Editor's note: On the morning of July 24, the Shanghai Composite Index continued to decline, falling more than 0.5% intraday, falling below 2,900 points again, a new low since February 22, 2024. On July 20, Wang Qing, chairman and chief economist of Chongyang Investment, made a judgment on current economic issues at a forum. Wang Qing pointed out that the root cause of China's macroeconomic problems lies in finance; In terms of foreign investment, the opportunity cost brought about by the external environment has led to a decrease in foreign investment; In terms of short-term macroeconomic policies, efforts should be made to address deflation. On July 22, the WeChat public account "Investment Workbook Pro" summarized the main points of the speech, which is now forwarded as follows:
Short-term macroeconomic policies should focus on tackling deflation
Moderator: From the perspective of micro enterprises and investors, how do you see the economic situation in 2024? What are the main challenges we face in terms of macroeconomics and micro-business?
Wang Qing: The so-called difference between macro and micro perceptions is actually deflation. One of the most comprehensive indicators of deflation is the GDP deflator. Our GDP deflator has been negative for several consecutive quarters. So in a deflationary environment, there is a so-called somatosensory problem. Residents care about personal income, enterprises care about sales revenue and profits, and the government cares about fiscal revenue, these are all nominal variables. And our macroeconomic data focus on the real variable, which is real economic growth. The difference between the two is the change in the price level. So I think that's the main problem. So what happened? People talk about economic growth all day long, but it's actually real GDP growth, as if real data has become nominal, and real nominal things are real, because these are related to everyone's lives. So now this is the case. This problem existed in 2023 and remains a problem this year, so this is the most prominent one of the current macroeconomic phenomena. This is partly because the main driver of economic growth this year is exports, and domestic demand remains relatively weak. From a forward-looking perspective, short-term macroeconomic policies should focus on tackling deflation.
Excluding real estate, private investment has recovered compared to last year
Moderator: What was the main driving force for the recovery of private investment in the first half of the year?
Wang Qing: If we remove real estate, private investment has indeed recovered compared to last year. I think an important reason is that the improvement in exports directly drives investment in the manufacturing sector. From the supply side, we have also increased our investment in new quality productivity, including the new three types of policy and financial support: electric vehicles, lithium batteries, and photovoltaics. So I guess this is an important reason for the recovery of private investment. From a forward-looking perspective, the sustainability of private investment is first and foremost the sustainability of demand. In the first half of the year, including the fourth quarter of last year, an important reason for the improvement in exports was the improvement of the global inventory cycle. However, the inventory cycle is relatively short, and at the same time we face headwinds for trade protectionism. From the supply side, the problem faced by the new three is overcapacity, and not only the problem is raised by our trading partners, but we are also facing this problem ourselves. Observing the performance of listed companies, there is obvious pressure on profits. The stock prices of electric vehicles, lithium batteries, and photovoltaics have fallen to a mess, and it is obvious that there is a problem. Under market forces, supply will also be affected, which may affect investment at the industry level, mainly in the form of the entire industry going through a process of liquidation, leading companies may win, but many companies may be eliminated, and the unsustainability of private investment may be exposed in aggregate.
The external environment has prompted foreign investors to demand high-yield compensation
Moderator: In the second half of this year, enterprises should invest in what directions?
Wang Qing: I'm not an expert, we focus on secondary market investment. Secondary market investments are not the same as industry investments. In the case of the secondary market, it is necessary to combine changes in asset prices. We are interested in the pharmaceutical industry, including innovative drugs, medical devices, and advanced manufacturing materials for some subdivisions of the manufacturing industry. In addition, on the issue of foreign investment, from the perspective of the capital market, foreign investment has declined a lot in the past two years, and the problem focuses on internal issues, including the business environment and investment prospects. From a short-term perspective, the external environment makes the opportunity cost of foreign investment in China very high. In Hong Kong too, the yield of the US dollar money market fund is 5.2% or 5.3%. Therefore, if foreign capital wants to invest in China, it must first give up short-term temptation; If you invest in China, you will have to exchange dollars for renminbi and face exchange rate risks. Last year, the renminbi depreciated by 10% against the dollar, causing the funds to lose nearly 15% before they were invested in projects or capital markets. In this case, whether it is the secondary market or the primary market, foreign investors will only invest if they require high-yield compensation. Therefore, foreign investors choose not to participate in the Chinese market at this time. It can be difficult to distinguish between short-term cyclical factors and structural long-term factors. If the external environment changes, the Fed begins to cut interest rates, and the dollar weakens, then the two factors mentioned above may be eliminated, and the foreign investment situation will be significantly eased. This is a positive.
The root cause of China's macroeconomic problems is finance
Moderator: Domestic demand, investment and consumption are still at a low level. How to solve these problems, so that every household dares to consume, so that enterprises dare to invest?
Wang Qing: I pay special attention to the Third Plenum. Especially before the conference, the capital market is very concerned about this. Combined with my work experience (previously working at the IMF), I understand the current problems of the Chinese economy. The main function of the IMF is to study the macroeconomic policies of various countries and provide recommendations. But there is a saying that it has another meaning, which is "it's mostly fiscal", which means that most macroeconomic problems are fiscal. I use this term to understand the current economic problems of China. One of the most important macroeconomic issues in China is that the property problem is in a downward cycle, but this is the initial trigger for the problem. China's economic transmission process is different from that of United States. The subprime mortgage crisis in the United States is a real estate problem that leads to financial problems, which in turn leads to economic problems. In China, the real estate problem has a direct impact on local finances, which in turn affects the economy. China's financial institutions are in good shape, with low non-performing loan ratios and record stock prices of several major banks. However, a few small and medium-sized financial institutions have fallen into some difficulties because they are too tightly tied to local finances. So, in China, it's a real estate problem, a financial problem, and then an economic problem. As for how the policy responds. According to my understanding, in addition to the short-term emergency response of macroeconomic policy and monetary policy, it is also necessary to solve fiscal problems, especially local fiscal problems. We invest in the capital market, and the economic situation is inferred from the performance of asset prices. This is characteristic of the current performance of asset prices. Looking at the bond market first, the interest rate on China's 30-year government bonds has fallen below 2.5%, which is the same level as Japan; The yield on 10-year Treasuries was 2.2%-2.3%. We all know the performance of China's stock market. So it's very pessimistic to look at the trading situation in asset prices, not a worry about simple cyclical factors, but a worry about a possible outbreak of systemic tail risk. This problem needs to be solved fundamentally. And if we analyze that this problem is a fiscal problem in China, it needs to take action at the root cause - fiscal action, to dispel the concerns of economic and capital market participants about systemic risk, and then boost confidence. This is particularly noteworthy.
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Established on January 19, 2013, Chongyang Institute for Financial Studies of Chinese University of China (Renmin University Chongyang) is the main funding project donated by Chongyang Investment to Chinese University and set up an education fund for operation.
As a new type of think tank with Chinese characteristics, Chongyang has hired dozens of former politicians, bankers, and well-known scholars from around the world as senior researchers, aiming to pay attention to reality, advise the country, and serve the people. At present, the Chongyang National People's Congress has 7 departments and 4 operation and management centers (the Center for Ecological Finance, the Center for Global Governance, the Center for China-US People-to-People Exchange, and the China-Russia Center for People-to-People Exchange). In recent years, the Chongyang National People's Congress has been highly recognized at home and abroad in the fields of financial development, global governance, major-country relations, and macroeconomic policy.