Original link: https://macin.org/2023/04/09/jing-ji-shuai-tui-liao/
In a word, the current economic situation in China is that deflation has begun, and the economy has fallen into the recession quadrant.
In the previous 15 months, we have carried out high-intensity currency credit injection, and M2 has increased by more than 40 trillion. The data for March will come out soon, and I estimate it should exceed 40 trillion. But we still haven’t stopped the economy from sliding into deflation.
From a concrete point of view, what are the outstanding contradictions on the demand side this time? The family department really has no money, and the six purses are indeed deflated. There are 1.4 billion people in China. According to the statistics of the central bank, 700 million people are now in debt. If children and the elderly are excluded, it is close to the debt of the whole people. The total debt of the household sector accounted for as much as 137.9% of its disposable income, and the debt ratio of American households was about 90% in the same period. There is a gap of more than 40 points between us and the United States.
This is not the same as our imagination. Today, the debt level of Chinese residents has reached a very high level. In order to cope with such debts, the annual interest payment has accounted for nearly 15% of disposable income. In the same period in the United States, this figure was 7%. The ability of the household sector to pay is constrained significantly by high debt. From January to February this year, the total amount of credit in China’s household sector was only 290 billion, less than 300 billion.
Under normal circumstances, for example, in 2021, the credit extension of the household sector in a quarter should be at the level of 3 trillion, that is, nearly 1 trillion per month. Today, real estate stocks rebounded significantly. I don’t know if the loan data of the household sector rebounded significantly in March. Please observe further. But judging from the data in January and February, ordinary people do not buy houses, and a large number of early repayments. If ordinary people don’t buy houses, developers won’t buy land, and it will be difficult to restart the leveraged model of China’s economy that land creates credit and finance generates income. This is a prominent contradiction from the demand side.
The prominent contradiction seen from the supply side is the involution of prices. At the beginning of the year, Tesla’s brisk price cut brought the entire Chinese car chain into serious involution, from the terminal car to the upstream lithium mine. The peak price of lithium salt last year was 600,000 a ton, and fell to 250,000 in three months, so the involution of prices is spreading, not only for vehicles. Ordinary people don’t buy houses, and real estate needs to be stockpiled. If there is another problem with the vehicle, the combination of the house and the car is almost 70% of the entire manufacturing industry, so today we are still relatively nervous and “shrunk”.
Whether China can find a combination of anti-deflation and allow investors to build an underlying logic for economic recovery is probably the key to getting rid of the current predicament in the stock market. Because of today’s market, I feel rather uncomfortable, a bit like the “law of the dark forest” in “The Three-Body Problem”. For institutions, survival is their first principle, but the amount of funds in the entire market is very limited. Once a more competitive theme direction appears in the stock market, the remaining part will become very bearish and painful.
In today’s Chinese stock market, although the direction represented by TMT and the digital economy is an obvious risk on state, new energy and big consumption fall into a clear risk off short position. The reason why the market is so divided is the stock market. The “heart” of the entire market cannot move, and the reason why it cannot move comes from the macro.
Today, Chinese assets and the Chinese economy mainly depend on two cycles:
- The first is the dollar cycle. Inflation in the US was high last year. In the second half of the year, the US launched violent interest rate hikes and intensive balance sheet reduction, which brought about a tightening of offshore US dollar credit flows. Offshore dollar credit flow is the blood of global financial asset pricing, so it has a great impact on the global interest rate sensitive market. Including the parts of Chinese assets that are very sensitive to the US dollar cycle, for example, Chinese concept stocks and Hong Kong stocks have suffered heavy losses.
- The other is the China cycle. The Chinese cycle is already sliding towards deflation today. Whether we can succeed in anti-deflation, pull the Chinese economy up from the bottom, get out of the haze of deflation, play a set of anti-deflation combination punches, and build the underlying logic of economic recovery, this is the main problem to be solved in our Chinese cycle.
Looking at the dollar cycle first, we need to establish a concept. This round of the dollar cycle is different from the previous history. In a sense, it is a political cycle. Why is there such a high inflation? During the wave of globalization in the past 30 years, the West represented by the United States has been enjoying very comfortable low inflation. Although the United States launched high-intensity quantitative easing 15 years after the subprime mortgage crisis, and even directly launched MMT in the past three years to monetize fiscal deficits, inflation in the United States remained at a very comfortable level.
Why did inflation approach 10% all of a sudden last year? The core reason is that there is a strong political will behind it, which has seriously damaged the two marriages on the global supply side.
- The first is the divorce between China and the United States, and it is a hard decoupling. China’s export data began to fall off a cliff in the fourth quarter of last year. The reason behind it is not the severe recession of the US and Western economies, but a large number of orders from China to the US have drifted, drifting to the Asia-Pacific, and China’s spare tires, drifting to Mexico. . Last year, China fell from the number one exporter of the United States to the third place, which means that China and the United States are in a substantial hard decoupling, which is driven by the United States.
- In addition, the geopolitical Russo-Ukrainian war resulted in the breakdown of the marriage between Europe and Russia, and the United States broke up this marriage. China and the United States provide the world with cheap goods, while Russia and Europe provide the world with cheap energy. All of a sudden, both cheap goods and cheap energy are gone at the same time, and they are seriously damaged. The United States has printed so many banknotes again. In the past three years of the COVID-19 pandemic, the United States has printed 5 trillion US dollars of banknotes directly through MMT, so this time it cannot be suppressed, and the entire inflation is released.
The inflation this time is, in a sense, a political inflation, so Americans are also in trouble today, encountering an impossible triangle. If interest rates continue to be raised, the damage to the stability of the financial system will become more and more obvious, and it will become unstable, which will directly damage the financial stability of the United States. Like UBS and JPMorgan Chase, various problems have appeared one after another. Behind it is the long-term high interest rate and the long-term long-term and short-term interest rate inversion, which makes the underlying assets of many financial institutions bear huge interest rate risk. shock.
If the interest rate hike is stopped and the balance sheet is turned from shrinking to expanding, it means that inflation cannot be controlled again. If you want to control inflation, you have to go back to the underlying logic of inflation, which is political inflation.
How to reduce decoupling with China, ease relations with China, expand its outreach, and how to get out of the quagmire of the Russia-Ukraine war are probably the keys for the United States to control inflation. Therefore, the impossible triangle facing the United States is not logically a bad thing for China’s external conditions, which means that there is a marginal possibility of improvement in the severe external conditions we are facing this year.
The focus of China’s economic recovery this year is still the Chinese cycle.
With external conditions likely to improve marginally, whether we can use a combination of anti-deflation punches through policies to build the underlying logic of economic recovery is the direction we will wait and see. From the current point of view, it is indeed very difficult. Because in the past 15 months, we have invested 40 trillion M2 intensively, but the pulse of the real economy is still weak, real estate has not responded, and financial assets have not risen. Stocks are a stock market, and funds don’t sell well. Where did all this money go? For the current problems encountered by the Chinese economy, we must make a correct diagnosis. The core problem of the current predicament of the Chinese economy is the collapse of the micro-credit foundation, which is essentially the recession of the balance sheet, especially the recession of the balance sheet of the household sector .
Today, China’s population has bid farewell to the pyramid-shaped demographic dividend structure, and has now become a “clock”. There is a professional term in demography called “child population clock”. This time window has been opened in China, which is a long-term factor .
The short-term factor is the high debt ratio. Today, the debt ratio of the household sector has reached 137.9%, which is a very high ratio. In 2015, our real estate was going to be destocked, and we called on 6 wallets to come out and increase leverage to destock. At that time, the debt ratio of the household sector was less than 80%, more than 70%. The debt ratio has doubled in 7 years. What are the prominent contradictions in China’s economic system today? Due to the personal balance sheet, the credit ability and credit willingness of the various subjects in the entire system are rapidly collapsing.
For today’s China’s macro-decision-making, the most important issue is to find a subject with strong credit will and credit ability in this system, stand up as a pillar, and support the ceiling that is about to collapse. To put it more bluntly, the credit of the central government must stand at the forefront, and do everything possible to add the credit of the central government to the economy, so as to help the entities with damaged balance sheets in the economy to effectively repair. After such macroeconomic policies continue, the cycle of economic recovery can be restarted. Otherwise, what we see is that flooding will not work, the real economy will not respond, real estate will not respond, and financial assets will not rise. Where does the water go? This is a problem we must solve. Next, the central government will definitely re-study and re-judgment based on the economic operation in the first quarter, and deploy economic policies for the remaining time. So, now is a very critical moment, “what should we do?”, “how to change?”. China’s macro-policy may have to face breakthroughs in conventional methods and change methods.
Because the prominent contradiction we are facing now is the recession of the balance sheet. In a sense, the present time in China is the United States 15 years ago, and Japan 30 years ago. What is this point in time? After the outbreak of the subprime mortgage crisis in 2008, the balance sheet of the United States was greatly damaged, and it took the United States 15 years (adjustment). The core task of the macro-policy in the past 15 years is the restoration of the balance sheet, for which it has formed a complete set of theoretical systems and rich policy practices. To put it simply, China is only 15 years later than the United States and came to an abnormal macro policy time. From the perspective of macro policy, the core of repairing the balance sheet is the convergence of finance and currency.
Therefore, as far as China is concerned, I am afraid that it will enter a time window for the convergence of finance and currency and breaking through conventional macro policies. In terms of technical conditions, China is satisfied. Because the tables of the two entities representing the central credit are strong, the debt ratio of the central finance is only 21%, and the ratio of the central bank to the economic volume is only 33%, so there is enough room for manipulation.
Moreover, China also has the advantages of system design. We have a policy-oriented financial sector represented by the China Development Bank. In a sense, the policy-oriented financial sector is a natural SPV platform for the combined operation of finance and currency. Historically, we have also used this mechanism. In 2015, China was facing severe real estate destocking. At that time, the central bank’s credit support was that the CDB issued 3 trillion PSLs, which activated the entire real estate cycle.
Of course, the situation we face today is far more complex than it was in 2015. We are faced with incremental financial support, because the “20th National Congress” has expanded the blueprint of Chinese-style modernization, which corresponds to the increase in capital formation in four directions in the future, including the transformation of the dual-carbon energy system, digital China, and national security. Strategic system construction and rural revitalization. But we need to solve complex inventory problems. Last year, the net growth of M2 reached 28 trillion RMB, and we only got 6 trillion in GDP. Where did all this money go? A large amount of currency credit is consumed on the huge sunk cost overflowed by the inefficient stock economy, and we must significantly reduce the sunk cost.
Specifically, there are three main directions:
- First, real estate is facing destocking. In 2021, the scale of real estate under construction in China will be as high as 80 trillion. This year and next year will gradually become the release of inventory, and there must be a main body to stand up to undertake it. In 2015, it was China’s household sector that stood up to support the destocking of real estate, but today China’s household sector is facing a recession in its balance sheet and cannot stand up, but there must be a main body to stand up. If there is no main body to stand up, it means that the entire real estate industry chain enterprises will face disaster, because they are facing various complicated debt chains, accounts receivable and so on.
- Second, the local government’s 65 trillion platform debt. These debts are facing the collapse of credit and liquidity, falling into a “zombie” state. Therefore, we must start injecting credit into the central government and significantly lower the interest rate, because the survival cost of these debt rolls is as high as 4%. We are afraid that we will start the interest rate replacement of these platform debts on a large scale and systematically, and through the central credit injection, the interest rates of local government debt platforms will be significantly reduced to restore their credit and liquidity.
- Third, the huge system of state-owned assets and state-owned enterprises. There are two statistics, some say 270 trillion, some say 350 trillion, but in any case, the largest part of economic assets is currently in a low-efficiency operating state, and the annual return on assets is only 1-2 %of. If the central credit goes on, with the help of China’s capital market, the rate of return of this part is increased to above 4-6%, for example, which is 10 trillion in real finance.
This is a great relief to the fiscal cliff-like gap pressure caused by the sharp drop in China’s land factor income. This is the task we have to face. China is currently facing severe and subversive external conditions, and the G2 is in a state of hard decoupling, which objectively means that China is entirely likely to implement bolder, more radical, and breakthrough macroeconomic policies. Because China has formed a net supply-side exposure of US$3.4 trillion in the past 30 years, if the G2 enters a trend of hard decoupling, it means that this net supply-side exposure of US$3.4 trillion requires a strong domestic demand growth in order to be hedged.
If the growth of domestic demand is trapped by the recession of the balance sheet, it means that from an industrial perspective, the main contradiction China will face in the future is to change from past inflation to deflation.
Why did we have no effect at all after we put in so many high-intensity currency credits, and the inflation didn’t come out? We must face up to changes in external conditions and return to the market. Today’s stock market reflects the dilemma of China’s macro policy today, reflecting the reality of the dilemma. “The wind moves, the flag moves, and the heart moves”, this is a joke in Zen Buddhism. It is used as a metaphor for the current macro-state of China, which is “the wind blows and the flag does not move”. The wind has blown hard and a lot of water has been released, but the economy has not responded, the asset side has not responded, and the real estate has not responded.
Therefore, it still cannot prevent the economy from sliding into deflation. If “the wind blows and the flag does not move”, this market is a stock market. Going back to the Merrill Lynch investment clock, to put it simply, today we are in the recession quadrant. Although we have launched high-intensity money and credit, we still cannot drive the investment wheel to the recovery quadrant.
Therefore, the choice of the market falls on the stock market, and the theme dominates the style. The innovation of Silicon Valley in the United States has no surprises in the United States, but it has set off a wave of technology stocks in China. Behind it is the achievement of the investment clock, because the investment clock falls in a declining quadrant, which determines that this is a stock market. How to break through this state?
The core of how to change from a stock to an increase is whether the next policy thinking can break through the conventional way, and whether it can play a set of powerful anti-deflation combination punches to build a strong underlying logic for economic recovery in the market. If a strong underlying logic can be built, the market may soon transition from a stock state to an incremental state this year, and this market will usher in a fast bull, or even a big bull. Because our high-intensity currency credit has been released in the past 15 months, 40 trillion M2, but these M2 did not correspond to the formation of strong GDP business capital.
The money is scattered in every corner of the economic system, and they are staring at the broad spectrum of asset returns all the time to see which asset is the first to show a strong momentum to make money.
These funds scattered in all corners of the economy will pounce on them like bloodthirsty sharks, and this market will soon be ignited. Therefore, the key point of the market transformation is whether the policy can play a set of powerful anti-deflation combination punches to pull the Chinese economy out of the quagmire of deflation. We will wait and see.
If “the wind blows and the flag does not move”, the entire market can generate a premium in the following two directions. One is the so-called fiscal premium. Whether it is the digital economy or the reform of state-owned enterprises we are talking about today, the underlying logic behind them all comes from political economy. At the heart of political economy is finance.
The Chinese economy has entered a stage of vigorously promoting the creation of a digital economic ecology. In the economic ecology, data is a new type of production factor. Can its income be effectively converted into new financial support for the new government? This is the first problem facing the new government. Regarding the ecology of the digital economy, from data rights confirmation to data assets to data processing, behind it is the scene from computing power to application. The capital market has carried out a full interpretation around the ecology of the digital economy, and it has become the biggest premium outlet in the capital market right now.
Of course, it is far from enough to rely on the transformation of income from digital factors. Because we have come from the past cycle of industrialization and urbanization, the gap formed by the cliff-like decline in financial support and income from land elements, the income from data elements may be far from enough.
Therefore, the reform of the state-owned enterprises and state-owned assets system has been put on the agenda, and the return on assets of this low-efficiency operating state-owned assets and state-owned enterprises sector must be effectively activated. How to activate it? The realistic solution is the injection of central credit, which can only be realized by activating the entire capital market.
If the rate of return on assets in this area is significantly increased from the low efficiency level of 1-2% to 6%, it will produce a financial effect of 10 trillion yuan, which is very important for the pressure of China’s huge land financial gap today. An effective relief. Another piece of premium is called safety premium. I suggest that you carefully study a series of speeches made by the General Secretary during the two sessions of the Jiangsu delegation and the delegation of the Federation of Industry and Commerce, and understand them word by word.
My experience after studying is that the essence behind the high-quality development we are talking about today is the simultaneous development of “development and safety”, and safety has become the first element in the new era.
Under the great changes unseen in a century, for China, security constraints are concentrated in the field of science and technology. If there is no safe amount of expansion, it is all illusory and low-quality. Therefore, for China’s capital market today, seeking security through technological innovation depends on the capital market, and solving financial pockets also depends on the capital market.
Today China’s capital market is more important than ever.
Author: Liu Yuhui Source: Mizuki Minutes
This article is reproduced from: https://macin.org/2023/04/09/jing-ji-shuai-tui-liao/
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