Introduction
We are in an era fraught with crises and rapid changes, where the pains of economic transformation and the setbacks of globalization intertwine, putting the Chinese economy in an unprecedentedly complex situation. The coexistence of insufficient effective demand and oversupply, along with geopolitical risks exacerbating asset uncertainty, prompts us to re-examine traditional economic development logic and thinking patterns. Meanwhile, Trump's potential return to politics raises concerns about whether history will repeat itself—will he launch another trade war, pushing China into a new round of economic crisis? Compared to 2016, the current international political landscape leans more towards de-globalization, facing significant resistance from tariff barriers to the return of manufacturing. Against the backdrop of insufficient domestic demand and oversupply, China finds it difficult to digest excess capacity through expanding exports, and the path for external demand expansion is increasingly narrow.
This article will analyze the current economic situation from multiple aspects, including population structure, consumption capacity, interest rate status, economic growth status, and market supply-demand contradictions, revealing the deep logic hidden behind the data. At the same time, through reflection on asset allocation, economic policies, and globalization trends, it will explore how to break free from habitual thinking in a complex environment, providing new perspectives and ideas to address current challenges.
I. Insufficient Effective Demand
1.1 Deterioration of Population Age Structure
Source: China Statistical Yearbook Figure 1.1
From 1982 to 2023, China's population age structure has undergone significant changes. The proportion of the population aged 0-14 has gradually declined from nearly 30% to around 16%, indicating a significant drop in birth rates and a continuous decrease in the proportion of young people. Meanwhile, the proportion of the working-age population aged 15-64 steadily increased from about 60% to nearly 70% between 1982 and 2010, but then began to decline gradually due to low birth rates and the exacerbation of aging trends. At the same time, the share of the elderly population aged 65 and above has risen from about 5% in 1982 to 15% in 2023, making the phenomenon of population aging increasingly evident.
Source: China Statistical Yearbook Figure 1.2
By examining the trends in birth rates, death rates, and natural growth rates, it can be seen that China's population growth is undergoing a transition from rapid growth to low growth and then to negative growth. The birth rate has dropped from over 20% in 1978 to below 10% in 2023, while the death rate has shown a gradual upward trend, increasing from 6.25% in 1978 to nearly 8% in 2023. Due to this dual change, the natural growth rate has rapidly shrunk from over 15% to its current negative value.
The aging population in China and the decrease in the young population are important reasons for insufficient effective demand. As the proportion of the elderly population continues to rise, their consumption capacity weakens, and their inclination to save increases, limiting their overall consumption drive; meanwhile, the decline in the young labor force, marriage rate, and birth rate not only weakens the consumption expenditure of young families but also suppresses the demand growth for housing, education, and other fields, thereby overall inhibiting the improvement of social effective demand.
China's population structure significantly differs from that of European and American countries, stemming from cultural traditions and developmental paths. China's population expansion primarily relies on its own fertility growth, while European and American countries largely depend on immigration for population expansion. This allows European and American countries to alleviate aging issues to some extent through the influx of foreign populations, while China relies more on its structural adjustments. Therefore, these differing development models have also led to significant differences in the aging processes and responses between the two.
Source: U.S. Census Bureau Figure 1.3
1.2 Accelerated Decline of Middle-Class Consumption Capacity
China's effective demand largely relies on the leverage effect of population income, with the middle class being the core force. As the largest and most dynamic group in the consumer market, their consumption capacity directly affects the stability and sustainability of economic development. Why? The rise of China's middle class is a significant achievement of reform and opening up, benefiting from rapid economic growth, urbanization, and substantial increases in income levels. Since 1978, China's GDP has grown at an average annual rate of 9.5%, with the urbanization rate rising from 17.9% to over 65%, and per capita disposable income increasing by about 138 times, laying the foundation for the formation of the middle class. By 2022, the middle class had reached about 400 million, accounting for nearly 30% of the national population, becoming the main force in the domestic consumer market. Their consumption has shifted from basic needs to quality demands, driving rapid development in industries like education, health, and tourism, and further releasing consumption potential through the proliferation of consumer credit and the internet economy. The consumption capacity of this group has directly fueled China's economic growth and injected lasting vitality into the consumer market.
Source: MacroMicro.com Figure 1.4
As shown in Figure 1.4, China's core consumer price index (core CPI) has experienced multiple fluctuations over the past nearly 20 years, with significant impacts from the 2008 global financial crisis and the 2019 COVID-19 pandemic, leading to negative index values. This reflects the significant suppressive effect of major economic shocks on the consumer market. However, under current conditions where similar macroeconomic risks have not occurred, the core CPI is showing a continuous downward trend. As of October 2024, the year-on-year growth rate of core CPI is only 0.2%, close to 0. This trend indicates that the momentum of consumption growth in China is weakening, especially as the economic vitality of the middle class, as the core force in the consumer market, is obviously shrinking. At the same time, high debt levels and diminished asset appreciation potential further restrict their willingness to consume. This decline in consumption capacity not only directly impacts the activity of the domestic consumer market but also weakens the driving force of the internal economic cycle, exacerbating the issue of insufficient effective demand.
Another point worth noting is that television dramas, movies, and other mass media, as 'lagging descriptors' of social phenomena, have frequently presented visual expressions of the declining consumption capacity of the middle class in recent years. For example, in the recent highly discussed works (Song of Mortals) and (Reverse Life), there are scenarios of senior managers and senior programmers being laid off or even switching to food delivery jobs, which is essentially a reflection of social reality. In real life, such cases are not uncommon, including some extreme events caused by layoffs. The interplay of these plots and social phenomena, widely disseminated through media, not only reinforces the public's perception of economic decline but also exacerbates the anxiety and insecurity of the middle class. Panic emotions continually expand through the effect of dissemination, further prompting the middle class to adopt consumption downgrade strategies to cope with economic pressure. This behavior model of 'forced economic contraction' not only reduces their consumption capacity but also weakens the overall effective demand in society, bringing more challenges to economic recovery.
II. Oversupply
The issue of oversupply is particularly prominent in the Chinese economy, closely related to the characteristics of our interventionist economy. Chinese enterprises generally have a policy orientation; when the state provides policy benefits or conveniences to a certain industry, that industry experiences an influx of capital and enterprises. Initially, early entrants into the market can benefit from policy dividends and lower market competition, but as more and more enterprises join the market, competition intensifies, resulting in fierce internal competition.
This internal competition in the market means that enterprises must maintain competitiveness by lowering prices, expanding production, or cutting costs to seize market share, ultimately leading to a significant shrinkage of overall industry profit margins. At this point, when market supply far exceeds demand, the industry may reach a critical point, risking systemic collapse. This phenomenon can be visually reflected in PPI (Producer Price Index) data. PPI reflects the profit level of enterprises; when PPI is negative, it indicates a general decline in corporate profits, even facing losses.
Source: MacroMicro.com | LIBO Figure 2.1
It is noteworthy that since the end of 2022, China's PPI has remained in negative territory. This indicates a continuous decline in the overall profit level of enterprises, with price wars within industries becoming increasingly severe and competition extraordinarily fierce. A large number of enterprises are struggling to survive under low profits or even losses, while only a very small number of companies with scale effects, technological advantages, or resource monopolies can survive. Long-term negative PPI not only reflects the severity of oversupply but also has far-reaching impacts on the stability and healthy development of the economic structure.
III. Current Interest Rate Situation
In recent years, China's interest rate levels have undergone significant changes. The interest rate trend over the past decade shows a continuous downward trend, with the government using rate cuts as a means to 'inject liquidity' to stimulate the economy and promote residents' consumption. In traditional thinking, lowering interest rates and maintaining low rates are usually viewed as 'good news,' indicating more capital flow, lower borrowing costs, and stronger consumption capacity. However, we need to deeply consider whether this logic applies in China.
Source: TradingView Figure 3.1
3.1 Main Sources of Income Affecting Perception of Interest Rates
The perception of interest rates relates to the changes in the structure of residents' income sources and the methods of accumulating social wealth. Decades ago, when interest rates were high, people's perception was not strong because most residents' income sources were labor income, and wealth growth primarily depended on the accumulation of labor compensation. However, with economic development, the rise of capital markets has altered this situation. In recent years, an increasing number of residents have turned their attention to capital markets, hoping to gain wealth through investment, while labor income's proportion in overall income has been gradually declining.
In stark contrast is the United States. In the U.S., a significant portion of residents' income comes from returns on capital markets, such as stocks, funds, and retirement account investments. Due to this income structure, low interest rates are clearly beneficial for American residents. Low interest rates mean lower financing costs for enterprises, rising returns in capital markets, and thus driving prosperity in the stock market. For American residents who rely on capital markets for wealth, low interest rates not only enhance investment returns but also further stimulate consumption willingness, creating a positive 'wealth effect.'
In China, residents' consumption and investment behaviors are often influenced by a negative 'wealth effect.' The root of this wealth effect lies in the significant attraction of the real estate and capital markets. Most people enter the capital market or purchase real estate not because labor income growth has led to more investment capability, but to quickly accumulate wealth through asset appreciation or speculation. In other words, the driving force behind Chinese residents' investments comes more from expectations of wealth appreciation rather than the investment capability naturally generated by income growth. This phenomenon also reflects the irrationality of residents' asset allocation.
3.2 The Capital Market Does Not Meet Expectations
Source: TradingView Figure 3.2
Moreover, since the global financial crisis in 2008, although the Shanghai Composite Index has experienced multiple fluctuations and slight rises, it has largely remained in a long-term consolidation state. As of now, the level of the Shanghai Composite Index is almost the same as in 2009, indicating that the returns in the capital market have been negligible over the past decade. The policy goal of low interest rates has not manifested positively in the capital market, instead exposing the inefficiency of fund flow distribution within the market.
The key point is that if the increase in consumption levels is not based on an increase in labor income but rather relies on volatile growth in the capital market, it will form a kind of 'false prosperity.' This prosperity is not sustainable and may even sow the seeds of risk for the economy. When the motivation for consumption growth comes from residents' debt expansion rather than actual income increase, it ultimately leads to the economy falling into the predicament of weak consumption, debt expansion, and stagnation in growth.
Therefore, the meaning of interest rates needs to return to its essence. An increase in interest rates (rate hikes) caused by rising labor income leading to overheating consumption levels is a healthy economic signal, representing robust economic development momentum. However, a decrease in interest rates due to the bubble in capital markets leading to artificially high consumption levels is extremely dangerous.
IV. Current Economic Growth Situation
In recent years, China's GDP annual growth rate chart shows that, aside from a brief impact from the 2019 pandemic, China's economic growth rate has remained positive. This indicates that our economy is generally on a continuous growth trajectory. However, although the data shows economic growth, the actual feelings of the public are completely different; many people feel a pressure of sharp economic contraction. The phenomenon of 'disconnection between data and perception' is worthy of our deep reflection.
Source: MacroMicro.com Figure 4.1
Although GDP data continues to grow, the distribution of the benefits of this growth shows a distinct 'top-down' characteristic, benefiting industries and assets controlled by the wealthy. In contrast, the pressures of economic contraction gradually transmit to lower-income individuals in a 'bottom-up' manner. From real estate to capital market returns, the benefits of most growth are primarily concentrated in the upper income strata. However, when economic growth slows, lower-income individuals often feel the first impacts of reduced income, employment pressures, and declining purchasing power.
This 'top-down' growth logic leads to uneven distribution of social wealth. During economic growth, the rise in asset prices benefits the wealthy more, allowing them to earn substantial returns through investments in real estate, stocks, and other capital market assets. In contrast, the income of lower-income individuals relies more on labor compensation, and during economic contraction, the reduction in labor income directly affects their living standards. For instance, the real estate boom in recent years has enabled the wealthy to accumulate a large amount of wealth through property appreciation, but high property prices have limited the purchasing power of many ordinary residents, forcing them to bear heavy debts.
In contrast to growth's 'top-down' approach, the effects of economic contraction tend to spread more in a 'bottom-up' manner. From ordinary workers to small business owners, the lower-income population often feels the pressure of declining income and weakened purchasing power first. Over time, this contraction gradually transmits to the middle class and affluent classes, impacting the vitality of the entire economic system.
V. 'Major Issues'
Behind economic growth, the middle class has borne the brunt of demand. However, with the dual pressures of negative population growth and excessive leverage, the effective demand of the middle class is continuously contracting, directly undermining their ability to support economic growth. On one hand, negative population growth means a decrease in the new generation of consumers, creating a natural demand gap for an economy reliant on consumption-driven growth. On the other hand, the high leverage and debt levels formed over the past years further restrict the middle class's consumption space, forcing them to cut spending and prioritize debt repayment.
In this case, the middle class cannot provide sufficient demand support for a new round of economic growth, and the supply generated by this round of growth cannot find enough consumption to digest it. This imbalance between supply and demand not only robs economic growth of its momentum but also leads to a decline in the income of supply-side enterprises, increasing the risk of bad debts. When corporate profits are insufficient to cover debts, systemic financial risks may emerge. It can be said that the contraction of middle-class demand is becoming the most critical breakpoint in the economic cycle, and if this issue is not effectively resolved, it will sow profound hidden dangers for future economic growth.
6. Reflection: Breaking Free from Habitual Thinking
In the current context of dramatic changes in the global economic environment, we need to break free from habitual thinking and find new paths to adapt to future development.
1. Shifting from 'growing the cake' to 'dividing the cake'.
In the past, we focused on how to 'grow the pie' by driving overall economic expansion through continuous GDP growth. However, the dividends of growth have not been fairly distributed, leading to widening wealth gaps and increasingly severe issues of insufficient consumption capacity among residents. Therefore, future focus should shift to 'dividing the pie.' This not only requires government policies to achieve redistribution through tax adjustments, welfare transfers, and other forms but also needs to address the imbalance between residents' incomes, promoting a shift of wealth from capital-intensive fields to labor-intensive fields. At the same time, reasonable adjustments to debt and leverage levels should be made to achieve resource reallocation between individuals and enterprises and across regions.
For the capital market, many may believe it is essentially a form of resource redistribution. However, the characteristics of the capital market determine that it cannot fully achieve equitable redistribution. There is a risk of manipulation in the capital market, where experienced and financially strong investors are more likely to dominate the market, while young people, retail investors, and those with less experience are often at a disadvantage. In other words, the capital market, in the process of resource redistribution, more often manifests as a kind of wealth 'disruption' rather than 'distribution.' It actually forms a mechanism of wealth 'circular harvesting,' where capital tends to flow back from the young and inexperienced to those who already occupy advantageous positions.
Therefore, genuine resource redistribution should be achieved through more systematic and inclusive policy measures, rather than merely relying on the natural operation of capital markets. This not only helps narrow the wealth gap but also enhances the overall consumption capability and economic vitality of society.
2. Maximizing the Capacity of Existing Supply to Transform into Effective Demand
In the future, both enterprises and individuals need to focus on how to maximize the transformation of existing supply into effective demand. The issue of oversupply is already evident, and activating market demand will be key. Enterprises need to find breakthroughs in demand through innovative methods, such as marketing models like 'MCN' or 'personal IP,' to further tap into and attract potential consumers.
The entertainment industry plays an important role in this process, serving as a 'painkiller' for ordinary people, providing emotional comfort and leisure under economic pressure. Therefore, the market demand in this field will continue to exist, becoming an important direction for enterprises to explore consumption potential.
3. Engaging in Personal 'Carry Trading'
Earning in inflationary areas and spending in deflationary areas, engaging in personal 'carry trading' could be a new approach to respond to changes in the global economic environment. In a globalized economy, different regions may experience vastly different inflationary and deflationary conditions, and this disparity provides new opportunities for individuals and enterprises.
For example, the U.S. capital markets (such as U.S. stocks and cryptocurrencies) exhibit strong profit potential in an inflationary environment, especially as Trump may return to the political stage, possibly ushering in a new round of inflationary policies in the U.S. Such inflationary policies will further drive the prosperity of capital markets, while cryptocurrencies, as a 'reservoir' of capital markets, have begun to operate in this environment, providing opportunities for investors. Additionally, from the perspective of seeking overseas markets, fields like cross-border e-commerce can also leverage opportunities brought by inflationary markets to achieve profits by meeting global demand.
On the other hand, spending in deflationary areas means acquiring more resources or assets at a lower cost, such as in the domestic consumer market and the sluggish real estate market. In a deflationary environment, consumers can meet more needs with relatively less spending, thereby enhancing their quality of life. This 'cross-market thinking' can help individuals and enterprises find better action paths amidst global economic fluctuations.
4. Prospective Investment
The profit space for mature markets and industries is becoming increasingly narrow, and future wealth growth needs to focus on yet-to-mature areas. As the domestic real estate market tends towards saturation and prices may decline, seeking overseas permanent property assets after meeting housing needs will become a choice. For example, properties in Singapore and forest resources in Europe.
Moreover, we must also take into account the current turbulent international situation, where the risks of war and geopolitical conflicts are increasing, making the issues of asset ownership particularly sensitive. In the context of national antagonism, traditional assets (such as real estate, bank deposits, and even some gold reserves) struggle to ensure the stability of ownership. In this case, the value of Bitcoin (BTC) becomes increasingly apparent. As a decentralized digital asset, Bitcoin does not rely on any country or institution, and its ownership is entirely in the hands of individuals, not subject to deprivation or freezing due to geography, policies, or wars.
Source: TradingView Figure 6.1
The rise of Bitcoin's status in the market has also been validated by the BTC/GOLD ratio chart. Over the past few years, this ratio has rapidly grown, indicating that Bitcoin is gradually being attributed with similar safe-haven properties as gold, and even surpassing gold in certain scenarios. Gold, as a traditional store of value, is still constrained by geographical and political factors due to its physical attributes affecting its liquidity and safety. In contrast, Bitcoin's digital characteristics make it superior to gold in terms of circulation efficiency and safety, leading to its increasing recognition as 'digital gold' among investors.
This trend not only reflects the market's recognition of Bitcoin but also further strengthens the value recognition of Bitcoin. In the context of increasing uncertainty in global assets, Bitcoin, as an asset that cannot be seized, is permanent, and forms global consensus, is providing people with a new way to hedge and store wealth.
5. Three Elements of Asset Allocation
In asset allocation, valuation, return rate, and volatility are the three key factors for measuring investment choices. However, the ideal state of 'high valuation, high return rate, and low volatility' is almost impossible to exist simultaneously. The market typically seeks to achieve balance through 'killing valuation,' 'killing volatility,' or 'killing return rate,' and this dynamic adjustment also reveals the essence of risk in asset allocation.
The 'dynamic balance of three elements: impossible to have it all'
The conflict between high valuation and low volatility: when asset valuations are excessively high and volatility is low, it easily attracts a large influx of capital, especially in a low-interest rate environment, where leveraging to amplify returns becomes mainstream. However, this state is often fragile; once market sentiment reverses or external conditions change, rapid 'volatility killing' may occur.
The conflict between high return rates and low volatility: high-return assets are usually accompanied by high risks, with sharp price fluctuations being a characteristic. For investors seeking stability, such assets are difficult to provide ongoing attractiveness.
The conflict between low volatility and high valuation: low volatility usually indicates strong market confidence, but excessively high valuations can make assets lose their attractiveness, and the market may seek to rebalance risk and return by 'killing valuations.'
The U.S. stock market has long attracted global investors with stable return rates and relatively low volatility. However, this low-volatility environment has also encouraged excessive leverage behavior, as investors generally increase their exposure to low-volatility assets through financing or derivatives to amplify returns. For example, Nvidia, as a star stock in the AI wave, once attracted a lot of capital due to its high valuation and low volatility. However, Nvidia experienced a flash crash; on September 3, Nvidia fell by 9.53%, marking the largest single-day decline since late April, with a total market value evaporating by $278.9 billion (approximately 1.99 trillion yuan), setting a new record for U.S. stocks.
This phenomenon indicates that when an asset possesses characteristics of high valuation and low volatility, the market is prone to extreme behavior. Once excessive leverage accumulates, slight market fluctuations can trigger a chain reaction, leading to significant pullbacks or flash crashes. This dynamic adjustment mechanism is not an isolated case, but rather an intrinsic logic of modern capital markets. In summary, the dynamic balance of valuation, return rate, and volatility is the core logic of market operation. Investors need to recognize that it is impossible to enjoy the ideal state of high valuation, high return rate, and low volatility simultaneously. Understanding the mechanism by which the market achieves rebalancing through 'killing valuation,' 'killing volatility,' or 'killing return rate' is an important prerequisite for optimizing asset allocation and avoiding risks.
VII. Conclusion
Amid the intertwining waves of de-globalization and a complex economic environment, the challenges faced by the Chinese economy are becoming increasingly severe. From changes in population structure to declines in consumption capacity, from contradictions in the current interest rate status to imbalances in economic growth, and from mismatches between supply and demand, various signs indicate that we are in a critical period that demands profound reflection and adjustment.
The dual dilemma of insufficient effective demand and oversupply reveals the deep-seated contradictions in the current economic operation. Population aging and the weakening of middle-class consumption capacity further diminish the vitality of the internal economic cycle; meanwhile, intensified competition among enterprises driven by policy orientation and declining profits have trapped the supply side in a dilemma. Against this backdrop, relying solely on traditional economic stimulus measures is unlikely to fundamentally resolve the issue; we need to re-examine growth logic, wealth distribution mechanisms, and the opportunities and challenges of globalization.
The reflections on breaking free from habitual thinking proposed in this article focus on the deep logic and future direction of the economy. From reasonable resource redistribution to maximizing the transformation of existing supply, and from asset allocation from a global perspective to prospective investment, we aim to provide broader ideas for the Chinese economy. In this process, the choices of individuals and enterprises, adjustments and implementations of policies, and changes in the international environment are all key variables.
The trend of de-globalization cannot be ignored, but it also presents us with an opportunity for repositioning and adjustment. Whether it's redefining the meaning of growth or seeking new balances for asset allocation, we need to embrace challenges with a more flexible and pragmatic attitude. Navigating through the fog requires not only a clear understanding of the current situation but also bold imagination and decisive action for the future. This may be the strongest response we can find in the current complex situation.
Disclaimer: Readers are strictly required to comply with the laws and regulations of their location, and this article does not represent any investment advice.
