The turning point of Chinese people's wealth | Eddie Wu's notes

Author | Li Chengdong

Dong's Notes Issue 143

Two pieces of data caught my eye this morning:

1) China's total retail sales of consumer goods in the first half of 2024 increased by 3.7% year-on-year. However, Beijing saw a decline of 0.3%, Shanghai dropped by 2.3%, Guangzhou remained flat, and Shenzhen rose by just 1%. The consumption data of these four major cities lagged behind the national average, almost at the bottom. In contrast, some second-tier cities and regions in central and western China maintained relatively high growth rates.

In the first half of the year, Suzhou grew by 7.4%, Quanzhou by 6.1%, Fuzhou by 5.9%, Changsha by 5.2%, Wuhan by 5.6%, and Yantai by 4.8%. In Northeast China, often said to have entered economic decline 20 years early, Shenyang grew by 4.9% and Harbin by 10.3%.

2) The national government fund budget revenue and expenditure report shows that in the first half of 2024, revenue from state-owned land use rights transfers was 1.5263 trillion yuan, down 18.3% year-on-year. Compared with the 3.4436 trillion yuan in the same period of 2021, it has fallen by 60%.

According to WIND data, in the first half of 2024, the total land transaction volume of the TOP100 cities was 861.12 billion yuan, down 35.1% year-on-year compared with 2023. Among first-tier cities, Guangzhou and Shenzhen saw declines of over 70%, while Beijing and Shanghai dropped by 18% and 17%, respectively. Among second-tier cities, Wuhan, Jinan, and Fuzhou saw year-on-year increases in land transaction volumes, while others declined to varying degrees, with Nanjing, Suzhou, Hefei, and Tianjin all experiencing drops of over 60%.

These two sets of data provide an important factual basis for judging the future:

First, 70% of Chinese household wealth comes from real estate. With the bursting of the real estate bubble and housing prices falling back to 2016-2017 levels, the myth that prices would stagnate but never fall has been shattered. The belief that China's monetary over-issuance would inevitably lead to rising asset prices is not necessarily true. This explains why retail sales in first-tier cities have dropped more sharply this year—because housing prices in these cities have fallen more severely, affected by the wealth effect of deleveraging. Many people have gone from being millionaires to being in debt, and with the added fear of unemployment, it's no surprise they're tightening their belts.

Second, 50-70% of local government revenue in China comes from land sales. No matter how you look at it, China's excellent urban infrastructure is largely the result of lavish investments by local governments, which benefited from the real estate bubble, soaring land sales revenue, and urban investment bonds often backed by land as collateral. In this regard, first-tier cities are stronger than third- and fourth-tier cities, as they have corporate headquarters and diversified revenue streams to rely on. In contrast, smaller cities are more dependent on land sales, making their situations even more difficult. Many of the distant-water fishing fleets come from these smaller cities.

This raises two questions: Where should ordinary people and business owners invest their money? And where can local governments find long-term, stable tax revenue without land sales?

From today's perspective, ordinary people and business owners are unsure where to invest their money, so they mainly focus on early debt repayment and fixed bank deposits. This isn't just a recent trend—data from the past four to five years show the same pattern, with people holding onto more cash. It's likely that Chinese people will no longer invest in hoarding property, especially given the continued decline in birth rates.

My judgment is that the future direction of Chinese household assets will converge with that of the U.S., with more than half of assets shifting to financial assets, especially equity. The fact that 70% of American wealth is concentrated in financial assets didn't happen overnight. Fundamentally, it's because the growth of innovative companies can create more incremental wealth.

What local governments can do now is cut spending—infrastructure investment will inevitably slow down—while introducing property taxes, consumption taxes, and inheritance taxes to increase revenue and reduce expenditure. They should learn from Shenzhen, Hangzhou, and Hefei by focusing on supporting industries and enterprises, which will create jobs, generate tax revenue, and stabilize regional housing and land prices. This transition will be long and painful, as there's no more easy money to spend, and a lot of bad debt needs to be repaid. Relying on "killing the goose that lays the golden eggs" or distant-water fishing to sustain local finances is clearly not a long-term solution.

Add to this the geopolitical pressure and containment from the U.S., and China's sudden brake on policy has been too sharp, leaving many people bewildered. The instinctive reaction of most has been to become more cautious, with everyone choosing to deleverage. As a result, consumption and the economy have entered a downward spiral.

Warren Buffett once said, "Be fearful when others are greedy, and greedy when others are fearful."

My view is to do the right thing, hold onto quality assets, and focus limited resources and energy on what matters. In this world, some things will remain unchanged even ten or twenty years from now! I will never choose to lie flat—the worst choice is still better than making no choice at all.