There are a lot of rich people in Chinese society. However, they choose not to invest and consume, preferring to hoard it for the winter. These people are well aware of the current situation, as the government exerts long-term and heavy pressure on local debt and urban investment debt. During the past three years of the pandemic, businesses have been under a huge burden, and people are also facing pressures such as mortgages and credit card repayments, which have been largely offset by monthly income. From January to April this year, the profit of Chinese industrial enterprises fell by 20.6%. Among the various types of enterprises, the private sector suffered the sharpest decline in profits, falling by 22.5%. It is worth noting that private enterprises mainly rely on the consumption of people's daily necessities, while state-owned enterprises are mainly dominated by monopolistic industries. The sharp decline in private-sector profits indicates a sharp reduction in internal demand and the pandemic as a tipping point.
However, this is not the root cause, the fundamental reason is that the proportion of people's debt is too high, and the leverage ratio of the residential sector **** Bank estimates that the leverage ratio of the residential sector has exceeded 70% for 40 years). When China faces economic problems, it has always taken the form of providing loans to enterprises to solve problems, but this year is completely different from previous decades, the people have no money on hand, and all the measures taken in the past have failed; If it is still proposed to revitalize the real industry, the loan issuance strategy will certainly be ineffective; It can be seen from last year's data: 28 trillion yuan of loans were issued last year, and the GDP growth was only 700 billion; Most of these loans did not go into the consumer sector at all; You try to repair houses and produce goods, but you can only sell a limited amount; If there is no epidemic, people's consumption downgrade and reduced purchase will be delayed for several years; But it is precisely because of the epidemic that this situation appeared in advance, and the debt crisis also broke out early.
China's economic drivers over the past few decades have mainly included investment, exports and consumption. Investment is divided into government investment and enterprise investment, of which government investment is mainly concentrated in infrastructure construction, while enterprise investment is mainly in expanding production capacity and real estate development. In the past 20 years, China's exports have undergone a certain degree of industrial upgrading, from the initial low-end industrial products such as garments to high-end end products such as mechanical and electrical products. However, the US interest rate hike has directly led to the difficulty of significantly increasing the growth rate of exports, and the growth rate of infrastructure construction is also declining due to the expansion of local debt. The most important thing is that the consumption sector has been subject to multiple constraints: real estate consumption has declined significantly, and consumption of basic daily necessities has even shown a deflationary trend.
Fundamentally, this is the result of a possible recession caused by excessive debt for the whole society, and it is completely different from the problems encountered in the past. In the past, economic crises were often caused by insufficient production or insufficient foreign trade, but in the current situation they are more typically caused by real estate bubbles and related loan problems. Historical events such as the recession of the late 90s in Japan, the bursting of the Florida bubble in 1925, and the financial crisis in 2008 are quite comparable. Although there are hundreds of years of historical cases abroad that can be used for us to learn and learn, it seems that human beings are always unable to truly learn wisdom and lessons. Even when faced with similar predicament, each country thinks that it is special and stands out, but this is not the case, so some people may say don't spend money if you don't have it! Using China's version of quantitative easing (QE) to stimulate production is not too problematic; However, the solution to the problem on the consumer side can only be achieved by giving people more purchasing power.
Traditionally, jobs are created through corporate loans, and local governments promote infrastructure construction to promote employment and ensure that workers are paid before expanding consumption. However, there is a problem: although the goods are produced, no one buys the housing goods; If the continued expansion of production will bring more environmental pollution, and people are saddled with huge debts that make them afraid to consume, how can you expect them to get rid of the bondage of debt?
If people are not allowed to survive the debt crisis, there is no way to resolve the signs of the crisis. In the early years, local debts were engaged in infrastructure construction, which was called infrastructure maniac at that time. However, many people are insensitive to the issue of indebtedness, believing that future inflation can easily offset these burdens and that this is feasible in the long run. While inflation and monetary tightening may be effective over the next 20 years, we are now facing a difficult situation: without financial assistance from the central government, local governments face enormous hidden debt pressures, making it difficult to repay interest. Even government-level operations such as buses and subways have experienced funding shortages, resulting in a worrying market for the goods produced by companies. This situation can only be dealt with by fighting a price war by cutting prices. For example, a price war broke out in the auto market earlier this year, and real estate companies are also eager to cut prices and promote them. However, in the case that the local government does not allow price cuts, corporate profits are bound to decline, which further leads to wage cuts and increased layoffs; The number of new hires of young employees will also decrease.
From the side, it is observed that the problem is already very serious: first, the delivery staff reaches full capacity in several cities; Secondly, Didi drivers have early warnings of imbalance between supply and demand in multiple cities; Third, the wages of screwmen are being reduced; The fourth leading real estate company has obviously laid off employees; Fifth, Internet giants have also begun to lay off employees; Finally, the design institute has also carried out personnel optimization and adjustment - which means that both technology-based and low-end manufacturing companies are laying off employees on a large scale, the number of unemployed has increased sharply, and even jobs such as delivery workers and Didi drivers have become extremely scarce.
The biggest difference from previous years is that the current economy has no new growth points to speak of, the Internet industry has maintained a strong development trend in the past 20 years, but this year Internet companies have reached their peak, lack of new economic growth momentum, can only continue to survive through material cost competition or price war. This competition will be very brutal.
On the other hand, at the individual level, the general public is heavily indebted, especially in terms of housing, credit cards and car loans, and has voluntarily cut back on spending after three years of the pandemic. The leverage ratio of the residential sector is too high, and the superficial data shows that it is close to the 60% warning line, which is actually far above this level.
Due to the high concentration of deposits, a large number of people do not have much savings. As mentioned above, this year's problems are different from past decades. Traditional methods struggle to solve this problem, and the view that the service sector is irrelevant to some, is clearly inconsistent with reality. Manufacturing and agriculture only require a small number of people to meet the needs of the entire society, and China is the world's factory. In addition to infrastructure construction, real estate and related industry workers, there is not much need for manufacturing workers because of modern technology. What if there is a lack of labor to produce products to meet the needs of society as a whole? Only by relying on the service sector to provide employment opportunities. Emerging service industries have created a lot of jobs: couriers, delivery workers, ride-hailing drivers, online education, etc. are all new service industries that have emerged in the past 15 years. Overall, more than 80 million people work in this category. In terms of employment, they already exceed the number of employees directly engaged in production activities in infrastructure construction and real estate, and lower than the former in the entire production chain.
Yet there are still those who claim today that real businesses are very important, and they are – that the real economy is crucial. Physical factories solve the problem of production capacity, but the service industry solves the problem of employment. The current challenge for the world economy is oversupply rather than underdemand; There is no shortage of capital, just a lack of consumption. If you don't sell out of what you produce, do you want to continue to expand production? At present, a considerable number of Chinese people are in good financial condition on the surface, but in fact, they are in a state of high leverage and are struggling to maintain their daily expenses. This is no different from those leading real estate companies, especially in the last 5-6 years when buyers are saddled with huge mortgages. Loss of job stability or urgent funding needs may lead to loan overdue or even bankruptcy. Of course, at the individual level in China, there is no lifelong accountability law that stipulates that the system of individual bankruptcy liability exists.
We call this phenomenon "futures speculation" because buying a home is essentially the same as speculating in the futures market
In particular, the wave of unemployment is likely to spread, and the hardest hit areas of unemployment are mainly concentrated in real estate enterprises, some IT industries and foreign trade enterprises. It will take time for unemployment to spread, and it will take time for economic hardship to spread gradually. Most industries have upstream and downstream and terminal demand relationships. If terminal demand weakens, sooner or later upstream companies will face the risk of layoffs and bankruptcy. The domino effect takes time to manifest. In fact, whether it is weakening consumption, unemployment, local debt problems, corporate income difficulties, and the decline in the real estate market, the root causes still stem from excessive house price increases that exceed people's affordability, forcing people to take out loans to buy houses; At the same time, local governments, blindly optimistic and unrestrained expansion when land supply is plentiful, have abandoned the traditional practice of Chinese loving savings.
Due to the boom in house purchases, a series of product sales have been booming, and the whole society is full of yearning for a better life in the future. This yearning gradually evolves into impulsive optimism and is contagious. Thirty years ago, Japan experienced a deep recession, also caused by soaring housing prices. At the time, Tokyo residents generally believed that the future would be brighter, and taxi drivers often received red envelopes for excess mileage.
Many people today conclude that the Japanese recession is related to the Plaza Accord in the United States, and although this is indeed one of the reasons, the most fundamental reason is the result of excessive internal social leverage . High housing prices have caused a large number of people to be saddled with huge debts for a long time, and you can see that even without the Plaza Accord, the subprime mortgage crisis broke out in the United States in 2018. Social laws may be closed for a short time because of strong policies, but they will not fail for a long time.
In fact, social laws, like other rules in physics, may be modified in different social circumstances, but they are universally applicable. Therefore, it is not a feasible option to let house prices fall to solve the problem, so the price decline will cause more damage to the economy. Some people claim that buyers who are just in need will be able to live in it even if prices fall, which is quite short-sighted. If there is a real sharp drop in prices, it will not trigger a rush to buy, but the transaction volume will be sharply cleared, and 35% of the GDP of the entire society will suddenly disappear, for no other reason: steel, building materials, home decorations, home appliances and equipment and construction equipment transportation can fall off a cliff; At that time, not only a few people were affected! I can see this as an ordinary person.
Can you imagine that the hand that holds the lifeblood of the economy knows this? From recent events, we can see that after the seven-discount promotion of Chinese developers was banned, it can be inferred that if there is a real sharp price reduction, it means that the local government's income from land sales will be directly zeroed or sharply reduced by more than two-thirds! In recent years, civil servants' salaries have increased, public spending has increased, and investment in various types of infrastructure has also increased; Today, it is run by the City Investment Company to obtain loans from banks through land mortgages. It can be imagined that the left hand and the right hand to reverse each other's accounts can only mean that the situation is very difficult!