Introduction
We are in an era fraught with crises and rapid changes, where the pains of economic transformation and the twists of globalization intertwine, presenting an unprecedentedly complex situation for the Chinese economy. The coexistence of insufficient effective demand and supply overcapacity, along with geopolitical risks exacerbating asset uncertainty, prompts us to re-examine traditional economic development logic and thinking patterns. At the same time, Trump's return to politics raises concerns about whether history will repeat itself—will he launch another trade war and push China into a new round of economic crisis? Compared to 2016, the current international political landscape is more inclined towards de-globalization, with significant resistance to globalization processes from tariff barriers to the repatriation of manufacturing. In the context of insufficient domestic demand and supply overcapacity, it is increasingly difficult for China to digest excess production capacity through expanding exports, and the path for external demand expansion is narrowing.
This article will analyze the current economic situation from multiple perspectives, including population structure, consumption capacity, current interest rate status, economic growth status, and contradictions in market supply and demand, revealing the deep logic hidden behind the data. At the same time, by reflecting on asset allocation, economic policies, and globalization trends, we will explore how to break free from inertia in complex environments and provide new perspectives and ideas to address current challenges.
1. 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 decreased from nearly 30% to around 16%, indicating a marked decline in birth rates and a continuous reduction in the proportion of young people. Meanwhile, the proportion of the labor force aged 15-64 steadily increased from about 60% to nearly 70% between 1982 and 2010, and then began to decline gradually due to low birth rates and the intensification of aging trends. Simultaneously, the proportion 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
Combining the trends in birth rates, death rates, and natural growth rates, it can be seen that China's population growth is undergoing a transformation from rapid growth to low growth and then to negative growth. The birth rate has fallen 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. Affected by this dual change, the natural growth rate has rapidly contracted from over 15% to its current negative value.
China's accelerated aging population and decreasing young population are important reasons for the insufficient effective demand. As the proportion of the elderly population continues to rise, their consumption capacity weakens, and their propensity to save increases, exerting limited pull on overall consumption; at the same time, the reduction in young labor force, along with the continued decline in marriage and birth rates, not only weakens the consumption expenditure of young families but also suppresses the growth in demand for housing, education, and other fields, thereby overall inhibiting the enhancement of social effective demand.
China's population structure exhibits significant differences from that of European and American countries, stemming from different cultural traditions and development 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 mitigate aging issues to some extent through the supplementation of foreign populations, while China relies more on its own structural adjustments. Therefore, these different development models also lead to significant differences in the processes and responses to population aging in the two regions.
Source: U.S. Census Bureau Figure 1.3
1.2 The Accelerating Decline of Middle-Class Consumption Capacity
China's effective demand heavily relies on the leverage of population income, and the middle class is the core force within it. As the largest and most vibrant group in the consumer market, their consumption capacity directly influences the stability and sustainability of economic development. Why is this so? The rise of China's middle class is a significant achievement of the reform and opening up, benefiting from rapid economic growth, urbanization, and significant increases in income levels. Since 1978, China's GDP has averaged a growth rate of 9.5%, the urbanization rate has risen from 17.9% to over 65%, and per capita disposable income has increased approximately 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 upgraded from basic needs to quality demands, driving rapid development in industries such as education, healthcare, 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 boosted 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 global financial crisis in 2008 and the COVID-19 pandemic in 2019, leading to negative index values. This reflects the significant suppressive effect of major economic shocks on the consumer market. However, currently, even in the absence of similar macroeconomic risks, the core CPI shows 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 driving force behind consumer growth in China is weakening, especially as the economic vitality of the middle class, the core force of the consumer market, is clearly shrinking. At the same time, high debt levels and reduced asset appreciation space further limit their willingness to consume. This decline in consumption capacity not only directly impacts the activity of the domestic consumer market but also weakens the momentum of internal economic circulation, thus exacerbating the issue of insufficient effective demand.
Another point worth noting is that television series, movies, and other mass media, acting 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, recent popular shows like "The Ordinary Song" and "Life in Reverse" depict scenarios where senior managers and high-level programmers are laid off or even change careers to become delivery workers, which is a projection of social reality. In real life, such cases are commonplace, including extreme incidents caused by layoffs. The mutual reflection of these storylines and social phenomena, widely disseminated through media, not only reinforces the public's perception of economic downturns but also exacerbates the anxiety and insecurity of the middle class. Panic emotions are continuously amplified through the effect of dissemination, further prompting the middle class to adopt consumption downgrading as a way to cope with economic pressure. This behavior pattern 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.
2. Supply Overcapacity
The issue of supply overcapacity is particularly prominent in the Chinese economy, closely related to the characteristics of our interventionist economy. Chinese enterprises generally exhibit policy orientation; when the state provides policy benefits or conveniences to a certain industry, that industry sees a large influx of capital and enterprises. Early entrants into the market often benefit from policy dividends and lower market competition, but as more enterprises join the market, competition gradually intensifies, forming a fierce inward competition phenomenon.
This inwardly competitive market pattern means that companies must maintain competitiveness by reducing prices, expanding production, and 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, posing a risk of systemic collapse. This phenomenon can be intuitively reflected through PPI (Producer Price Index) data. PPI reflects the profit level of enterprises; when PPI is negative, it means that corporate profits are generally declining, and they may even face 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 intensifying within industries and competition becoming exceptionally fierce. Many enterprises struggle to survive under low profits or even losses, while only a very few with scale effects, technological advantages, or resource monopolies can survive. Long-term negative PPI not only reflects the severity of supply overcapacity but also has far-reaching impacts on the stability and healthy development of the economic structure.
3. Current Interest Rate Status
In recent years, China's interest rate levels have undergone significant changes. From the interest rate change chart over nearly 10 years, it shows a continuous downward trend, with the government lowering interest rates to "release liquidity" as a means to stimulate the economy and promote resident consumption. In traditional thinking, interest rate cuts and low rates are usually seen as "good news," implying more capital flow, lower borrowing costs, and stronger consumption capacity. However, whether this logic applies in China requires deeper contemplation.
Source: TradingView Figure 3.1
3.1 Major Income Sources Affect Perception of Interest Rates
The perception of interest rates is related to the changes in the structure of residents' income sources and the accumulation of social wealth. Decades ago, when interest rates were high, people's perception was not strong, as most residents' income at that time was derived from labor, and wealth growth primarily depended on the accumulation of labor remuneration. However, with economic development, the rise of capital markets has changed this situation. In recent years, more and more residents have turned their attention to capital markets, hoping to gain wealth through investment, while the proportion of labor income in overall income has gradually declined.
In stark contrast is the United States. In the US, a significant portion of residents' income comes from capital market returns, such as returns on stocks, mutual funds, and retirement accounts. Due to this income structure, low interest rates are evidently favorable for American residents. Low interest rates mean lower financing costs for enterprises, increased returns from the capital markets, and thus promote the prosperity of the stock market. For American residents who rely on the capital market for wealth, low interest rates not only enhance investment returns but also further stimulate consumption willingness, forming a positive "wealth effect."
In China, residents' consumption and investment behaviors are often influenced by negative "wealth effects." The source of this wealth effect lies in the huge attraction of the real estate and capital markets. Most people enter the capital market or buy real estate not because an increase in labor income has provided them with more investment capability, but to quickly accumulate wealth through asset appreciation or speculative activities. In other words, the investment motivation of Chinese residents is more driven by the expectation 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 increases, it remains 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 capital market returns have been nearly negligible over the past decade. The policy goal of low interest rates has not manifested positively in the capital market, but rather exposed the inefficiency of internal capital flow allocation.
The key point is that if the increase in consumption levels is not based on an increase in labor income but relies on the volatile growth of the capital market, it will create a form of "false prosperity." This prosperity is not only unsustainable but may also sow the seeds of risk for the economy. When the driving force behind consumption growth stems from the expansion of residents' debt rather than an actual increase in income, it ultimately results in the economy falling into a predicament of weak consumption, debt expansion, and stagnation.
Thus, the meaning of interest rates needs to return to its essence. An increase in interest rates (rate hikes) that results from increased labor income leading to overheated consumption levels is a healthy economic signal, representing robust economic development momentum. However, a decrease in interest rates that results from the bubbling of the capital market leading to artificially inflated consumption levels is extremely dangerous.
4. Current Economic Growth Status
In recent years, China's GDP annual growth rate chart indicates that, aside from a brief impact from the pandemic in 2019, China's economic growth rate has remained positive. This suggests that our economy is generally in continuous growth. However, despite the data showing economic growth, the actual feelings of the general public are completely different; many people feel a pressure of sharp economic contraction. The phenomenon of "disconnection between data and physical sensation" warrants our deep reflection.
Source: MacroMicro.com Figure 4.1
Although GDP data continues to grow, the distribution of this growth's benefits exhibits a clear "top-down" characteristic, favoring industries and assets controlled by the wealthy. In contrast, the pressure of economic contraction gradually transmits downwards to the lower strata. From real estate to capital market returns, most of the benefits brought by growth are concentrated among the upper-income strata. However, when economic growth slows, the lower strata often feel the impact of reduced income, employment pressure, and diminished consumption capacity first.
This "top-down" growth logic has led to unequal distribution of social wealth. During economic growth, the rise in asset prices benefits the wealthy class more, as they gain substantial returns through investments in real estate, stocks, and other capital market assets. Meanwhile, the income of the lower strata relies more on labor remuneration, and during economic contractions, the reduction in labor income directly affects their living standards. For example, in recent years, the prosperity of real estate has allowed the rich to accumulate considerable wealth through property appreciation, but high housing prices have restricted the home-buying ability of many ordinary residents, forcing them to bear heavy debts.
In contrast to the "top-down" growth, the impact of economic contraction more often spreads in a "bottom-up" manner. From ordinary workers to small business owners, the lower strata often feel the pressure of income decline and weakened consumption capacity first. Over time, this contraction gradually transmits to the middle class and wealthy strata, affecting the vitality of the entire economic system.
5. "Main Issues"
Behind economic growth, the demand has been primarily borne by the middle class. However, with the dual pressures of negative population growth and excessive leverage, the effective demand of the middle class is continuously shrinking, directly weakening 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 high debt levels formed over the past years further restrict the consumption space of the middle class, forcing them to cut back on spending and prioritize debt repayment.
In this context, 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 endpoints to digest it. This supply-demand imbalance not only drains the momentum of economic growth but also leads to decreased income for supply-side enterprises, increasing the risk of bad debts. When corporate profits are insufficient to cover debts, systemic financial risks may become apparent. 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 addressed, it will sow profound hidden dangers for future economic growth.
6. Reflection: Breaking Free from Inertia
Against the backdrop of drastic changes in the current global economic environment, we need to break free from inertia and find new paths to adapt to future development.
1. "Making Cake" Turns into "Dividing Cake"
In the past, we focused on how to "make the pie bigger" by continuously increasing GDP to drive overall economic expansion. However, the growth dividends have not been equitably distributed, leading to an increasing wealth gap and insufficient consumption capacity among residents. Therefore, the future focus should shift to "dividing the pie." This requires not only government policies to achieve redistribution through tax adjustments and welfare transfers but also to address the imbalances in residents' incomes, promoting the shift of wealth from capital-intensive fields to labor-intensive sectors. At the same time, a reasonable adjustment of debt and leverage levels is needed to achieve resource reallocation between individuals and enterprises, as well as across regions.
For the capital market, many may believe that it is essentially a kind of resource redistribution. However, the characteristics of the capital market determine that it cannot fully achieve fair redistribution. The capital market is at risk of being manipulated, and experienced, wealthy 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, tends to present more as a form of wealth "rupture" rather than "distribution." It effectively creates a mechanism of wealth "circular harvesting," where capital is more inclined to flow back from the young and inexperienced to those who already hold an advantageous position.
Therefore, true resource redistribution should be achieved through more systematic and inclusive policy measures, rather than relying solely on the natural operation of capital markets. This not only helps to narrow the wealth gap but also enhances the overall consumption capacity and economic vitality of society.
2. The Ability to Maximize the Transfer of Existing Supply into Effective Demand
In the future, whether for enterprises or individuals, the core ability lies in how to maximize the conversion of existing supply into effective demand. The problem of supply overcapacity is already evident; activating market demand will be key. Enterprises need to find breakthrough points for 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 "pain reliever" for ordinary people, providing emotional comfort and entertainment under economic pressure; thus, the market demand in this field will continue to exist, becoming an important direction for businesses to tap into consumer potential.
3. Engaging in Personal "Carry Trading"
Earning money in inflationary areas and spending in deflationary areas, engaging in personal "carry trading" could be a new idea for coping with changes in the global economic environment. In a globalized economy, inflationary and deflationary conditions may vary greatly between different regions, and these differences provide new opportunities for individuals and enterprises.
For example, the capital markets in the United States (such as the US stock market and cryptocurrencies) exhibit strong profit potential in an inflationary environment, especially with the possibility of Trump's return to politics, which may trigger a new round of inflationary policies in the US. These 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 such as cross-border e-commerce can also leverage the opportunities brought by inflationary markets to achieve profits by meeting global demand.
On the other hand, spending money 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 improving their quality of life. This "cross-market thinking" can help individuals and enterprises find better action paths amid global economic fluctuations.
4. Forward-looking Investment
Mature markets and industries are increasingly narrowing profit margins, and future wealth growth needs to focus on less mature fields. As the domestic real estate market approaches saturation and prices may decline, seeking overseas permanent property assets will become an option after meeting basic housing needs. For example, properties in Singapore and forest resources in Europe.
Furthermore, we must also consider the current international situation's volatility, with the risks of war and geopolitical conflicts increasing, which makes asset ownership issues particularly sensitive. In cases of national opposition, the stability of ownership of traditional assets (such as real estate, bank deposits, and even some gold reserves) is challenging to ensure. In such situations, Bitcoin (BTC) increasingly demonstrates its value. As a decentralized digital asset, Bitcoin does not rely on any country or institution; its ownership is entirely in the hands of individuals and cannot be seized or frozen due to geographical, policy, or wartime factors.
Source: TradingView Figure 6.1
The rising status of Bitcoin in the market has also been validated by the BTC/GOLD ratio chart. In recent years, this ratio has surged, indicating that Bitcoin is gradually being endowed with similar safe-haven attributes 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 properties affecting its liquidity and security. In contrast, Bitcoin's digital characteristics offer advantages in efficiency and security over gold, making it increasingly viewed as "digital gold" by more and more investors.
This trend not only reflects the market's recognition of Bitcoin but also further strengthens the recognition of Bitcoin's value. Against the backdrop of increasing uncertainty in global assets, Bitcoin, as an asset that cannot be seized, permanently exists, and forms a global consensus, is providing people with a new way to hedge and store wealth.
5. The 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, low volatility" is almost impossible to achieve simultaneously. The market typically seeks balance by "killing valuations," "killing volatility," or "killing return rates," and this dynamic adjustment also reveals the essence of risk in asset allocation.
"The Dynamic Balance of Three Elements: Impossible to Have All Three"
High Valuation and Low Volatility Conflict: When asset valuations are too high and volatility is low, it is easy to attract a large influx of funds, especially in a low-interest-rate environment, where leveraging to amplify returns becomes the market norm. However, this state is often fragile; once market sentiment reverses or external conditions change, rapid "volatility killing" may occur.
High return rates and low volatility conflict: high-return assets are typically associated with high risks, where price volatility is a characteristic. For investors seeking stability, such assets are difficult to provide sustained attractiveness.
The conflict between low volatility and high valuation: low volatility usually indicates strong market confidence, but excessively high valuations can make assets unattractive, and the market may rebalance risks and returns through "killing valuations."
The US 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, with investors generally increasing their exposure to low-volatility assets through financing or derivatives to amplify returns. For instance, NVIDIA, a star stock in the AI wave, attracted a significant amount of funds due to its high valuation and low volatility. However, NVIDIA experienced a flash crash on September 3, with a drop of 9.53%, marking the largest single-day decline since late April, and a total market value evaporation of $278.9 billion (approximately ¥1.99 trillion), setting a new record in the US stock market.
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, even slight market fluctuations can trigger a chain reaction, leading to significant corrections or flash crashes. This dynamic adjustment mechanism is not an isolated case but rather an inherent 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 understand that it is impossible to simultaneously enjoy the ideal state of high valuation, high return rate, and low volatility. Understanding the mechanism through which the market achieves rebalancing by "killing valuations," "killing volatility," or "killing return rates" is a crucial prerequisite for optimizing asset allocation and avoiding risks.
7. Summary
Amid the intertwining waves of de-globalization and complex economic environments, the challenges facing the Chinese economy are becoming increasingly severe. From changes in population structure to declines in consumption capacity, from contradictions in 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 requiring profound reflection and adjustment.
The dual dilemma of insufficient effective demand and supply overcapacity reveals the deep-seated contradictions within the current economic operation. Population aging and the weakening of middle-class consumption capacity further undermine the vitality of the economic internal circulation; meanwhile, the intensifying competition among enterprises driven by policy orientation and declining profits has trapped the supply side in a predicament. In this context, 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 posed by globalization.
The thinking proposed in this article about breaking free from inertia focuses on the deep logic and future direction of the economy. From the rational redistribution of resources to maximizing the conversion of existing supply, from global perspectives on asset allocation to forward-looking investments, 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 brings us opportunities for repositioning and adjustment. Whether redefining the meaning of growth or searching for new balances in asset allocation, we need to face 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 most powerful response we can find in the current complex situation.
Statement: Readers are required to strictly comply with local laws and regulations; this article does not represent any investment advice.