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source: liuli investment news

on the afternoon of september 21,zhongtai securitieschief economist li xunlei shared his latest views and suggestions on the chinese economy at a channel investment strategy meeting on the topic of "how to deal with the current structural and cyclical difficulties in the economy."

li xunlei said that he has been doing macro research for more than 30 years, but the current situation is something he has never encountered in his macro research career.

in the past, the economy had cycles, but they were all short cycles that would pass after a little bit of endurance.

but now it’s different. from 2021 to now, the real estate and stock markets have been falling, and this difficulty is unprecedented.

moreover, the claim in the market that the real estate market will bottom out when the sales area of ​​new homes falls to a certain level is not true.

china's current rental-to-sale ratio is still relatively high, which has a long-term suppressive effect on housing prices.

li xunlei suggested that the government should increase leverage to deal with the current predicament.

moreover, the central government is increasing leverage, issuing 5 trillion yuan a year and 50 trillion yuan of ultra-long-term special government bonds in 10 years;

issuing more national debt has no consequences, only benefits;

we must increase the government's visible hand and step up our efforts.

in response to the current market environment, li xunlei suggested at the beginning of this year that two types of assets should be reallocated, one is gold and the other is government bonds. until now, he does not believe that gold has reached its peak.

regarding opportunities in the a-share market, li xunlei believes that m&a opportunities have increased significantly.

highlights of li xunlei’s discussion:

this round of rmb appreciation against the us dollar will exceed 7, possibly reaching 6.9 or 6.8

the difficulties and pressures we are currently facing are obvious to all.

before discussing how to respond, we first need to analyze how the current difficulties came about.

i have been doing macro research for more than 30 years, but the current situation is something i have never encountered in my macro research career.

in the past, the economy had cycles, but they were all short cycles that would pass after a little bit of endurance.

but now it’s different. from 2021 to now, the real estate and stock markets have been falling. this difficulty is unprecedented.

so, what is the reason behind this difficulty?

i think there are two main reasons:

one reason is structural.

one reason is cyclical.

this corresponds to the problems of overcapacity and insufficient effective demand.

as the global economy grows and shrinks, china has made tremendous achievements in the past 30 years.

but if we look deeper into the details,

it can be found that the eu has been declining, the us has stabilized after 2011 and its global share has begun to rise, while china's growth rate has begun to slow down.

especially in 2021, there is a turning point.

in 2021, china's share of the world's total reached 18.3%, and our population accounted for 17.6% of the world's total, which is higher than the global average.

but for two consecutive years, namely 2022 and 2023, the us share increased and china's share decreased, and the gap between china and the united states is widening.

of course, things may be different this year.

the previous widening of the gap was mainly due to the depreciation of the rmb.

however, the rmb has recently started to appreciate again.

the lowest exchange rate of rmb against the us dollar was 1:7.3, and now it has risen to 7.05.

i estimate that this round of appreciation of the rmb against the us dollar will exceed 7, possibly reaching 6.9 or 6.8.

this is because the federal reserve cut interest rates after a four-year interval, and this round of interest rate cuts by the federal reserve is estimated to continue until 2026.

during this process, the us dollar index is currently around 100 and should break through 100.

the rmb will experience another round of appreciation.

therefore, when we consider issues, we cannot always use inertial thinking and think that the rmb will definitely depreciate and the us dollar will definitely appreciate.

nothing is absolute in the world, everything changes over time.

the rental-to-sale ratio is still high

long-term suppressive effect on housing prices

as for the real estate issue, this is a rather sensitive topic.

but what i want to say is that the so-called statement that the current market's new home sales area will bottom out at a certain point is not true.

it's just like the stock market. if the stock market reaches the lowest level, will the stock price go up?

ultimately, the rise and fall of the stock price is still determined by its valuation level.

currently, china's real estaterental-to-sale ratioin core cities it is about 1.5%-2%, basically below 2%, and far below the global average of 4.2% for core cities.

theoretically, if we want to reach the 4.2% level, how much more will our housing prices fall? everyone can do a simple calculation.

we can't assume that housing prices have bottomed out just because sales volumes reach a certain level.

just like the a-share market, the index reached more than 6,000 points in 2007, why is it only 2,700 points now?

it is still determined by the valuation level and the expectation of future corporate growth.

i think the current rental-to-sale ratio is still on the high side, which will have a long-term suppressive effect on housing prices.

if house prices fail to rise and the stock market does not perform well, residents' property income will decline.

if property income declines, it will affect both residents' willingness to buy houses and their willingness to consume.

i wrote an article last november called "the economic contractionmultiplier effecthow to respond.

this article mentions that we cannot only see the current economic downturn, but also the multiplier effect brought about by the continued economic downturn.

this multiplier effect is all-encompassing.

for example, the decrease in the growth rate of fiscal expenditure, which is closely related to revenue;

the fiscal and financial sectors are shrinking.real economyin shrinking.

the multiplier effect of contraction affects each other in all aspects, further aggravating the economic downward process.

i suggest that everyone should conduct in-depth research on 2021.

this year is not only a turning point for real estate——

the twenty-year-long real estate upswing ended in 2021, so it was a big turning point;

i also found that the turning point in the prices of other collectibles with financial attributes also occurred in 2021.

at the same time, we need to consider the broader context, such as the accelerated process of population aging.

the central government is increasing leverage

issue 5 trillion special government bonds every year

i mentioned earlier that when facing a downward cycle in the real estate market, we must still pay attention to the multiplier effect of economic contraction.

let me tell you that the article i wrote in november last year attracted the attention of senior management.

at the beginning of this month, i wrote another article entitled "from incremental contraction to stock contraction."

this article will be published in a magazine of the national development and reform commission next month.

it also gives me a little hope because i suggested over-issuing government bonds in this article.

you asked me earlier whether there is an asset shortage?

i think the shortage of assets is an objective fact.

the 10-year treasury yield may reach the "1 era".

so, residents’ balance sheets are shrinking. how to deal with this?

behind the financial contraction is the decline in investment willingness of the corporate and household sectors.

from january to august, the growth rate of private investment was still negative.

residents' mortgage balances are declining, m1 has been negative for six consecutive months, and the cash growth rate is rising.

therefore, these problems have not bottomed out yet.

we cannot stick to the old ways, but should consider the trend of its evolution.

i don’t know what will happen, because none of us has experienced this round of economic downturn.

the world has never experienced this before.

china, the world's second largest economy, is in a downward trend, and the main factor behind this decline is the long-term downward trend in the real estate sector.

my suggestion - i have been suggesting this since 2022 - is that the government should increase leverage.

because companies and residents are deleveraging, and we want to achieve stable growth, so what should we do?

then the only option is for the government to increase leverage.

but the government’s leverage does not mean local governments’ leverage. it should be the central government that increases leverage.

our government's debt structure is too unreasonable.

most of them are local government debts, while in other countries they are central government debts.

because the central government has a good reputation and low financing costs,

so it should be the central government that increases leverage, and we are all local governments increasing leverage, but now it’s the other way around.

i suggested in the article not long ago that

since there is a shortage of assets, everyone wants government bonds. our central bank also says that the yield on government bonds is falling too fast, so we should issue more government bonds.

5 trillion yuan will be issued every year, and 50 trillion yuan will be issued in ten years for ultra-long-term special government bonds.

what are the consequences after it is sent?

no consequences, only benefits.

why?

because our central government's leverage level is too low, it is only 20% now.

after issuing 50 trillion yuan, the leverage level increased by about 25%, and the total is less than 50%.

the current leverage level of the u.s. federal government is 120%.

so i think our central government has a lot of room to increase leverage.

to avoid deflation

merger and acquisition opportunities have increased significantly

we need to avoid deflation - japan suffered a long period of deflation after the real estate bust.

why deflation?

the income of ordinary people is declining.

to date, the income of ordinary japanese people is lower than it was in 1990.

so, you tell me, is it possible to avoid deflation?

what we need to do is to continuously increase the income of the people.

only in this way can consumption and investment be boosted.

so i think that these 5 trillion yuan are not mainly for investment, but for people's livelihood.

because there is overinvestment, especially overinvestment in infrastructure, the return on investment is very low.

how do you evaluate the financial sector?

we must support large state-owned financial institutions to become better and stronger.

we must strictly enforce the entry standards and regulatory requirements for small and medium-sized financial institutions, promote mergers and reorganizations, and achieve reduction in quantity and improvement in quality.

so, where do you think the opportunities are in the future?

where are the opportunities in the a-share market?

i think the m&a opportunities have increased significantly.

because, during the economic downturn, businesses are having a hard time and many businesses cannot continue to operate.

if they can no longer operate, they will reduce the number of companies through mergers, acquisitions and restructuring.

in the u.s. stock market, 80% of the stocks disappeared, while in our a-share market, the number of delisted stocks is probably less than 2%.

the delisting rate is too low. in the future, a large number of companies will be delisted and a large number of companies will be acquired and merged.

therefore, in this regard, everyone should have a deep understanding.

interest rates will continue to fall

having determination does not mean not cutting interest rates

what do you think about the future interest rate trend?

i think interest rates are likely to go down.

the fed has already cut interest rates.

yesterday, everyone was expecting the central bank to lower the lpr, but it didn't.

neither the 1-year nor the 5-year rates have been lowered, which shows that our central bank is very resolute.

but having determination does not mean not cutting interest rates.

because our current real interest rate level is still at a historical high - china's real interest rate level is higher than that of the united states.

since it is higher than that of the united states, why can't we lower interest rates?

i estimate that next year's gdp growth rate will definitely be lower than this year.

if the economy goes down again next year, we must respond in advance.

i think this round of interest rate cut by the federal reserve is still good, 50 basis points, while the general market prediction is 25 basis points.

why is it 50 basis points?

because the fed believes that inflation is not its first concern now.

employment is its first concern.

since employment is the first concern, we should respond in advance.

therefore, policy should be a leading indicator rather than a lagging indicator.

if we always lag behind in policy implementation, by the time the policy is introduced, it will have no effect.

policies must respond ahead of market reactions.

the fed’s logic is simple.

there is no certainty that inflation will fall, nor is there any certainty that the unemployment rate in the united states will rise.

but it has a very simple logic - now concerns about employment outweigh concerns about inflation.

if that's the case, then cut interest rates.

once the federal reserve cuts interest rates, i think the u.s. federal funds rate should break 3 in this round of rate cuts.

it is 5 now, it should break 3, there is a lot of room.

therefore, in response to the asset shortage, the local debt pressure is so great, consumption is so weak, the price of bonds in the capital market is rising, and everyone has such a great demand for bonds;

from the perspective of supply and demand, we should also over-issue government bonds.

only a few companies create value

survival of the fittest, the rise and fall of the fittest

finally, i would like to talk about how we understand the capital market.

capital market, is it a barometer of china's economy?

definitely.

then some people say, our gdp is so good, why is the stock market so bad?

conversely, why is the stock market rising so well when the u.s. gdp is so bad?

because the stock market reflects the quality of economic growth, not the total amount of economic growth.

because quality is determined by the profitability and growth potential of listed companies.

the rise of the u.s. stock market was driven by 10% of stocks, while 90% of stocks did not rise or even fell.

therefore, as the economy becomes more mature, the differentiation among enterprises will become more and more serious.

from 1985 to the present, the median average return of all stocks in the united states is only 1.1%.

although the average increase is relatively large, it is an average, and the median is only 1.1%.

the average lifespan of us stocks is 14.5 years, and the median is only 8.9 years. both lifespans are very short, and most companies will disappear.

therefore, we must buy companies that can survive.

companies that create value are always a minority.

from 2010 to the present, 650 companies accounting for 12.5% ​​of the u.s. stock market have created a total of 69 trillion u.s. dollars in net wealth, while more than 4,540 companies accounting for 87% have created zero net wealth in total.

therefore, this must be a process in which the strong will become stronger and the fittest will survive.

with the a-share market currently falling to its current level, the valuation level has dropped significantly.

but there are also structural problems here.

there are quite a number of small-cap companies whose valuations are too high and are not worth the money, but we investors have given them too high valuations.

this may require a relatively long period of adjustment in the future.

when china's economy enters a stage dominated by stock economy——

in the past, china's economy grew by 10%, which was an incremental economy.

the economic growth rate is now around 5%, and it may be even lower in the future. its stock characteristics are becoming more and more obvious.

therefore, it is definitely a process of differentiation - the strong will always be strong, the fittest will survive, and some will gain while others will lose.

everyone must remember these three characteristics.

excellent companies are few and far between.

for the a-share market, buying indexes may be a better choice than buying stocks.

because the index is a passive investment, the compilation of the index itself also involves a process of survival of the fittest, kicking out bad companies and keeping good companies.

from the perspective of development, china's economy, in accordance with the requirements put forward by the third plenary session of the 18th cpc central committee, will achieve high-quality growth and enhance new quality productivity, and industry rotation is inevitable.

we cannot compare the companies of 30 years ago with those of today. it must be a process of continuous optimization and iteration.

for example, from 2018 to 2024, among the top 20 industries with the highest growth rates in the a-share market, power equipment and new energy ranked first, and electronics ranked second.

this is particularly consistent with our current industry development trend.

as for investment, we should look to the future.

gold + treasury bonds

finally, in may this year, i participated in a dialogue program on cctv-2, and what i mentioned at the time was,

we need to reallocate the two types of assets.

one is gold and the other is government bonds.

four months have passed now, and this should have confirmed my judgment at the time.

my recommendation for gold was in 2016.

from 2016 to now, i have never said that gold has peaked.

we need to have a basic judgment about the world.

we are in an 80-year period of peace, unprecedented in human history - it has been almost 80 years since the end of world war ii.

although these 80 years were peaceful, they were filled with sharp contradictions.

from geopolitics, to trade wars, to technology wars, to the game between the two major powers, to the current russia-ukraine war, etc.

this will cause the global economy to fall into a period of low growth and high volatility.

therefore, the logic behind allocating gold is not only the downward trend in interest rates, but also geopolitical factors and so on.

jewels in prosperous times, gold in troubled times.

i think we still need to have a rational understanding of the future world.