Northeast Securities’ chief economist Fu Peng recently stated that China’s current problems are much more serious than those faced by Japan in the past, and the trend of consumption downgrade in society is far from over.
The “New Opportunities, New Vitality – Phoenix Bay Area Economic and Financial Forum 2024” was held from September 2 to 4 in the Hengqin Guangdong-Macau Deep Cooperation Zone. Northeast Securities’ chief economist Fu Peng delivered a speech on the current economic situation in China during the forum.
According to China’s Weibo account “Mr. Luo’s Financial Talk” on September 14, Fu Peng pointed out that China’s current issues are similar to Japan in the past, but more severe. China is facing challenges such as aging before becoming wealthy, debt issues before prosperity, and a very grim employment situation. Additionally, due to the combined effects of an aging population and debt pressure, China is running out of time and resources to deal with the upcoming severe aging issue.
Fu Peng believes that China is currently facing weak consumption recovery in the macroeconomic sector, and this issue cannot be solely attributed to lack of confidence. He explained that the yield of national bonds reflects investors’ expectations and attitudes towards the market. The decline in bond yields indicates a significant decrease in Chinese companies’ ability to generate investment returns. Currently, China’s national bond yield is 2.1%, which may drop below 2% by the end of the year.
The declining investment returns have multiple underlying reasons, including sluggish consumption, decreasing returns on infrastructure investments, stagnant growth in private enterprise investments, declining foreign investments, and the drop in national bond yields. These factors signify the low investment returns reality, leading to fierce competition within limited markets and internal consumption stagnation across various industries.
The low national bond yields signify a drastic decrease in investment returns, which deters companies from investing further in a cycle of negative investment returns, perpetuating a vicious circle.
China’s economy currently lacks consumption and demand. Without consumption and demand, any stimulated consumption merely borrows from future consumption potential.
Fu Peng believes that the ongoing consumption downgrade in China has not reached its lowest point yet. The significant increase in consumption over the past decade was not driven by natural wage growth; instead, it was largely supported by rising real estate prices. The initial decline in house prices resulted in many people losing their down payments, turning their houses into liabilities, which leads to an inevitable consumption downgrade. As long as the real estate market continues to shrink, the consumption downgrade will persist. When the real estate market contracts, China’s so-called consumption upgrade almost instantly reverts to its original state.
Fu Peng stated that the price wars and internal competition happening in various industries this year do not produce winners. To increase profits in a competitive market, the only viable option for companies is workforce reduction. While this may seemingly maintain a company’s profits, if all companies follow this route, national employment will become exceedingly challenging.
Workforce reduction leads to further consumption downgrade among employees, resulting in declining revenue and profits for companies, forcing them into continued price wars and internal competition. Consequently, residential consumption continues to contract.
Fu Peng believes that a vicious cycle of negative trends across businesses and residents will spiral downwards once formed. This negative trend, if left unchecked, may lead China into a more severe crisis than Japan.