Li Xunlei: Don't Expect Another Round of New Infrastructure Wave or Rely on Real Estate Stimulus to Boost Economy

Yesterday, invited to the " 2020 Spring ETF and Asset Allocation Summit " organized by Hua'an Fund to make a speech on "the impact on China's economy under the spread of the global epidemic and the response to it". Report. The main points are as follows:

1, in the global trade friction continues, the probability of the global epidemic out of control, the global economy may be in recession, and I am afraid that the signs of this recession is still going to continue, the whole globalization or to end a paragraph.

2, China in the epidemic before the 2020 GDP growth target should be 6%, now I'm afraid that the GDP growth target down to 5.5% or so, of course, the first quarter may be even more difficult to see, the second and third quarters may have a recovery, there is a relatively strong rebound.

3, do not expect to come back to a new round of infrastructure boom, or rely on real estate stimulus to pull the economy, its marginal effect is getting weaker and weaker.

4, for 2020, I am still optimistic about the capital market. From the investment point of view, financial assets are more worthy of configuration than real estate, to configure the head of the enterprise, rather than configure the kind of non-head of the speculative theme, speculative concepts of the style is difficult to sustain.

5, the 2015 situation should not be repeated. This year's larger space to cut rates and interest rates, reminding me of the 2015 wave of rate cuts; but 2015 is both the year of financial innovation, but also experienced a roller-coaster process from leveraging to deleveraging. What is different today from that year is that our awareness of financial risk prevention has been further raised.

6. "It is estimated that fiscal policy in 2020 will be vigorously relaxed, and in the past, the fiscal deficit rate was generally below 3%, and in 2019 it was 2.8%. It is estimated that it will break through to 3.5% in 2020. In terms of monetary policy, it has entered a cycle of interest rate cuts to reduce interest rates and release liquidity.

Epidemic may get out of control -

Global economy downward in 2020 amidst shocks

Our Feb. 3 "Mathematical Model-Based New Crown virus transmission forecast" report, the forecast results and the actual situation of the domestic epidemic is more in line with: the model predicts that the inflection point of new cases occurred on February 17 (under the neutral assumption); as of February 29, the Health Commission announced the cumulative number of people diagnosed nationwide (excluding Hong Kong, Macao, and Taiwan) is 79,824, the model predicts that the value of 78,775 people, a difference of only 1.3%. Promoting the resumption of work under the epidemic prevention and control zoning and grading measures will not bring about a significant recurrence of the epidemic.

At the same time, we believe that the country's stringent prevention and control measures have reduced the transmission coefficient to about 0.5 (on average, each patient can only infect 0.5 people), and this effect may require a reduction in the frequency of contact between people by 80% compared to normal.

Taking the stringency and effectiveness of domestic prevention and control measures as a yardstick, we assessed the difficulty of preventing and controlling the outbreak overseas: the outlook is not optimistic, the probability of losing control is high, and accelerating the development of effective drugs and vaccines may be the top priority in dealing with the new global crown epidemic. From the epidemiological transmission model, the basic number of infections has to fall below 1 to control the outbreak, and under the premise that all other parameters are controlled at the same level as at home, personal contact frequency has to fall by more than 66% compared to the usual level, which may be a big challenge for the organizational and mobilization capacity of many countries.

As a result, the spread of overseas epidemics may be difficult to control in the short term, and the harm may be significantly higher than that of other epidemics in the past few decades, which would have a greater adverse impact on global mobility and economic activity, and the downward pressure on the global economy would increase significantly.

Even without this epidemic, the global economy is also in a downward trend, such as 2019, Japan's GDP growth rate of only 0.7%, the United States GDP growth rate of 2.3%, the European Union's GDP growth rate of 1.4% , without exception are downward. Even India, which everyone is optimistic about, saw its GDP drop to 5.3% last year from more than 7% the year before.

So in the case of global trade friction, global epidemics are very difficult to control, this year the global economy showed signs of recession, and I am afraid that this sign of recession will continue. So the process of globalization may have to come to an end. 2019 global merchandise exports as a share of GDP has appeared a downward inflection point, the out-of-control epidemic may add to the already weak global economy, do not be too optimistic about the global economy.

In order to hedge against economic downward pressure, the global 2020 interest rate cuts will continue, the interest rate cuts mean that liquidity is still further released, like the Federal Reserve's sudden announcement of a 50 basis point interest rate cut, which is also relatively rare in history. If there is no epidemic, interest rate cuts are also a general trend, because the whole economy is falling back, the return on investment, the return on capital, is a general trend. Therefore, the interest rate cut is not something that the central bank intends to do, the central bank is just going to follow the trend, so the essence of the interest rate cut still lies in the worry about the economy of the country, for the global economic downturn brought about by the risk of worry.

The U.S. stock market has been very volatile lately, and the reason why the U.S. stock market soared on Wednesday is that in the "Super Tuesday" campaign, Sanders is unlikely to be the Democratic presidential nominee. This has led investors to expect a more moderate approach from the next U.S. president, which is good for the U.S. economy and good for the global economy.

Well, the reason why the global economy is so weak is related to the income polarization caused by long-term peace, which has brought about the solidification of classes and the deterioration of the economic structure, because peace means that the rules of the game remain unchanged. So there are many things that we can't just look at one side of the coin, we need to analyze them both positively and negatively. Don't think that peace means everything is fine, it will bring about the solidification of the economic structure, the solidification of the class.

This solidification has led to a decline in the efficiency of the entire economy, and to the dissatisfaction of the middle and lower income groups with the reality.

So whether there is an epidemic or not, problems like structural solidification are destined to make the global economy in the future show low growth, high shock characteristics, investors' risk appetite will decline, and the demand for risk aversion will rise. I put forward such a "peace leads to recession" logic in 2018 and recommended gold as a hedge. It's a long-term logic, and as for how the process will play out, it's bound to be repetitive, it's bound to have distortions, but the general trend remains the same. And this downward trend is in a recessionary trend, to the Chinese economy also bring negative impact.

The epidemic has accelerated the trend of structural differentiation of China's economy

China's economy is in the process of slowing down, and at the same time, there is also a structural differentiation of the economy. If you pay a lot of money to stabilize growth, it will also lead to many problems, such as the rise of macro leverage, the polarization of residents' income, and the intensification of trade friction.

Because in order to maintain high growth, we need to export, in the global economy, it is easy to trade conflicts with other countries; the pursuit of high growth, their own structural problems will appear, which affects consumption, resulting in overcapacity; in order to stabilize growth, rely on fiscal and monetary policy to stimulate the rise in debt ratios, which, in turn, will constrain the growth of the economy.

Any policy has a benefit, but also a cost. Therefore, in the constant policy stimulus, the global economy can not sustain high growth, because growth has a limit, the allocation of resources, economic structure in the process need to have timely adjustment, if not adjusted there will be problems. We have seen macro leverage levels continue to rise over the past 12 years, by about 100% , including government leverage, corporate leverage, and residential leverage, all of which are on the rise.

One thing I want to emphasize is that there is a limit to growth, and adjustment is unavoidable, and it is healthier to wash. We are now in the middle of the divergence, is a reflection of this stock of economic characteristics more and more obvious. So don't expect another round of new infrastructure wave, another round of real estate surge to stimulate the economy, the marginal effect of policy stimulus is getting weaker and weaker.

The stock of economic characteristics more and more obvious when the differentiation is bound to appear, the differentiation is reflected in all aspects, First of all, the demographic differentiation , we are now 2/3 of the city's population is a net outflow of population inflow of the city is a small number of inflow city where it is mainly in the inflow of the city? The first is that the number of people who have been diagnosed in this outbreak is high. The places with high numbers of confirmed cases of this epidemic, except Hubei, are basically economically developed areas, because these places have a relatively large flow of people. So in the demographic divide, there's a net decrease in population in the backward areas, and in the developed areas such as the Yangtze River Delta, the Pearl River Delta, the Hangzhou Bay Area, the Guangdong-Hong Kong-Macao Greater Bay Area, the population concentration in all of these places is increasing.

Secondly, there is the differentiation of residents' income. For example, the income gap between the high-income class and the middle- and high-income classes is widening, and the income of the high-income class is growing faster, as evidenced by the significant increase in the sales of luxury goods; the low-income class, under the poverty alleviation policy, has seen a more significant increase in income over the past few years, but the income growth of the middle-income class has slowed down dramatically, which is similar to the change in the global structure of the population's income.

In fact, it is the middle and lower income classes that are really pulling the scale of consumption up. The epidemic has also brought more pressure on the middle and lower income classes, such as the employment of migrant workers, in the resumption of work, the number of migrant workers back to the city less than 40%. Looking back to 2009, after the subprime mortgage crisis, the proportion of migrant workers returning to the city also dropped sharply, but compared to now, it is much more serious. Because of the epidemic superimposed on the original structural problems, making the phenomenon of increased polarization.

Overall, there are good and bad divisions, such as industrial division is normal or conducive to the phenomenon of optimal allocation of resources. The new economy is in high growth, the traditional economy is in low growth, this is the transformation of the old and new momentum. The epidemic has also accelerated the differentiation between head and non-head enterprises, like some large chains within the restaurant industry, which can easily obtain financing. And most of the small and medium-sized catering enterprises, may now face enormous pressure to survive.

Another example is that the national real estate sales in January to February also showed a serious division. Real estate enterprise sales revenue from high to low ranking, sales of the top ten companies sales despite the fall, but the fall only ten percent. And 81 ~ 100 sales fell more than 40% , which shows that the phenomenon of real estate enterprises is very obvious.

From the sense of investment, to allocate assets to configure the head of the enterprise, rather than configure the non-head of the kind of speculation, speculation on the theme, speculation concept of the enterprise. Looking back at history, in fact, the world is the same, whether it is the United States or China, in the capital market to make money on the business or money investors are a minority, basically showing the phenomenon of two eights.

The epidemic has accelerated the downward pace of economic growth, but also accelerated the process of economic structural differentiation. China's economic restructuring has a healthy aspect, that is, accelerating the transformation of the old and new kinetic energy. At the same time, there are also worrying aspects, such as differentiation leading to more serious structural problems, which need to be promoted and remedied through reform.

China's Policy Response and Overall Direction in 2020

The impact of this epidemic on China's economy may be far greater than the subprime crisis. Just looking at the data from January to February will show that, for example, the average daily coal consumption of the 6 major power plants is significantly lower than that of 2016, 17, 18 and 19, 4 years. The 2nd one, from the Shanghai Spring Festival migration scale index to compare, is also a substantial decline. In terms of prices, as far as the food basket index is concerned, the price of food has seen a relatively large rebound, increasing the cost of living for residents. The tertiary industry hit is the biggest, including aviation, high-speed rail, catering, tourism, etc. The impact of this epidemic on the economy can not be underestimated.

At the same time, the countermeasures to deal with the epidemic is still there, such as pulling China's economic growth is still mainly by investment, and investment in three major blocks: infrastructure investment, real estate investment and manufacturing investment. Manufacturing investment in the current reduction in aggregate demand, so it is difficult to get up, but infrastructure investment can be promoted through policy.

Of course, the role of policy should not expect too high. Such as the recent media said that more than a dozen provinces infrastructure investment projects add up to a total investment scale of 25 trillion. This is a bit of a stolen concept, the provinces announced only reported on the project, but these investment projects are phased to implement, and some projects can not be implemented, it also needs to have the supporting funds with the National Development and Reform Commission to approve.

So we can not take the letter of intent of those projects as the actual size of our infrastructure investment, pulling the troika of fixed-asset investment, refers to infrastructure investment, real estate investment and manufacturing investment. Infrastructure investment in the current situation must play a leading role, historically speaking, infrastructure investment accounted for the proportion of fixed asset investment is probably not more than 25%, usually in 20% or even lower.

The proportion of real estate investment in fixed asset investment can reach about 25%, to stabilize investment, certainly need to stabilize real estate. But the premise of stable real estate investment is housing not speculation, now the goal of the policy is to stabilize housing prices, stabilize expectations, do not let housing prices surge again, do not let housing prices plummet, plunge that is China's economy will be out of control. The logic is clearer.

Responding to the epidemic, the three major sectors of the structure to accelerate the adjustment

In the face of the epidemic, China's economy to stabilize, but also rely on the power of investment, relying on the government's ability to organize resources. Because the Chinese government has the most resources in the world, such as land, natural resources, state-owned enterprises, administrative assets. These assets add up, that is no country's government assets can match. Therefore, we have to have confidence, to have institutional confidence, especially in response to the crisis, China's institutional advantages, institutional advantages, etc. have been fully realized.

I believe that the problem of China's economic structure has existed for a long time, and there is a tendency to solidify, therefore, we must deal with the central local and local governments, state-owned enterprises and private enterprises, high-income and low and middle-income groups of the relationship between this is the reform. For a long time, the central government has been having a good time and the local governments have been having a bad time, therefore, the central government must give the local governments more financial power in the future. State-owned enterprises have had a good time and private enterprises have had a bad time, so state-owned enterprises, especially banks, have to make concessions to private enterprises or non-financial enterprises. As far as the residential sector is concerned, how to make the income structure of our residents more reasonable? The gap between the rich and the poor can be narrowed by means of transfer payments and tax reform.

So the policy will gradually open the knife to the distorted structure, in layman's terms, that is, the state-owned enterprises to the private enterprises to give profits, banks to the entity to give profits, the central government to the local concessions, the rich to the poor to give profits, so that the whole structure will be more reasonable. For example, under the epidemic, our employment will encounter more pressure, how to do? Mainly through the support of small and medium-sized enterprises, to solve the employment problem, to give certain subsidies to the unemployed groups, the issuance of consumption vouchers and so on.

Fiscal policy will definitely relax vigorously

Monetary policy has entered a cycle of interest rate cuts

In the past, the fiscal deficit ratio, that is, the fiscal deficit as a percentage of GDP, was generally below 3%, and in 2019, it was 2.8%. I estimate that it will definitely break through in 2020, break through to how much? My estimate is to 3.5% or even higher. Wouldn't 3.5% be risky? For some private countries it might be, because the denominator of the fiscal deficit ratio is GDP, and if that denominator is replaced by assets, we have huge government assets and don't have to worry too much about the rise in the fiscal deficit ratio.

Monetary policy has loosened up, entering a cycle of interest rate cuts and liquidity releases. From January until now, the central bank has released about 3 trillion dollars of liquidity, a scale of release is also unprecedented in history. By cutting LPR, MLF and reverse repo rates, etc., it has made market-based interest rates go down further. The U.S. cut rates, some developed economies in the EU cut rates, and after they did, they left more room for us to cut rates as well.

My overall judgment, 7-day reverse repo rate is expected to fall to below 2.2%, MLF rate is expected to fall to below 2.8%, 10-year bond rate is expected to fall to below 2.5%, after the developed countries to reduce interest rates, China's interest rate reduction space is greater. Correspondingly, in a city policy, the bank will also give more loans to real estate enterprises, of course, the premise is to stabilize the price of housing, in the future, in order to encourage real estate investment for the purpose of the policy should also be opportune to introduce.

Overall, a loose liquidity, interest rates continue to decline in the financial environment is favorable to the capital market, and the capital market and the promotion of the reform of the registration system, strong support for the new economy, technological advances, etc., these initiatives or will continue. In such a big background, for capital market investors, should seize the opportunity of China's economic transformation in the context of such an epidemic. The Fourth Plenary Session on finance put forward 48 words: To strengthen the basic system of capital market construction, and improve the modern financial system with a high degree of adaptability, competitiveness, and universality.

2020 policy initiatives reminiscent of the 2015 Big Release

For 2020, the new crown epidemic is like a huge black swan, China's economy is experiencing unprecedented pressure, and the strength of the policies to fend off the epidemic is also unprecedented. But I do remain optimistic about the outlook for the capital markets.

On the one hand, I think the domestic epidemic is largely under control and the risks of the epidemic will not be released indefinitely. On the other hand, in the context of the global recession and the continuous interest rate cuts in developed economies, global capital is expected to continue to flow to China, while there is still more room for future cuts in China's interest rates.

Of course, a little worried about the place is a large amount of liquidity in the financial system flow, did not enter the entity, reminds me of the stock market in 2015 abnormal volatility. For example, the phenomenon of over-the-counter (OTC) funding has recently resurfaced, and the valuation levels of some stocks are too high, showing bubbles.

However, what is different from 2015 is that the depth of understanding of finance up and down has been further enhanced, and after the supply-side structural reform of 2016-2019, we have a deeper understanding of the pros and cons of financial deleveraging or stabilizing leverage, and a more objective and rational understanding of the relationship between finance and the economy.

This year is again the 30th anniversary of the establishment of the SSE and SZSE, and after 30 years of development, China's capital market should have become the world's second largest capital market. At the same time, this year coincides with the 40th anniversary of the Shenzhen Special Administrative Region (SAR) and the 30th anniversary of the establishment of the Shanghai Pudong New Area (SPNZ) . This is a very special significance for the commemoration of the reform and opening up. What kind of "reform red packet" the central government will bring to Shenzhen and Pudong is worth looking forward to.

The KIC and or GEM pilot registration system, behind the registration system is the deepening reform of the capital market, and the reform is relatively strong. In general, our senior to the focus of financial reform, stabilize the economic financing function of a large part of the capital market above, which brings the capital market activity. At the same time, the spread of the epidemic forced the reform, promoted the capital market reform, state-owned enterprise reform, business environment improvement, government quality and efficiency.

Therefore, the economy is in a downward trend, the power of transformation will be increasingly increased, while the policy efforts to increase, interest rates down, financial strength, brought a lot of structural investment opportunities. Hopefully, with the epidemic coming to an end as soon as possible, China's economy will return to normal, and the space for capital market development will also be greater.

Risk Tips: Epidemic out of control, financial risk outbreak