Historic Opportunities for Investing in China - Exchange of Chinese Economy and Capital Market in North America
A historic opportunity to invest in China
——Exchange China's economy and capital market in North America
(Haitong Macro Weekly Communication and Reflection Issue No. 290, Jiang Chao, etc.)
At the end of each year, we will visit customers in North America. This time, we came to Canada this time. The global stock market fell sharply, and the atmosphere of the bear market was blowing. In addition, the performance of A shares this year was not up to par. Are overseas customers interested? Listen to us talking about China, and frankly we didn't have a clue before we set off.
In the past week of exchanges, the Chinese economic story we told has been recognized by many overseas customers. So, how to understand the changes that are taking place in the Chinese economy?
With debt to develop the economy, comedy turns into tragedy.
To understand the future of China's economy, we must understand the past of China's economy.
First of all, we must admit that the reason why China's capital market is so painful this year must be that something went wrong in the past. At the economic level, the biggest problem in the past was the model of borrowing to develop the economy.
Since the financial crisis in 2008, every time we encounter the challenge of economic downturn, it is solved by borrowing heavily. So far, we have experienced three rounds of debt cycles.
The first time was in 2008-09. In order to cope with the challenges of the global financial crisis, we mobilized the corporate sector to borrow heavily and increase investment in manufacturing. While we were the first to recover from the global financial crisis, it came at the cost of excessive debt in the corporate sector and excess manufacturing capacity.
The second time was in 2012-13. Overcapacity caused the economy to decline again. We launched government financing platforms to borrow heavily and increased infrastructure investment, but the consequence was that the hidden debt of government departments increased significantly.
The third time was in 2016-17. After the local debt was regulated, the economy declined again. We initiated a large amount of borrowing by the residential sector. Although the economy stabilized again, the price was that the debt ratio of the residential sector rose sharply and the real estate bubble intensified.
In the past 18 years, China's economy has once again experienced a significant downturn.
It can be found that every time we encountered an economic downturn in the past, we tended to deal with it by borrowing money, and each time we could solve short-term economic problems, but the good times were short-lived, and economic pressure often returned after a period of time.
And the reason behind this is actually very simple, because relying on borrowing to develop will only create economic fluctuations, but not economic growth.
According to Dario of Bridgewater, the operation of the economy may seem complicated, but it can be simplified. All economic activities are made up of one transaction, whether we spend money to buy a house or spend money to buy food, we are actually making a transaction. Behind all transactions, there are actually two modes:
The first is that the money we trade comes from work, which means we trade labor for commodities. The meaning behind this transaction model is that real economic growth comes from everyone's labor, from everyone's efforts and innovation. That is, in the long run, only an increase in production or productivity can create economic growth.
The second is that the money we trade comes from borrowing, which means we are exchanging debt for commodities. For example, using a credit card can also buy a house and a car, and it can also generate economic growth in the short term, but borrowing money has to be repaid, so repaying the money often leads to an economic downturn. Therefore, relying on borrowing to develop will only generate economic fluctuations. When borrowing, the economy will rise, and when debt is repaid, the economy will fall.
Therefore, we understand the role of debt on the economy, and in fact, we can understand the fate of China's economic cycle fluctuations in the past 10 years, because each borrowing will certainly bring about a short-term economic recovery, but when the debt is paid, it will inevitably face economic growth. Decline.
However, this time the problem is not the same as before. Because after three rounds of borrowing cycles, all entities in our economy have already borrowed money. At present, the debt ratios from enterprises, the government to the residential sector are all at their historical peaks, and the overall debt ratio of the Chinese economy is also at an all-time high. It is at a historical peak, and it is very close to the level before the US subprime mortgage crisis, and there is no room for improvement.
Therefore, at present, the Chinese economy has encountered the problem of huge debt, which cannot be solved by the old way of borrowing and developing. Reflected on the capital market, everyone is worried about the long-term prospects, because this is a new problem that the Chinese economy has not encountered in the past 40 years.
Deleveraging to collect money and drive out defaulted and bad money.
For China, huge debt is a new challenge, but for the world it is frequent. In fact, countries often encounter huge debt problems, because in the short term it is difficult for everyone to resist the temptation of borrowing to develop, so unknowingly, they have borrowed too much. Such as the subprime mortgage crisis in the United States in 2008, the bubble economy in Japan in the 1990s, and the debt crisis in Latin America are actually huge debt problems.
However, although the huge debt problem is difficult to deal with, it is not without solutions. For example, the financial crisis broke out in the United States in 2008, and the economy recovered in 2009. In his new book "Understanding the Giant Debt Crisis", Dalio summed up the experience of dozens of deleveraging around the world, and proposed that in order to achieve a perfect deleveraging, four things must be done: one is monetary tightening, and the other is Debt default, the third is to recreate money, and the fourth is wealth redistribution.
And if we follow Dalio's framework, what we need to know is whether our deleveraging has begun, and where has it reached?
From 2008 to 2017, the average annual growth rate of China's M2 was 15.4%, and the average annual growth rate of banks' total liabilities including off-balance sheet currencies was 17.1%, far exceeding the economic growth rate over the same period. Obviously, we have not tightened much in the past ten years. currency.
However, in 2018, China's M2 growth rate dropped to 8%, and the growth rate of total bank liabilities dropped to 7%, which was far lower than the average growth rate of the past 10 years, and even lower than China's nominal GDP growth rate. This shows that This year's monetary tightening in China has already begun.
Then, when did the monetary tightening start, and another question opposite to it is who did the money over-issuance?
Let's answer the latter question first, who led the over-issuance of currency?
When it comes to currency over-issuance, everyone's first reaction is that the central bank does it, because the central bank is responsible for issuing banknotes. But if we look at the balance sheet of the People's Bank of China, the average growth rate of the base money provided by the central bank in the past 10 years is 12%, and the average growth rate in the past 5 years is only 5%, which is much lower than the growth rate of broad money in the same period.
Therefore, the central bank cannot be blamed for China's over-issue of currency. In fact, shadow banking led to the over-issue of currency. The channel business represented by non-bank financial institutions such as brokerage asset management, fund subsidiaries, and trust companies has flourished in the past few years, helping commercial banks to evade supervision and over-issuing credit, resulting in a serious over-issuance of real money.
Since 2017, the central bank has promoted a vigorous financial deleveraging. In 2018, the new regulations on asset management were officially released. We gradually closed the door to shadow banking, resulting in a sharp drop in real money growth. Therefore, our monetary tightening started from the financial deleveraging last year, which is reflected in the sharp decline in the growth rate of money under various calibers.
We have already started the first step of deleveraging and implemented monetary tightening, which has greatly reduced the real growth rate of money.
Let’s look at the second step of deleveraging, debt default.
This year, we have seen that China's debt default events are actually endless.
For example, P2P defaulted in the industry this year, and hundreds of P2P companies closed down in June and July.
In the bond market, more than 80 bonds have defaulted in the past 18 years, and the total default amount is about 80 billion, which has exceeded the total default amount in the previous four years.
This shows that the second step of deleveraging, debt default, has also occurred.
Although the outbreak of debt defaults has had an impact on related companies and financial institutions, and also affected market expectations, being able to tolerate large-scale debt defaults is actually a huge improvement for China's financial market, because it is a significant improvement in market participation. A huge warning for the
In the past, due to the expectation of just redemption, companies desperately borrowed money when they had the opportunity, while financial institutions had no risk of defaulting, and they desperately lend as long as there is demand, resulting in excessive borrowing. But now that a large number of debts have defaulted, enterprises will be more risk-conscious in the future, and they will not dare to borrow money indiscriminately, and banks will not dare to lend freely.
We have studied the distribution of bond defaults. Although it is mainly private enterprises, it cannot be said that these enterprises are completely innocent. Although there is an impact from the tightening of the financing environment, the most fundamental reason lies in themselves. Defaulting enterprises are common There is a problem that the amount of debt investment in the early stage is huge, but the subsequent cash flow is insufficient. Therefore, the emergence of debt default is actually a punishment for the past debt speculation.
Therefore, on the whole, we have actually gone halfway on the road of deleveraging: we have not only tightened the currency, but also tolerated the emergence of debt defaults, which is equivalent to eliminating unhealthy economic cells and driving out bad money in the economy. .
Another example is the real estate bubble. Everyone knows that this is a tumor of the Chinese economy, which will affect the long-term health of the economy. But in the past when the currency was over-issued, this bubble will only get bigger and bigger. This year, housing prices in many places have started to fall. The reason is that we have made up our minds to shrink the currency, so even the most tenacious tumor cells have begun to be eliminated. This is actually not a bad thing for the long-term health of China's economy.
Tax cuts benefit the people and reward the return of good money.
However, if it is just simply shrinking the currency and defaulting on debt, it may actually lead to an economic recession, not only punishing the bad guys, but also hurting the good guys.
This is actually the worry of China's capital market this year. So far, only the bond market has been rising, while the stock market has fallen sharply, reflecting the expectation of an economic recession. Everyone is worried that the sharp contraction of the currency will lead to an economic depression.
Therefore, to achieve a perfect deleveraging, we need to do two other things: one is to recreate money, and the other is to redistribute wealth.
First of all, it is necessary to objectively understand the relationship between money and the economy. It is wrong to issue excessive money, but it is also impossible to not issue money.
Currency is the blood of economic operation, so economic growth is actually inseparable from currency. But in the past, we issued a lot of money, and the way of issuing it was wrong. The shadow bank issued too much informal money, just like the human body. If there is too much blood in some organs, it will actually become a tumor. Now that we have discovered the tumor, shutting down the shadow bank is equivalent to surgical removal of the tumor, but other parts of the body still need blood. After the operation, the human body is weaker and the blood flow is relatively slow, so external blood transfusion is needed to maintain life. For the economy, this external blood transfusion is actually the central bank providing the base currency.
For example, after the financial crisis in the United States in 2008, the total assets of the Federal Reserve nearly quintupled, from less than $1 trillion to nearly $5 trillion at the peak.
Therefore, similar to the Fed's behavior, the central bank's four sharp RRR cuts this year are actually the right choice. After the closure of shadow banking, the central bank needs to come forward to provide the base currency.
However, what the central bank provides is the base currency. The central bank’s RRR reduction is like an external blood transfusion after surgery, which can maintain vital signs. However, in order to completely restore health, the human body needs to restore its own hematopoietic function, which is actually a requirement for the internal organs of the body. To restore health, be able to create blood circulation.
In the economy, there are two most important organs, one is the corporate sector and the other is the residential sector.
In order to restore the health of enterprises and the residential sector, it is not enough to simply rely on the central bank to release water. The most important thing is actually the fiscal policy. Through substantial tax cuts, the profitability of the corporate sector and the income of the residential sector can be increased.
Therefore, in terms of re-creating money, the People's Bank of China has done what it needs to do, providing enough base money. What is currently lacking is the creation of broad money, which requires fiscal tax cuts to stimulate the vitality of residents and enterprises.
In addition, the last thing in deleveraging is wealth redistribution. Simply put, the government should distribute more wealth to the low-income class, because the poor have a higher propensity to consume, so that consumption can be reactivated.
Therefore, we can see that among the four things that need to be done for a perfect deleveraging, the central bank has already done everything. We have both contracted the currency and tolerated the occurrence of debt defaults. At the same time, the central bank has come out to provide base currency. But what still needs to be done is to activate broad money and redistribute wealth, and the latter two actually require fiscal policy to cut taxes significantly, but it is precisely the latter that is not progressing very smoothly.
The United States has a tradition of tax reduction. After the financial crisis, the Obama administration passed a number of tax reduction bills, which reduced taxes by trillions of dollars and made a huge contribution to the rapid recovery of the economy.
In China, until the first half of 2018, our tax cuts have not seen actual results. In the first half of 2018, my country's tax revenue growth rate was 14.4%, of which the growth rate of value-added tax revenue was as high as 16.6%, which was much higher than the economic growth rate in the same period. Taxes are still going up.
But in the third quarter, the tax cuts finally started. The growth rate of China's tax revenue in the third quarter was 8%, of which the growth rate of value-added tax was 2%, which was lower than the current economic growth rate, indicating that the tax burden has finally decreased. Especially in the past September, the growth rate of tax revenue dropped to 6%, and the growth rate of value-added tax dropped to -1.2%, indicating that the tax reduction continued.
There may be two reasons why the effect of the tax reduction was only seen in the third quarter: one is that the 1% reduction in the VAT rate this year occurred in May, so the effect of the tax reduction will not be seen until after the third quarter; the other is that China The main body of taxation is value-added tax, which is levied along with the production process. In the first half of the year, the price of industrial products soared, so the value-added tax remained high, and in the second half of the year, the price of industrial products continued to fall, so the effect of VAT reduction was more obvious.
In October, the reduction of personal tax also began. The new version of the individual tax law has been implemented, not only raising the threshold from 3,500 yuan to 5,000 yuan, but also including four major expenditures such as education, medical care, housing, and pensions into the scope of individual tax deductions, which is equivalent to a monthly salary of less than 10,000 yuan. It is exempted from personal tax. The tax reduction for ordinary working class is not small. In fact, it shows great sincerity.
The tax cuts have finally begun, but they are not strong enough. Take the personal tax reform this time as an example. Since the proportion of people who pay personal tax in China is very small, this means that most people do not actually enjoy the benefits of the tax reduction. According to Ministry of Finance officials, about 187 million people paid personal income tax before this tax cut, which means that although nearly 200 million people can enjoy the benefits of the personal tax cut, the other 1.2 billion people have nothing to do with it. In addition, China really needs tax cuts in the corporate sector. Because the Chinese corporate sector bears 80% of the tax, we have only reduced the value-added tax rate by 1% for the corporate sector. In contrast, the US tax reform has lowered the corporate income tax rate from 35% to 20%. Therefore, China also needs to increase the intensity of tax cuts for the corporate sector.
In order to truly increase the income and reduce the burden on China's residents and corporate sectors, the most important thing to reduce is the value-added tax. one party On the other hand, value-added tax is a turnover tax, and all residents pay value-added tax indirectly when shopping. Therefore, the reduction of value-added tax means that the price of products will naturally decrease, which is equivalent to increasing the income of all residents in disguise. On the other hand, the biggest tax cost of enterprises is value-added tax. Therefore, if the value-added tax rate is greatly reduced, the burden on enterprises can be effectively reduced.
According to our estimates, if we reduce the value-added tax rate by 3%, especially if the 16% tax rate is reduced to 13%, an additional tax reduction of about 1 trillion can be achieved. If we can achieve such a scale of tax reduction, It will effectively reduce the burden on the residents and the corporate sector.
For the resident sector, substantial tax cuts can hedge the interest burden caused by huge debt. Since the household sector has added about 20 trillion in debt in the past three years, according to the 5% loan interest, the average annual increase in loan interest expenditure is 1 trillion. The previous increase and deduction of the individual tax threshold is equivalent to a tax reduction of 300 billion yuan. We assume that there will be an additional 1 trillion value-added tax reduction and exemption, and residents can also enjoy half of it, so the total amount is equivalent to a tax reduction for the resident sector. About 1 trillion yuan, which can basically offset the interest burden of huge debt in the past three years.
For the corporate sector, the previous value-added tax rate was cut by 1%, and the scale of tax reduction was about 300 billion yuan. If an additional tax reduction of 1 trillion yuan is added, the total value-added tax reduction scale will reach 1.3 trillion yuan. Departmental enjoyment is also equivalent to a tax reduction of about 700 billion yuan for the corporate sector. Coupled with other R&D tax credit policies that have been implemented, the tax reduction for the corporate sector can also reach a scale of trillions.
The tax cut is actually the most important step in China's economic recovery. In the past, continuous borrowing has exacerbated the debt burden of Chinese enterprises and the residential sector. However, through substantial tax cuts, the pressure brought by their debt burden can be fully offset, which actually makes China The main organs of the economy were restored to health.
And the significance of the tax cut is that it is a very important incentive mechanism. For our country, the most dynamic residents and enterprises tend to contribute the most to the tax. If the tax can be greatly reduced, the reward for these healthy cells will be greater. The tax reduction can encourage healthy cells to thrive. China's economy Restoring health is just around the corner!
We hope that the research on the further reduction of the value-added tax rate proposed by Premier Li in September will be released as soon as possible. As long as we persist in deleveraging to collect currency, drive out defaulting and bad currencies, and substantially reduce taxes and reward good money for the return, we can hope to rebuild the positive cycle of good money driving out bad money.
The policy emphasizes fairness and does not deny efficiency.
In fact, everyone has seen the huge effect of tax cuts. For example, Trump in the United States is actually relying on tax cuts to promote the continued prosperity of the US economy and stock market. After the Chinese government announced a substantial tax reduction, in fact, the A-share market also rebounded significantly last week, indicating that the tax reduction can indeed inspire people.
However, the significant reduction in value-added tax that everyone has hoped for so far is still under study and has not been realized. Therefore, the market also has doubts about whether to reduce taxes significantly, and an important concern is whether we have the will to reduce taxes? This actually involves the understanding of the relationship between the government and the market.
Taxes correspond to the government's income, so tax reduction is equivalent to reducing the government's income, which is actually equivalent to moving towards a small government and a large market, and moving towards the national retreat and the private advancement.
In the first nine months of this year, the profit growth rate of state-owned enterprises was as high as 23.3%, while the profit growth rate of private enterprises was only 9.3%.
So, how will we choose in the future?
In our opinion, the market has misunderstood the formation of the state's advance and the private sector's retreat. In fact, it should not be the goal of our policy, but may be the result of unintentional formation. In fact, it can be corrected.
In the report of the 19th National Congress of the Communist Party of China, it was officially proposed to resolutely fight the tough battle of preventing and defusing major risks, precision poverty alleviation, and pollution prevention. We believe that the policy goal embodied in this is to put fairness in an important position. From the perspective of the government, in the past, many people relied on currency excess to make money, but this brought financial risks, which is obviously unfair; there are still many people who make money by polluting the environment, which is not fair; and if economic development cannot benefit low-income groups, It's also not fair. Therefore, the core of government policy is to emphasize fairness.
However, in the process of controlling environmental pollution, we may rely too much on administrative means to implement one-size-fits-all measures in the early stage, resulting in the closure of a large number of small and medium-sized private enterprises in the upstream steel, chemical and other industries, while the remaining state-owned enterprises benefit from upstream prices. Objectively, it has formed the result of the advance of the country and the retreat of the people. However, if upstream prices remain high for a long time, while downstream private enterprises are dying, this is obviously a new unfairness.
Therefore, it is definitely wrong to pollute the environment, but is there a better way to control environmental pollution? In addition to administrative means, can we use more market-oriented means, such as formulating emission standards, and advanced technologies that meet the standards can be produced? Regardless of whether state-owned enterprises or private enterprises, this can actually allow advanced production capacity to be re-produced, which can not only stabilize the sluggish economy, but also reduce high upstream prices, without polluting the environment, killing three birds with one stone, why not do it?
Therefore, we see that in the heating season this winter, the environmental protection production limit in northern cities is no longer "one size fits all", but staggered production is arranged according to changes in air quality. .
Therefore, the core of the government's policy is actually to emphasize fairness, and this is not wrong in itself. We see that Trump's trade war is about America first. In fact, he is also talking about fairness from his own perspective. The lack of stamina for development and falling into the middle-income trap is also due to the unfair economic development of Latin American countries, and only a few people can benefit from economic development.
But emphasizing fairness does not deny the importance of efficiency. Because if there is no efficiency, for example, in the era of planned economy everyone eats a big pot of rice, and they are not full, it is actually the biggest unfairness.
To balance fairness and efficiency, tax reduction is actually the best choice.
On the one hand, with the same tax cuts, small and medium-sized enterprises and low-income groups have the largest relative improvement, which is actually reducing the gap between the rich and the poor. On the other hand, tax reduction is a future-oriented policy. The enterprises and residents that make the greatest contribution to society, the greater the future contribution, the greater the room for benefit, which can stimulate the vitality of the economy.
Therefore, if we want to achieve more equitable social and economic development, we should actually reduce taxes.
Deleveraging is short-term pain, but big tax cuts are long-term bright.
China's economic development is currently at a critical juncture, and the current choice is actually related to the development prospects in the next few decades.
In the past 40 years, our economy has been in the take-off stage. We have developed from a low-income country to a middle-income country, and our country has also become the second largest economy in the world. This is a very remarkable achievement.
In the past, the main advantage of our development was cheap labor. Relying on reform and opening up and the introduction of overseas advanced technology, we have gradually become a global manufacturing factory. But if we think about it carefully, India also has all these advantages, India has more people and it is cheaper, India has never been closed, why is India's development far less than ours?
In fact, the role of the government in the stage of economic take-off is indispensable. Although India has the advantage of low cost and can imitate advanced technology overseas, it lacks a strong government to form an effective organization to realize this advantage. We observed that South Korea, China Taiwan and other economies all adopted the model of state capitalism at the beginning. South Korea is a military government, and Taiwan, China is the government leading the ten major constructions. Through the introduction of technology, relying on external demand to develop manufacturing industries, the economy has finally achieved economic growth. take off.
We are in Canada this time, in Albert, where there is a huge oil sands reserve, but because the government is not strong enough, and the oil pipeline cannot be repaired due to environmental protection pressure, although the local reserves 95% of the world's oil sands resources, it can only be The low price of less than 30 US dollars / barrel is far lower than the international oil price, because of the lack of transportation equipment.
In China, transportation is actually not a problem. We went to Guizhou and heard that more than half of the 100 highest bridges in the world are in Guizhou. We can turn the moat into a thoroughfare, including the completion and opening of the Hong Kong-Zhuhai-Macao Bridge. The achievements of our government are due to our government's ability to execute, and it is also our advantage in the stage of economic take-off.
However, our strengths have changed over time. After economic development, our labor wages are no longer cheap compared with Southeast Asian countries. In the past, we could create GDP by borrowing money to build roads, but now the density of our highways has surpassed that of the United States, and we cannot use them without cars if we build too many roads. In the past, we could develop by imitating other people's technology, but now we are the boss in many fields, so it is impossible to imitate others, and we have to rely on our own innovation. In the past, we were able to develop by relying on external demand, but now the external demand is unreliable, so we must return to domestic demand.
In this sense, although the Sino-US trade war has a short-term impact on us, it is actually forcing us to make the right choice, because as a major economy, if we want to achieve economic prosperity, we must ultimately rely on domestic demand, relying on Innovate yourself, Trump is just making us face that up front.
Therefore, after we have crossed the stage of economic take-off, the next step to achieve is economic prosperity, which means that many past experiences are no longer applicable, and we must change the economic development model.
Although our labor force is no longer cheap, we graduate 10 million college students every year, and we have the largest human capital in the world. Without the quantitative dividend of the population, we have ushered in the quality dividend of the population.
Although under the current trade conflict, external demand is facing the pressure of shrinking, but we have a population of 1.4 billion, and the per capita income has reached the level of middle-income countries. This is the world's most potential internal market in the future, and we have domestic demand that we can rely on.
Although infrastructure investment is saturated and real estate investment is not lacking, innovation investment in China is still very scarce. To innovate on our own, we must encourage our own companies to invest in R&D and increase investment in innovation. Huawei's ability to become the world's largest telecom equipment manufacturer and smartphone manufacturer shows that Chinese companies are not incapable of innovation.
But all of this, whether it is going back to relying on domestic demand for development, or back to being driven by innovation, and giving full play to the advantages of human capital, actually requires the government to step up tax cuts. Through tax reduction, income can be returned to the resident sector, increasing the consumption potential of residents. Tax cuts can increase the profits of the corporate sector, thereby increasing the innovation capacity of enterprises.
Therefore, tax reduction is the most critical step in China's economic transformation. In the past, we could achieve economic take-off by relying on a big government and a small market, but if we want to achieve economic prosperity, we must return to a small government and a big market to stimulate the vitality of the economy.
In order to achieve tax cuts, there are actually three options: one is to increase the fiscal deficit rate, which is difficult to achieve in China. After all, the 3% fiscal deficit rate is a red line in China and will not be easily exceeded; the second is to reduce fiscal expenditures , it is necessary for the government to cut expenditures and overcome difficulties together with everyone. This is not easy, after all, many expenditures are rigid; the third is to sell assets to raise funds, increase mixed ownership reform, and introduce social capital. This is actually the choice that Thatcher made back then. He reduced taxes by selling stakes in state-owned enterprises and cured the British disease. At present, our state-owned enterprises in the upstream industry have high profits after overcapacity reduction. In fact, it is the best time to promote mixed-ownership reform, which can not only raise funds for tax reduction, but also realize the national retreat and private progress.
In the history of the United States, there is a story similar to that of the Chinese economy in the past 10 years. It happened in the 1970s. At that time, the United States was also over-issued in currency, and speculation was rampant. Speculators once became the richest man in the United States.
But in 1981, everything changed. Reagan became the president of the United States, and Reagan was also one of the greatest post-war presidents in the United States. Trump's "Make America Great Again" was actually the original words of Reagan's campaign in 1980. . After Reagan was elected president of the United States, facing the mess of stagflation, he proposed the famous "Economic Recovery Act", and his main policy propositions are two points, one is to reduce currency issuance, and the other is to increase tax cuts.
Due to the contraction of the currency, the era of American speculation ended, the commodity market entered a big bear market, and the speculative richest man in the United States, Bunker, went bankrupt. After that, the richest man in the United States has been dominated by technology upstart Gates for a long time. With tax cuts, the United States has entered a great era of innovation and prosperity. Before 1981, the U.S. stock market did not rise for 17 years. After 1981, the Nasdaq index, which represents innovation, rose a full 50 times, with an average annual increase of 10%. The biggest contributor to innovation is tax cuts. Since Reagan, the United States has formed a tradition of tax cuts. Round after round of tax cuts have inspired American companies to increase investment in research and development. Therefore, there can be thousands of wealthy people like Apple and Amazon. A company with a market value of 100 million US dollars, because its investment in research and development costs tens of billions of dollars.
China's stock market has not risen much for 17 years. The background behind this is the same as in the 1970s in the United States. It is also the over-issue of currency. All the funds have gone to the real estate market to speculate. People who bought houses have been very proud in the past 10 years. It is a winner in life, but this economic development model obviously has no future. As long as we are determined to deleverage and collect currency, then speculators must be careful, because the soil for speculation is gone, and the era of real estate is coming to an end. And as long as we make up our minds to cut taxes, the opportunity will come for those who work hard and are determined to innovate, and we will usher in a great era of innovation.
We believe that if the current government puts more emphasis on fairness, it will not go back to the old path of borrowing and development, but is expected to move towards a new path of shrinking currency and reducing taxes for development. It will endure short-term economic pain in exchange for long-term health. In this way, the long-term Chinese economy will be full of hope. .
In China's capital market, foreign capital is not pessimistic.
For the recent decline in U.S. stocks, overseas investors believe that the main reason is that the valuation is too high, and the accelerated rate hike by the Federal Reserve will have an impact on the valuation. However, almost all Canadian institutions are firmly optimistic about the long-term prospects of the U.S. economy, because the scale of the Canadian economy is too small. In the past, they have mainly invested in the United States for a long time, and they have obtained huge gains. Therefore, everyone thinks that the future volatility of the U.S. market will increase. Big, but don't think there's a big problem with the fundamentals of the U.S. economy.
In overseas markets, people are not so pessimistic about China. This year, due to the sharp drop in A-shares, financial practitioners are more pessimistic, and they are all talking about various high-level national fortune issues. However, in the eyes of overseas investors, it is not only A shares that have fallen this year. Almost all emerging markets except the United States are falling, and emerging markets are characterized by high volatility. Because of the large number of retail investors, it is actually quite normal for A shares to rise and fall sharply. This is actually not rational, but will give professional investors greater opportunities.
Internally, we see ourselves as having many problems, but in fact, everyone has their own problems. For example, in Canada, everyone is also worried about immigration, but this problem is even more serious in Europe. Many immigrants from Muslim countries do not work at all after coming here, relying on high welfare subsidies to live, and due to high fertility, their power is on the contrary.
It is getting bigger and bigger, resulting in lower and lower economic efficiency. But in fact, all countries are very welcome to Chinese immigrants, because the Chinese tradition is to bear hardships and stand hard work. In China, we are not worried about immigration, we are worried about the aging population, but this problem is more serious in Japan, but now that there are robots, it can actually replace a large part of human work.
For example, we are worried about the real estate issue, which is a problem in many countries. In the past few years, Canadian residents’ debt has actually risen sharply, and house prices in many places have doubled in three years. However, last year, Toronto and Vancouver both imposed a 15% property tax on overseas speculators. House prices have fallen sharply over the past two years. But without real estate prices rising, the Canadian economy is still developing. Even if my country's housing prices fall, it does not mean that there is no hope for the economy.
The characteristic of the Chinese is that they attach great importance to education. Where there are many Chinese, the local school exams will get better, and then a new school district will be formed. Some local friends told me that they would even let their children take various online classes in China, because It works really well. In addition, I recently changed to a Huawei mobile phone because it is convenient to use. This actually shows several things: First, it is not the house that is valuable, but education. Therefore, China's education, medical and other service industries are full of hope. In addition, China's excellent innovative enterprises create value because they are really easy to use.
Although we have seen a sharp drop in the stock prices of companies such as Tencent and Alibaba since the beginning of this year, the clients we have seen in Canada are all annuities, in fact, they are mainly long-term investments, and several institutions have taken Tencent for many years. I started investing as soon as I went public. In fact, I made a lot of money from Chinese assets in the past, so I would not be bearish on China for a long time because of short-term declines. But it will continue to develop, and the general trend of consumption upgrades for 1.4 billion people has not changed, so the fall of these good companies representing the future is more an opportunity than a risk.
As for the exchange rate issue, although the RMB exchange rate is depreciating this year, other emerging markets are also depreciating. Therefore, it can mainly be explained by the appreciation of the US dollar, and everyone thinks that China's industries are competitive, so the depreciation of the exchange rate will improve exports and foreign exchange, which will improve the expectation of further depreciation. At present, the RMB may not be in place, but the more it depreciates. The closer it is to the equilibrium exchange rate level.
Moreover, the foreign-funded institutions we communicated actually agreed with our point of view, that is, China’s development by borrowing in the past was actually detrimental to long-term health, but now deleveraging and tax reduction are doing the right thing, so the recent policy evaluation is actually is very sure.
Last year, the market was talking about a new cycle, but we wrote "The Peak of Prosperity" to indicate risks, because we saw residents borrowing and speculating. This is a bubble rather than a new cycle. We wrote "The Peak of Prosperity" in 2016. Residents Leverage, Dangerous Game!". And this year, when we wrote "Investing in China's Historic Opportunity," we saw deleveraging, debt defaults, and tax cuts. These are all things that are right in the long run. Even if there is pain in the short term, there is hope in the long run.
According to reports, the public and battery vehicle technology supplier Provincetown Jomtien US company (ProteanElectric) cooperation, wheel motor technology is expected to promote a new model cell vehicle design and manufacturing.