Shao Yu: These two things are definitely the core themes of the future

On September 3, Shao Yu, a specially appointed senior researcher at the National Financial and Development Laboratory, gave a keynote speech on the disruption of China's capital market at the Phoenix Bay Area Finance Forum.

The representatives of the investment homework class summarized the key points as follows:

1. By 2030 or 2035, the peak of urbanization and industrialization will be outdated. Relying solely on total factor productivity and labor efficiency technology innovation, the growth it brings will converge to around 2%, which is still valuable.

2. It is crucial to understand where the key decisions lie now. In the decade from "peak population" to "peak carbon", do we expect housing prices to double again? Should we let more urban investment platforms take on more debt?

3. The silver economy and the substitution of robots for human labor will definitely be core themes in the future.

4. Investing in listed companies is like betting on the country's future. If we can successfully transform, I believe that China's leading large technology companies should stand out.

5. China's capital market has its own characteristics. For example, core technology companies represented by strong and light aroma, although all good companies, do not provide much help for transformation. Such adjustments are underway. Only by completing institutional design and adjusting the capital market can we achieve our desired goals.

Shao Yu believes that the future economic trend may be LV-shaped, with GDP growth expected to drop to 2% by 2035, similar to the level of developed countries. From the peak population in 2022 to the peak carbon emissions by 2030 or extended to 2035, we have a very brief 10 to 12-year window.

How to understand this decade of change, what can we really do, and what are the goals we want to achieve? The Third Plenum also made it very clear that the core revolves around new quality productivity.

In the past 10 years, technology-leading companies have become the world's largest market value companies. If we can successfully transform, China's leading large technology companies should stand out.

Here are the highlights compiled by the representatives of the investment homework class (WeChat ID: touzizuoyeben) to share with everyone:

Population has peaked, these two things will definitely be the core themes of the future

This research topic includes both macroeconomic and microeconomic aspects. In the current macroeconomic environment, how the capital market, as a component of the microeconomy, will adjust and what we can expect from it are worth discussing.

This chart is one I recently drew to provide a reference for everyone. You need to know which stage we are in now, what this process we are going through means.

The image actually outlines our entire economy, including our investments, the capital market we care most about, and the real estate, four key scenes.

In fact, although economists have discussed many viewpoints, understanding the economy is not complicated.

First, there are two basic constraints, which are also supporting conditions.

First, the quadrant at the bottom of the image represents the population. It is well known that China's total population reached its peak in the second half of 2022, reaching 1.41 billion. From that time, it is estimated that the population may have decreased by about 2 million this year. Standing at the current point in time (the yellow line in the image), we need to predict future trends.

The dashed blue line in the image represents the United Nations' forecast path for China's future population growth. By the end of the century, our population is expected to retreat to half its current position.

So aging may occur, including the disappearance of pensions, and whether you like it or not, the silver economy, the silver economy and the substitution of artificial intelligence by robots will definitely be core themes in the future.

Carbon peak will be achieved in ten years

Another constraint is the blue line in the first quadrant of the image - our carbon emissions. The rapid growth of carbon emissions is closely related to the industrialization and urbanization processes since the 1980s and 1990s. It is expected that by 2030, according to our plans, we will achieve the peak of carbon emissions.

This is not just about driving electric cars. Studies show that when the urbanization rate of an economy exceeds 80% and the share of manufacturing exceeds 30%, carbon emissions will peak.

If our energy path is gradual, then in about ten years, we will complete the peak period of urbanization and industrialization. From the peak population in 2022 to 2030, or extended to 2035, we have a very brief 10 to 12-year time window, which constitutes our two key constraints.

The two curves of "real GDP year-on-year" and "M2 year-on-year" may gradually decline

Looking at our economy - the third quadrant. People often mention the relationship between finance and the real economy. We use M2 to represent financial relationships (red line), while the real economy is reflected by GDP growth (blue line). Both move forward together, complementing each other. In the past 30 years, GDP growth has averaged 10%, but now it is 5%.

The current issue lies in predicting future trends. What every economist needs to do is extend this line backwards. The debate on the trajectory of the Chinese economy has been ongoing for many years, whether it will be an L-shape or a V-shape. After years of discussion, we believe it might be an LV-shape.

If it is an LV-shape, the economic growth rate for the next five years will be around 5%, then by the "15th Five-Year Plan" (2026-2030), it may drop to 4%, and by the "16th Five-Year Plan" (2031-2035), it may further decrease to 3%.

The reason is that the peak of urbanization and industrialization has passed, relying solely on total factor productivity and technological innovation in labor efficiency. The growth it brings will converge to around 2%, which is still valuable.

Looking at financial variables (red line), M2 growth rate in the 1990s was as high as 23%, meaning the economy added 23% purchasing power each year. Now, M2 growth rate has dropped to a historic low, around 6% to 5%, with M1 even experiencing negative growth.

This is because in the past, we sold 1.8 billion square meters of real estate annually, but now we can only sell 0.9 billion square meters. With the decrease in real estate sales, related loans and banking businesses will also be affected.

There exists a subtle relationship between finance and the real economy. Although no one can quantify this relationship, we can see it through historical experience.

In other words, when predicting the macroeconomy, we must draw this blue line (economy) and red line (finance), extending it into the future. Overall, we believe it will gradually decline due to base effects and the important constraints of population and carbon emissions mentioned earlier.

In summary, when predicting the macroeconomy, we must consider these factors. Overall, we believe that these indicators will gradually decline, affected by base effects and the important constraints of population and carbon emissions.

Without adjusting macro and micro mechanisms, it is difficult for the stock market to V-shaped reverse

Next, we are most concerned about the capital market, stock market, and our homes.

Regarding the capital market, we have discussed many micro issues. Interestingly, our stock market index has long hovered around 3000 points. We have reached 6000 points and 5000 points before, but these highs have not been sustained. We need to reflect on these experiences, what they have brought us, and our deeper understanding of the entire economy.

Everyone sees two pillars, which is very important. We reached 6000 points once and 5000 points once.

Why did it reach 6000 points? Do you all remember? It started in 2005 when we talked about the equity split reform. Due to arbitrage trading, also known as hot money flowing into China during the subprime mortgage crisis in 2008, the entire market valuation quickly surged to 6000 points.

The ending was also dramatic, because of the subprime mortgage crisis. Just now, a speaker mentioned the 4 trillion. This 4 trillion happened after the crisis, it did not trigger the rise to 6000 points, (stimulation) often occurs in a stage of decline, this is the first time.

The second time was from 2015 to 2016, this time everyone should remember vividly. It was called the reform bull at the time, various bulls, later proved to be a big water buffalo. How? By allowing residents to buy more stocks through off-exchange leverage. What happened next, many may not remember, there were thousands of stocks hitting the limit down, thousands of stocks halted trading, etc. Because investors only have a memory of 7 seconds.

Returning to the fundamentals, at this critical moment, we need to predict the future. I also hope for a V-shaped reversal, but the problem is that without adjusting macro and micro mechanisms, it is difficult to achieve this.

Because, stocks account for less than 10% of residents' investments, the most important is housing.

Everyone also knows that in the past 30 years, precisely speaking, buying a house before 2021, especially leveraging to buy a house, was correct. But in this year, due to deleveraging and industry adjustments, this process has ended, and it is difficult to repeat.

Everyone needs to understand where the key decisions are now. In the decade from "peak population" to "peak carbon", do we expect houses to double again? Let more urban investment platforms take on more debt?

Two prosperity have passed, what can we do in the future

So what do we really need? What are our expectations for the capital market? Is it just about the rise in points? What kind of change do we really want to bring about? This change is the real question we should be asking.

Why did I add a few vertical lines in the chart, because these are the stages of our development.

The first stage (early days of reform and opening up), you may have seen a TV series "Prosperity", the general audience may think it's a story of a man and four women, but as an economist, I don't think so.

It tells the initial stage of China's reform and opening up, from 1984 to 1995, especially in Shanghai. It involves significant changes in three industries, namely textiles and clothing, catering, and stocks.

The stock market, from the establishment of the capital market in 1991 to the rapid prosperity at 1000 points, seemed to be flourishing, looking splendid and magnificent. But this is just a prelude. The first season of "Prosperity" has ended. With the passage of time, if there is a second season of "Prosperity," it will probably be about Chinese private enterprises, especially real estate companies. It seems that this season has also come to an end.

So now, what will the future hold for us in this position? Today, a speaker gave a very good speech.

In the future, you can do two things, first, you can choose to follow the trend, because this is a huge change. It not only involves our methodology, our cognition, but also our values. You can adapt to survive.

You can also create the future. Creating the future means what our capital market needs to do?

Central Bank Increases Regulation? Too many things to buy, too busy, institutional development is also very painful

Due to time constraints, we will not delve into the top-level decision-making on the deployment of the capital market.

I will talk about a core logic, whether the capital market should strengthen the number of listed companies, the total financing amount, or quality companies. What mechanism should be used to ensure the balance between investment and financing.

In other words, it is important to let these investors truly feel the growth brought by these quality companies and the wealth appreciation they bring.

Of course, I also believe that now many people mention, for example, the central bank should increase efforts to regulate. Some suggest that it would be best for the central bank to buy houses as well. Yes, the central bank has too many things to buy, houses, stocks, bonds, and even gold, right? It's too busy. On the other hand, institutional development, because now everyone understands that if there were many companies listed in the past, now there are many delistings, this is a very painful process. Because improving the quality of listed companies is an eternal topic, and it is difficult to see results quickly.

What can be done during the ten-year window of change? The core revolves around new quality productivity

So, how can we demonstrate the effects we want to achieve, it involves how we understand the ten-year window of change we are facing. What can we do, what are our goals? In fact, this is very clear in the Third Plenary Session, its core revolves around our new quality productivity, how to promote the entire development process of these new productivity through our education, our human resource input, and the stimulation of our entrepreneurial spirit. Especially our financial adjustments can promote the entire development process of these new productivity.

New quality productivity consists of four parts: the power source, application scenarios, quality products and companies, and the comprehensive application of new quality productivity by the new generation of infrastructure.

There are many companies and categories involved, and if these companies can be provided with sufficient funding and other investments, including the process of reshaping the entire financial capital market we are currently in, we believe that with persistent efforts, great enterprises will emerge and bring substantial returns to investors.

If we succeed in transformation, big tech companies will stand out

Globally, the core logic of innovation and the source of large market value companies are constantly changing. The question we need to ask is whether our capital market can support these companies, whether it is in artificial intelligence, smart machines, or other key areas.

To see what the desired outcome looks like, we can make a simple comparison.

This chart is very important. It illustrates the great enterprises - large market value companies that have emerged in the past three to four decades of global geopolitical and technological changes.

Let me tell you, it is only in the past decade that these technology-leading companies have become global large market value enterprises. Before that, there were rounds of changes.

For example, in the 90s, the most powerful and largest companies in the world were mostly Japanese companies, especially Japanese commercial banks. Then, Japan lost it for 30 years.

During these 30 years, several companies shone brightly, growing tenfold in ten years, such as Daikin air conditioning, Toyota, Uniqlo, which also gives us inspiration.

Looking at the large companies in China and globally, on the left are the M7, the seven largest technology companies in the United States.

In fact, investing in listed companies is like betting on the country's fate, if we can succeed in transformation, I believe that China's leading large technology companies should stand out.

Buying high-dividend companies is reasonable, but has not formed a good cycle

Looking at our current situation, as everyone knows, this round has mostly bought some high-dividend financial companies, so the valuation of banks is very high.

Of course, currently, the pace of this investment is reasonable, but it has not formed a good cycle. Because buying dividends, in essence, is like buying bonds, when you invest in the capital market, you focus on capital appreciation.

So when we look at our large market value companies, we also see the difference between the starting point and the endpoint.

Jiangxiang Technology does not help much in market transformation, and it is worth considering how to produce technology companies like Huawei.

But we also recognize that China has its own characteristics. For example, our core technology companies may be "Jiangxiang Technology" and "Nongxiang Technology" companies, but this may not help much in our transformation, even though these are good companies So we believe that such adjustments are underway.

Unless we can complete the institutional design and adjustment of the entire capital market, we cannot achieve our desired goals.

For example, most people may think that the highest-quality private technology company in China is Huawei. Huawei is equivalent to Tesla, Nvidia, and Apple, but unfortunately it is not listed.

In other words, what are the goals that our capital market can design? Because we want to produce such companies, this question is worth pondering.

Facing huge challenges, there may be two different worlds in the future

I believe we are facing tremendous changes and challenges. Especially, we must see that the whole world is becoming more complex due to great power competition.

It is very likely that there will be two different worlds in the future, using different systems, from chips to infrastructure, to the underlying, and even drugs may form different cycles.

The most successful Chinese companies in the future will definitely not be import substitutes, but export-oriented

China's huge manufacturing capacity is right here. So I believe that great companies will definitely emerge in China.

And these companies will definitely have such characteristics. First of all, they must be driven by technology. Secondly, they will quickly globalize and go to various places around the world.

The most successful Chinese companies will become large market value technology companies in the future, they are not import substitutes, but export-oriented. Their supply chain and products can be found all over the world. The success of these companies, I believe, will bring more returns to our investors.

By then, it may not just be a simple matter of points, but it is worth owning and looking for such companies.

Source: Investment Homework Pro Author: Wang Li

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