Article reproduced from: LoongDao
Introduction
We are in an era fraught with crises and rapid changes, where the pains of economic transformation intertwine with the setbacks of globalization, presenting China with an unprecedentedly complex situation. The coexistence of insufficient effective demand and oversupply, along with heightened geopolitical risks increasing asset uncertainty, compels us to re-examine traditional economic development logic and thinking patterns. At the same time, Trump’s return to politics also raises concerns about whether history will repeat itself—whether he will once again initiate a trade war, pushing China into a new round of economic crisis. Compared to 2016, today's international political landscape leans more towards anti-globalization, facing significant resistance in globalization processes from tariff barriers to the return of manufacturing. Against the backdrop of insufficient domestic demand and oversupply, it is becoming increasingly difficult for China to digest excess capacity through expanding exports, and the path of external demand expansion is becoming narrower.
This article will analyze the current economic situation from multiple aspects, including demographic structure, consumption capacity, interest rate status, the current state of economic growth, and market supply-demand contradictions, revealing the deep logic hidden behind the data. At the same time, through reflections on asset allocation, economic policies, and globalization trends, it explores how to break free from inertia and provide new perspectives and ideas to respond to current challenges.
1. Insufficient effective demand
1.1 Deterioration of demographic age structure
Source: China Statistical Yearbook Figure 1.1
From 1982 to 2023, China's demographic 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 significant decline 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, and then began to gradually decline due to low birth rates and the intensification of aging trends. At the same time, 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
Analyzing changes in birth rates, death rates, and natural growth rates reveals that China's population growth is transitioning from rapid growth to low growth, and now to negative growth. The birth rate has decreased from over 20% in 1978 to below 10% in 2023, while the death rate has shown a gradual increase, rising from 6.25% in 1978 to nearly 8% in 2023. This dual change has rapidly contracted the natural growth rate from over 15% to its current negative value.
China's increasing population aging and decreasing young population are significant reasons for insufficient effective demand. As the proportion of elderly people continues to rise, their consumption capacity weakens, and their tendency to save increases, limiting their overall consumption pull; concurrently, the decreasing young labor force, along with declining marriage and birth rates, not only weakens young families' consumption spending but also suppresses demand growth in housing, education, and other areas, thereby overall inhibiting the improvement of social effective demand.
There are significant differences between the demographic structures of China and Western countries, stemming from differences in cultural traditions and developmental paths. China's population expansion mainly relies on its own fertility growth, whereas Western countries largely depend on immigration for population expansion. This allows Western countries to alleviate aging issues to some extent through the influx of foreign populations, while China relies more on its own structural adjustments. Consequently, these differing developmental models have led to significant disparities in both the aging processes and the responses to aging between the two.
Source: U.S. Census Bureau Figure 1.3
1.2 The consumption capacity of the middle class is accelerating downward
China's effective demand largely relies on the leverage of population income, and the middle class is the core force within it. As the largest and most dynamic group in the consumption market, their consumption capacity directly affects the stability and sustainability of economic development. Why? The rise of the middle class in China is a significant achievement of the reform and opening-up policy, benefiting from rapid economic growth, urbanization, and a significant increase in income levels. Since 1978, China's GDP has averaged a growth rate of 9.5%, urbanization rates have increased 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 grown to about 400 million, accounting for nearly 30% of the national population, becoming the main force in the domestic consumption market. Their consumption has shifted from basic needs to quality demands, driving rapid development in industries such as education, health, and tourism, and further releasing consumption potential through consumer credit and the popularity of the internet economy. The consumption capacity of this group has directly propelled China's economic growth and injected lasting vitality into the consumption market.
Source: MacroMicro.com Figure 1.4
From Figure 1.4, it can be seen that China's core Consumer Price Index (CPI) has experienced multiple fluctuations over nearly 20 years, with the 2008 global financial crisis and the 2019 COVID-19 pandemic significantly impacting the core CPI, leading to negative index values. This reflects the significant suppression effect of major economic shocks on the consumption market. However, currently, in the absence of similar macroeconomic risks, the core CPI has shown 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 China's consumption growth is weakening, especially as the economic vitality of the middle class, as the core force of the consumption market, is noticeably contracting. At the same time, high debt levels and diminished asset appreciation further limit their consumption willingness. This decline in consumption capacity not only directly impacts the vibrancy of the domestic consumption market but also weakens the internal circulation dynamics of the economy, exacerbating the issue of insufficient effective demand.
Another noteworthy point is that television dramas, movies, and other mass media, as 'lagging descriptors' of social phenomena, have frequently presented visual expressions of declining consumer capacity among the middle class in recent years. For example, in the recently popular shows 'Ordinary People' and 'Reverse Life,' there are plots of senior managers and senior programmers being laid off or even switching to become delivery workers, which is essentially a projection of social reality. In real life, such cases are not uncommon, including some extreme incidents caused by layoffs. The interplay between 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 felt by the middle class. Panic emotions are continuously amplified through the effects of dissemination, further prompting the middle class to adopt downgraded consumption strategies to cope with economic pressures. This behavior pattern of 'forced economic contraction' not only reduces their consumption capacity but also weakens the overall effective demand in society, presenting further challenges for economic recovery.
2. Oversupply
The issue of oversupply is particularly prominent in the Chinese economy, closely related to the characteristics of our interventionist economy. Chinese enterprises generally exhibit policy directionality; when the state grants policy benefits or conveniences to a certain industry, it attracts a large influx of capital and enterprises into that industry. Initially, early entrants can benefit from policy dividends and relatively low market competition, but as more enterprises join the market, competition intensifies, leading to fierce inward competition.
This inward-looking market pattern means that companies, in order to seize market share, must maintain competitiveness through price cuts, expansion, and cost reductions, 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 intuitively reflected through PPI (Producer Price Index) data. PPI reflects the profit levels of enterprises; when PPI is negative, it indicates a general decline in enterprise profits, and even 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 overall profit levels for enterprises, with increasingly fierce price wars within industries and exceptionally intense competition. A large number of enterprises are struggling to survive under low profits or even losses, with only a very few enterprises possessing scale effects, technological advantages, or resource monopolies able to survive. Long-term negative PPI not only reflects the severity of oversupply but also has profound implications for the stability and healthy development of the economic structure.
3. Current state of interest rates
In recent years, China's interest rate levels have undergone significant changes. The interest rate trend over nearly a decade shows a continuous decline, with the government reducing interest rates to 'inject liquidity' as a means to stimulate the economy and promote household consumption. In traditional understanding, interest rate cuts and low rates are usually seen as 'good news', indicating more capital flow, lower borrowing costs, and stronger consumption capacity. However, whether this logic applies in China needs further contemplation.
Source: TradingView Figure 3.1
3.1 The influence of main income sources on the perception of interest rates
The perception of interest rates is influenced by 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, because most residents' income sources were labor income, and wealth growth mainly depended on the accumulation of labor remuneration. However, with economic development, the rise of the capital market has changed this situation. In recent years, an increasing number of residents have turned their attention to the capital market, hoping to gain wealth through investments, while the proportion of labor income in total income is gradually decreasing.
In stark contrast is the United States. In the U.S., a significant portion of residents' income comes from capital market returns, such as investments in stocks, funds, and retirement accounts. Due to this income structure, low interest rates are clearly favorable for American residents. Low interest rates mean lower financing costs for companies, rising capital market returns, and subsequently boosting stock market prosperity. 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 a negative 'wealth effect.' The root of this wealth effect lies in the immense allure of the real estate and capital markets. Most people enter the capital market or purchase real estate not because of increased labor income that provides more investment capacity, but to quickly accumulate wealth through asset appreciation or speculative activities. In other words, the driving force behind Chinese residents' investments is more about expectations of wealth appreciation than the investment capacity that naturally arises from 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 highs, it has generally remained in a long-term consolidation state. As of now, the level of the Shanghai Composite Index is almost the same as in 2009, which means that the returns in the capital market over the past decade have been negligible. The policy goal of low interest rates has not manifested positive effects in the capital market; rather, it has exposed the inefficiency of fund allocation within the market.
The key point is that if the increase in consumption levels is not based on increased labor income but relies on the volatility of the capital market, it will create a 'false prosperity'. This kind of prosperity is not sustainable and may lay risks for the economy. When the driving force of consumption growth comes from the expansion of household debt rather than the increase in actual income, it will ultimately lead the economy into a predicament of weak consumption, debt expansion, and stagnation.
Therefore, the meaning of interest rates needs to return to its essence. An increase in interest rates (rate hikes) caused by increased labor income leading to overheating consumption levels is a healthy economic signal, indicating robust economic development momentum. However, a decrease in interest rates due to a bubble in the capital market resulting in artificially high consumption levels is extremely dangerous.
4. Current state of economic growth
In recent years, China's GDP annual growth rate chart indicates that, aside from the brief impact of the pandemic in 2019, China's economic growth rate has remained positive. This indicates that our economy is generally in a state of continuous growth. However, although data shows economic growth, the actual feelings of the general public are completely different; many feel the pressure of a sharp economic contraction. The phenomenon of 'disconnection between data and perception' warrants our in-depth reflection.
Source: MacroMicro.com Figure 4.1
Although GDP data continues to grow, the distribution of this growth’s benefits shows a clear 'top-down' characteristic, benefiting industries and assets controlled by the wealthy class. However, the pressure of economic contraction gradually transmits to the lower strata in a 'bottom-up' manner. From real estate to capital market returns, most of the benefits brought about by growth are concentrated in the upper-income strata. When economic growth slows down, the lower strata often feel the impacts of reduced income, employment pressure, and weakened consumption capacity first.
This 'top-down' growth logic has led to uneven distribution of social wealth. During economic growth, rising asset prices benefit the wealthy class more, who gain substantial returns through investments in real estate, stocks, and other capital market assets. In contrast, the income of the lower strata heavily relies on labor remuneration, and during economic contractions, the reduction in labor income directly affects their living standards. For instance, the real estate boom in recent years has allowed the wealthy to accumulate vast amounts of wealth through property appreciation, while high property prices have limited the home-buying capacity of many ordinary residents, even leading them to bear heavy debts.
In contrast to the 'top-down' growth, the impact of economic contraction spreads more 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. As time goes on, this contraction gradually transmits to the middle class and wealthy classes, affecting the overall vitality of the economic system.
5. 'Main Issues'
Behind economic growth, demand has largely been borne by the middle class. However, with the dual pressures of population decline and excessive leverage, the effective demand of the middle class is continuously shrinking, directly undermining their support for economic growth. On one hand, population decline means fewer new-generation 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 consumption space of the middle class, forcing them to cut spending and prioritize debt repayment.
In this situation, the middle class cannot provide sufficient demand support for a new round of economic growth, and the supply generated in this round cannot find enough consumption endpoints to absorb it. This supply-demand imbalance not only robs economic growth of its momentum but also leads to declining incomes for supply-side enterprises, increasing the risk of bad debts. 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 cannot be effectively resolved, it will lay profound hidden dangers for future economic growth.
6. Reflection: Breaking Free from Inertia
In the current context of dramatic changes in the global economic environment, we need to break free from inertia and find new paths that adapt to future development.
1. Transition from 'making cake' to 'dividing cake'
In the past, we focused on how to 'make the cake bigger', driving overall economic expansion through continuous GDP growth. However, the growth dividends have not been equitably distributed, leading to widening wealth gaps and insufficient consumption capacity among residents. Therefore, future efforts should shift towards 'dividing the cake'. This requires not only government policies to achieve redistribution through tax adjustments, welfare transfers, etc., but also addressing the imbalances in residents' incomes, promoting wealth to flow from capital-intensive areas to labor-intensive sectors. At the same time, it is essential to reasonably adjust debt and leverage levels to achieve resource reallocation between individuals and enterprises, as well as 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 fair redistribution. The capital market carries the risk of manipulation, where experienced and financially strong investors are more likely to dominate the market, while young people, retail investors, and those with less experience often find themselves at a disadvantage. In other words, the capital market in the process of resource redistribution tends to show more as a 'rupture' of wealth rather than 'distribution'. It effectively forms a mechanism of 'cyclical harvesting of wealth', where capital is more inclined to flow back from young people and those with less experience to those who already occupy advantageous positions.
Therefore, true resource redistribution should be achieved through more systematic and inclusive policy measures, rather than relying solely on the natural operation of the capital market. This not only helps narrow the wealth gap but also enhances the overall consumption capacity and economic vitality of society.
2. The ability to maximize the transformation of existing supply into effective demand
In the future, whether for enterprises or individuals, the core capability lies in how to maximize the transformation of existing supply into effective demand. The problem of oversupply has become evident, and how to activate 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 explore 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 activities under economic pressure. Therefore, market demand in this area will continue to exist, becoming an important direction for enterprises to tap into consumption potential.
3. Engage in personal 'carry trading'
Earning in inflationary areas, spending in deflationary areas, and engaging in personal 'carry trading' may be a new approach to respond to changes in the global economic environment. In a globalized economy, inflationary and deflationary conditions in different regions may differ dramatically, and this disparity provides new opportunities for individuals and enterprises.
For example, the U.S. capital markets (such as U.S. stocks and cryptocurrencies) show strong profit potential in an inflationary environment, especially with Trump potentially returning to politics, which could usher 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 the 'reservoir' of capital markets, have already begun to operate in this environment, providing opportunities for investors. Additionally, in light of seeking overseas markets, cross-border e-commerce and other fields can also leverage the opportunities presented by inflationary markets to achieve profits by meeting global demand.
On the other hand, spending in deflationary areas means obtaining more resources or assets at a lower cost, such as in the domestic consumption market and the sluggish real estate market. In a deflationary environment, consumers can satisfy more needs with relatively less expenditure, thus improving their quality of life. This 'cross-market thinking' can help individuals and enterprises find better action paths amidst global economic fluctuations.
4. Forward-looking investment
Mature markets and industries are seeing diminishing profit margins, and future wealth growth needs to focus on untapped areas. As the domestic real estate market becomes saturated and prices potentially decline, seeking overseas permanent property assets after satisfying basic housing needs will become an option. For example, real estate in Singapore, forest resources in Europe, etc.
Moreover, we must consider the current turbulent international situation, where the risks of war and geopolitical conflicts are increasing, making asset ownership issues particularly sensitive. In the case of national opposition, traditional assets (such as real estate, bank deposits, and even some gold reserves) find it challenging to ensure ownership stability. In this context, the value of Bitcoin (BTC) becomes increasingly evident. 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 to be stripped or frozen due to geography, policy, or war.
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 rapidly increased, indicating that Bitcoin is gradually being attributed similar safe-haven properties as gold, even surpassing gold in certain scenarios. As a traditionally valued asset, gold's physical attributes mean its liquidity and security are still constrained by geographical and political factors. In contrast, Bitcoin's digital characteristics enable it to outperform gold in terms of circulation efficiency and security, leading to an increasing number of investors viewing it as 'digital gold'.
This trend not only reflects the market's recognition of Bitcoin but also further strengthens the value recognition of Bitcoin. Against the backdrop of increased uncertainty in global assets, Bitcoin, as an asset that cannot be seized, is permanently present and forms a global consensus, providing people with a brand 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, it is almost impossible for the ideal state of 'high valuation, high return rate, low volatility' to exist simultaneously. The market typically balances itself by 'killing valuations', 'killing volatility', or 'killing returns', and this dynamic adjustment also reveals the essence of risk in asset allocation.
The dynamic balance of the three elements: it is impossible to have it all.
Conflict between high valuation and low volatility: when asset valuations are excessively high and volatility is low, it easily attracts a large influx of funds, especially in a low-interest-rate environment, making leveraging to amplify returns the market mainstream. However, this state is often fragile, and once market sentiment reverses or external environments change, rapid 'killing of volatility' may occur.
Conflict between high return rate and low volatility: high-return assets typically come with high risk, characterized by significant price fluctuations. For investors seeking stability, these assets are unlikely to provide sustained appeal.
Conflict between low volatility and high valuation: low volatility typically indicates strong market confidence, but excessively high valuations can make assets lose their appeal, leading the market to 'kill valuations' to rebalance risk and return.
The U.S. stock market has long attracted global investors with stable returns 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, attracted a lot of funds due to its high valuation and low volatility. However, NVIDIA experienced a flash crash on September 3, falling 9.53%, marking the largest single-day drop since late April, with a total market value evaporating by $278.9 billion (approximately 1.99 trillion yuan), setting a new record in the U.S. stock market.
This phenomenon indicates that when an asset possesses the 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 pullbacks 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 operations. Investors need to recognize that it is impossible to simultaneously enjoy the ideal state of high valuation, high return rate, and low volatility. Understanding how the market rebalances through 'killing valuations', 'killing volatility', or 'killing returns' is an important prerequisite for optimizing asset allocation and avoiding risks.
7. Summary
Amidst the intertwining of anti-globalization trends and a complex economic environment, the challenges facing China's economy are becoming increasingly severe. From changes in demographic structures to declining consumption capacity, from the contradictions in the current state of interest rates to the imbalance in economic growth, and the mismatch between supply and demand, various signs indicate that we are at a critical juncture that requires 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 weakened consumption capacity of the middle class further diminish the vitality of economic internal circulation; meanwhile, intensified competition among enterprises under policy guidance and declining profits have put the supply side in a predicament. Against this backdrop, relying solely on traditional economic stimulus measures is unlikely to fundamentally address the issues; we need to rethink the logic of growth, the wealth distribution mechanism, and the opportunities and challenges of globalization.
The thinking proposed in this article aims to break free from inertia, focusing on the deep logic and future direction of the economy. From the rational redistribution of resources to maximizing the transformation of existing stock supply, from global asset allocation to forward-looking investment, we attempt to provide broader ideas for China's economy. In this process, the choices of individuals and enterprises, the adjustments and implementations of policies, and the changes in the international environment are all key variables.
The trend of anti-globalization cannot be ignored, but it also presents us with opportunities for repositioning and adjustment. Whether redefining the meaning of growth or seeking 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 amidst the current complex situation.
Disclaimer: Please strictly adhere to local laws and regulations; this article does not represent any investment advice.