while consumer goods prices remained slightly negative at -0.9%, reinforcing the divide between industrial activity and household demand. After eight consecutive months of positive monthly increases, producer prices declined modestly on a month-over-month basis during June as lower oil prices weighed on energy-related industries. However, the broader annual trend remained firmly positive. Several sectors experienced particularly strong pricing gains. Coal mining, electrical equipment manufacturing, electronics production, and steel processing all recorded stronger year-over-year price growth than in May. Meanwhile, energy-intensive industries linked to oil refining and chemicals experienced some moderation as crude prices retreated during the month. Overall, producer inflation increasingly reflects structural industrial transformation rather than broad cyclical recovery. Artificial Intelligence Is Beginning to Influence Factory Prices One of the more notable developments within China’s producer price data is the growing influence of artificial intelligence and advanced manufacturing. Demand for industrial robots, intelligent wearable devices, industrial control systems, specialized electronic materials, virtual reality equipment, and advanced carbon-based materials continued pushing factory prices higher. This represents an

YCC CAPITAL Emerging Markets & China Strategy June 30, 2026 Executive Perspective Markets often resemble an experienced sailor navigating changing tides. Calm waters can create the illusion of stability, while the strongest undercurrents remain invisible beneath the surface. China’s economy today fits that description remarkably well. Headline growth continues to hover around official targets, yet underneath lies one of the largest reallocations of capital, labor, and political priorities in decades. At YCC Capital, we believe investors should resist viewing China through either excessively pessimistic or overly optimistic lenses. Instead, the current environment should be understood as a prolonged transition from a property-led economy toward one increasingly dependent on advanced manufacturing, strategic technology, exports, and state-directed industrial policy. This transition is producing winners and losers simultaneously, creating a pronounced K-shaped economy that is likely to remain the defining feature of China’s macro landscape over the coming several years. The second half of 2026 is therefore unlikely to deliver either a dramatic acceleration or a hard landing. Rather, policymakers appear increasingly willing to tolerate moderate growth in exchange for structural reforms, industrial upgrading, and financial stability. While targeted policy support should prevent a severe downturn, the economy continues to face significant headwinds from weak domestic demand, lingering property weakness, unfavorable demographics, and an increasingly uncertain global environment. Against this backdrop, we expect China’s economy to remain resilient in externally oriented manufacturing sectors while domestic consumption and property continue to recover only gradually. Export competitiveness, technological upgrading, and selective fiscal support should offset part—but not all—of the structural drag from deleveraging and slowing household confidence. China’s Economy: Stable Growth Masks Structural Divergence China entered 2026 with stronger-than-expected momentum. The first quarter benefited from robust exports, resilient industrial production, and continued investment in high-technology manufacturing. However, momentum moderated noticeably beginning in April as fiscal spending slowed, domestic demand weakened more than anticipated, and geopolitical disruptions in the Middle East temporarily affected global production chains. Rather than signaling a new recession, the slowdown reflects the increasingly uneven nature of China’s growth model. Export-oriented industries continue to outperform while domestically focused sectors remain under pressure. We expect GDP growth to follow a pattern of moderation before stabilizing later in the year. Our base case projects: Q2 GDP growth: 4.6% Q3 GDP growth: 4.7% Q4 GDP growth: 4.7% Full-year GDP is expected to expand by approximately 4.7%, comfortably within the government’s stated target range of 4–5%. The second half should benefit from easier year-over-year comparisons, gradual fiscal acceleration, and implementation of several structural policy initiatives. Nevertheless, growth is unlikely to return to the rapid pace experienced during previous stimulus cycles, reflecting policymakers’ preference for higher-quality expansion over headline speed. Manufacturing Has Become China’s New Growth Engine One of the defining characteristics of China’s post-pandemic economy has been the widening gap between production and consumption. Industrial production continues to significantly outperform retail spending, highlighting China’s increasing dependence on external demand and technological upgrading. Between January and May, industrial value-added grew 5.4%, substantially exceeding retail sales growth of only 1.4%. This divergence reflects two powerful global forces. First, the ongoing AI revolution has triggered an unprecedented wave of investment in semiconductors, data infrastructure, industrial automation, and advanced electronics. Chinese manufacturers remain deeply integrated into these global supply chains despite geopolitical tensions. Second, global re-industrialization has encouraged multinational firms to diversify production networks. Although some manufacturing has migrated elsewhere in Asia, China’s sophisticated supplier ecosystem continues to provide significant competitive advantages in many high-value manufacturing sectors. High-technology industries have therefore increasingly diverged from traditional manufacturing, reinforcing the country’s transition toward “new productive forces.” Property Is No Longer Driving Growth Perhaps the most profound structural shift underway is the diminished role of real estate. Property investment remains the weakest component of China’s economy. During the first five months of 2026, real estate investment declined 16.2% year-over-year, marking an extraordinary 46 consecutive months of contraction. Several years ago, such a decline would almost certainly have pushed China into recession. Today, the macroeconomic impact is considerably smaller because technology-intensive industries now account for a larger share of economic activity than construction. Nevertheless, real estate remains an important drag on household wealth, consumer confidence, and commodity demand. Encouragingly, leading indicators suggest stabilization rather than continued collapse. Tier-one cities have experienced noticeable improvements in housing prices and transaction volumes as inventories gradually normalize. However, these improvements remain geographically concentrated and insufficient to drive a nationwide recovery. China’s property market appears to be establishing a cyclical floor rather than beginning a new expansion. Excess inventory remains elevated, and meaningful recovery will likely require continued policy support alongside sustained inventory reduction. For global investors, this distinction is critical. The era in which Chinese real estate served as the principal engine of commodity demand has likely ended. Infrastructure Spending Faces New Constraints Infrastructure investment has traditionally served as Beijing’s preferred counter-cyclical policy tool. This time, however, local government debt has fundamentally altered that equation. Broad infrastructure investment slowed steadily during the first four months of 2026, reflecting an accelerated campaign to reduce local government financial risks. Although government bond issuance has proceeded relatively quickly this year, fiscal spending has become increasingly selective rather than expansionary. Rather than maximizing headline investment, policymakers now appear focused on balancing economic stabilization with debt sustainability. This represents an important philosophical shift in Chinese policymaking. Instead of repeating the massive infrastructure stimulus programs that characterized previous downturns, Beijing increasingly favors targeted investment supporting long-term productivity improvements. Manufacturing Investment Enters a More Mature Phase Manufacturing investment has successfully offset much of the weakness originating from property over recent years. However, after several years of exceptionally rapid expansion, signs of overcapacity have become increasingly visible across multiple industries. Low producer prices, compressed corporate margins, and declining capacity utilization prompted authorities to intensify their campaign against excessive industrial competition—commonly referred to as the “anti-involution” initiative. The objective is straightforward: improve industrial profitability rather than maximize production volume. This policy shift will likely moderate manufacturing investment growth in the near term while improving the sector’s long-term