Not afraid of the future: the logic of economics, policy and investment

  Another new year. It’s time to think about the possibilities for the economy, policy and capital markets this year. This paper mainly discusses three aspects. The first is to look ahead to the global macro economy this year, and put forward strategic suggestions on the investment logic of major assets. The second is to make predictions on the direction of my country’s economic policy in combination with the spirit of the Central Economic Work Conference. The third is the understanding of some major current theoretical and practical issues.
Economic Outlook and Investment Logic

  This year, an important judgment is that the main contradictions faced by the US and European economies and my country’s economy are different, and the policy response has also become divided.
  From an overseas perspective, the economic growth rate of the United States and Europe is expected to be around 4%, which is still on the track of post-epidemic recovery. The main threat in the economy is rising inflation. In November last year, the consumer price index in the United States was 6.8%, the inflation rate in the euro zone was 4.9%, and the inflation rate in Germany reached 5.2%, all at the high level of the past 40 years. At the same time, consumers’ inflation expectations are also gradually heating up. Currently, the one-year U.S. inflation expectation surveyed by the University of Michigan is about 5%, and the five-year inflation expectation has exceeded 3%, both far higher than the central bank’s 2% inflation target. . In this context, the monetary policies of the Federal Reserve and the European Central Bank are tightening, and interest rate hike expectations are rising.
  Unlike the United States and Europe, for China, the inflation situation this year is basically controllable. Most institutions estimate that the consumer price index will be around 2% this year. Under the benchmark scenario of marginal decline in international bulk commodity prices and the effective domestic policy of ensuring supply and stable prices, the industrial product price index is expected to decline steadily in 2022, with an expected annual centerline of 3.9%. The main contradiction of China’s economy is the increasing downward pressure on the economy. The GDP growth rate in the third quarter of last year has fallen below 5%, which is extremely unsatisfactory. To achieve the mid- and long-term economic development goal of doubling the economic aggregate or per capita income proposed by the central government in 2035, my country needs to maintain an average growth rate of 4.7% during the 15 years. If it falls below 5% during the beginning of the “14th Five-Year Plan”, it will be detrimental to the realization of the medium and long-term development goals. Therefore, the bottom line target for my country’s economic growth this year should be above 5%. Based on this judgment, my country’s economic policy direction is to maintain growth, monetary policy tends to be relaxed, liquidity is reasonably sufficient, and fiscal policy maintains a positive attitude.
  From the perspective of the capital market, combined with the economic situation and policy direction, this year’s major asset allocation, it is recommended to adopt a strategy of both offense and defense, reduce offense and strengthen defense.
  First of all, for overseas assets, since the United States has entered the window of interest rate hikes, interest rate-sensitive assets tend to be weak, and it is expected that the performance of overseas fixed-income assets will be relatively weak; the equity market needs to reduce income expectations under the background of rising risk-free interest rates; at the same time, the United States will raise interest rates. The rhythm may be faster than that of Europe, the dollar is expected to remain strong, and the trend of non-US currencies including the RMB is likely to be weak; the price of gold is “easy to go down and difficult to go up.”
  Secondly, for domestic assets, due to the main risk of “stagnation” in China, the growth rate of corporate profits is declining, so it is also necessary to reduce the income expectations for A shares, and the aggressiveness of equity assets in the allocation of major categories is weaker than in the past two or three years; Correspondingly, under the background of “stagnation”, the defensive value of fixed income assets in the allocation of major categories has increased.
  Finally, this year’s China’s stock market is still a structural market. The implication is that there will not be an exponential bull market, and at the same time, a certain style characteristic will evolve to the extreme, and it is likely to continue to develop along the high-boom track, such as new energy, carbon neutrality, and hard technology under the growth style. direction. At the same time, since this year is on the track of monetary policy relaxation, there will be a certain possibility of valuation repair, including the requirements for valuation repair in the Internet, finance and other sectors.
Prediction of Central Economic Policy

  The Central Economic Work Conference held at the end of last year clearly stated that my country faces “triple pressures”, namely demand contraction, supply shocks and weakening expectations. In my opinion, this judgment is objective and accurate.
  The first pressure is the contraction of demand, which is reflected in the narrowing of the external demand gap, the inflection point of export growth, the pressure on the growth of real estate station investment, the weak recovery of consumption, and the lack of investment momentum in the manufacturing industry. The second pressure is the supply shock, which is reflected in the fact that the industry and service industries are constrained by multiple factors such as the epidemic, supply chain disruptions, and “dual carbon” and “dual control” industrial policies.
  Of particular concern is the third pressure, weakening expectations. This is a new statement and the finishing touch. The international environment is deteriorating, economic pressure is increasing, regulatory policies are tightening, and administrative accountability is intensifying. Entrepreneurs and ordinary people have insufficient knowledge and understanding of the major reform measures that are competing for more money, and their confidence is seriously lacking. The widespread pessimism is reflected in the reduction of land acquisition by real estate companies and the decline in residents’ willingness to purchase houses; the increase in residents’ precautionary savings and the decrease in the marginal propensity to consume; the decline in business expectations and capital expenditures tend to be cautious. Compared with demand contraction and supply shocks, the impact of weakening expectations on the economy is more profound, because demand and supply can be automatically repaired through market adjustment to a certain extent, but confidence issues cannot rely solely on the market, and require policy responses or even political actions. Mobilize the enthusiasm and creativity of entrepreneurs and market players.
  Under the “triple pressure”, the central government proposed that “steadiness is the first word”, and “steady” has become the keynote of economic work. In the full text of the Central Economic Work Conference, the word “stabilization” appeared 25 times, and “stabilizing the economy” was taken as the premise of “stabilizing society” and “stabilizing politics”, highlighting the centrality of economic construction. The central government requires “actively launching” policies that are conducive to economic stability, and that policy efforts should be “appropriately advanced.” “Expanding demand” through macro policies, “adjusting supply” through micro, structural, technological, and reform and opening-up policies, and achieving stable development and common prosperity through regional and social policies.
  Regarding monetary policy, the central government’s expression is “flexible and appropriate, reasonable and sufficient”. The current economic performance is below potential and requires monetary policy to respond. In terms of direction, this year’s monetary policy is generally more loose; in terms of rhythm, the central bank may need to complete major policy operations before the US starts to raise interest rates. Therefore, in the first half of the year, there is still the possibility of lowering the RRR and interest rates. In addition, the structural features of monetary policy will be further strengthened to support key areas and weak links in economic development.
  Regarding fiscal policy, on the income side, new tax cuts and fee reductions will be used to stimulate the vitality of market entities, and to strengthen spending on small, medium and micro enterprises, individual industrial and commercial households, and the manufacturing industry. On the expenditure side, ensuring the necessary expenditure intensity is the focus. The first is to carry out infrastructure construction “moderately ahead”, and promote investment in major projects during the “14th Five-Year Plan”, affordable housing, and green economy. The second is to ensure basic livelihood, wages and operation. The central government’s willingness to fiscal policy is relatively positive, but fiscal capacity will still be subject to certain constraints. Due to the narrowing of the tax base due to the economic downturn, the slowdown in land sales will drag down local finances, and the pressure on the fiscal balance will be intensified. It is expected that the target deficit rate this year will return to the normal positive level of 3%. Considering that the fiscal deposits accumulated last year can be carried forward to this year, the government’s new debt limit may be stabilized at 3.5 trillion yuan.
  Regarding industrial policy, the term “industrial policy”, which is academically controversial, has been replaced by “supply-side policy” in recent years. Actually, the two are the same thing. Industrial policy is either encouraging, restrictive, or neutral. In this sense, investors should carefully screen the intentions of industrial policies and look for policy-friendly industry opportunities. In the past two years, the language of incentives and restrictive policies has been very clear. At present, encouraging industries mainly refer to scientific and technological innovation, “strengthening national strategic scientific and technological strength”; restrictive industries mainly include traditional fossil energy and environmentally unfriendly industries. Manufacturing and consumer industries are policy-neutral industries. Most of these industries and companies are subject to the laws of the market, while industries encouraged or restricted by policies are mainly subject to policy logic. Market investors need to carefully observe and analyze different investment opportunities in each “track”.

  Finally, on real estate policy. The central government proposed to “explore new development models”, indicating that the original operating logic of the real estate industry may face disruptive changes. In terms of general logic, “housing is not for speculation” and the policy will remain unchanged, the importance of public housing construction such as affordable housing has been significantly increased, and it has formed a partial replacement for the commercial housing market. The small logic is to appropriately adjust the control efforts on the margin, ensure the reasonable capital needs of the real estate industry, focus on meeting the mortgage requirements for first homes and improved housing, reasonably issue real estate development loans and M&A loans, stabilize real estate sales and construction investment, and stabilize land transactions. expected. The central government has a clear attitude towards the current risk factors of individual companies in the real estate industry. The first is to properly defuse the risks of individual housing companies to ensure that there is no systemic crisis. Second, some companies that expand blindly or make mistakes in decision-making do not have “too big to fail” policymakers. Decision makers must pay the price and be punished by the market.
Correction of some major current theoretical and practical issues

  The Central Economic Work Conference has made a special discussion on five major theoretical and practical issues that may be misunderstood at present, corrected the current possible ideological differences and misunderstandings, and helped market players correctly understand and grasp the connotation of the policy, so as to ” stabilizing expectations”.
  First, common prosperity is placed at the top of the major theoretical issues that need to be clarified, which reflects the great differences in the understanding of common prosperity in society, and it is necessary to unify thoughts. Economic development needs to take into account efficiency and fairness, and balance the relationship between “making the cake” and “dividing the cake”. The central government pointed out that common prosperity “is a long-term historical process.” In my opinion, common prosperity is a constant pursuit of the eternal other side. First of all, making the “cake” bigger and better is the cornerstone of common prosperity. We must still adhere to the basic line of focusing on economic construction and maintain the necessary economic growth rate. Secondly, through the “three distributions” to divide the “cake”, the reform will be carried out in the direction of “heavy labor and light capital” in general. Finally, improving the public service system should be the key to achieving “common prosperity”, especially in the fields of education, medical care, housing, and elderly care.
  Second, the nature and role of capital is a core issue in socialist economic governance. The central government proposes that capital has two sides in economic development: as a factor of production, capital has a positive role, but at the same time it must effectively control its negative role. On the one hand, the central government affirms the rationality of various forms of capital, emphasizing the two “unshakable”, while consolidating and developing the public economy, it encourages, supports and guides the development of the non-public economy. On the other hand, the central government for the first time emphasized the need to set “traffic lights” for capital. Which capital expansion behaviors will face the “red lights”? This is the key question that needs to be answered. In my opinion, those capitals, especially private capitals, that enter the public sphere to grow savagely, harm broad public interests, and form monopoly power, may face “red light” constraints.
  Third, with regard to economic security, the central government proposes to “correctly understand and grasp the supply guarantee of primary products” and “implement a comprehensive conservation strategy”, which are not only an inevitable choice to ensure my country’s economic security, but also an inherent requirement for high-quality development. Primary products mainly refer to agricultural products and resource products, which are the basic material guarantee for economic operation and economic security. On the one hand, some primary products in my country have a high degree of external dependence, and in the “more complex, severe and uncertain” external environment, security risks continue to rise. On the other hand, the hard constraints faced by my country’s economic development at this stage have increased significantly, and the constraints of resources and the environment are getting closer and closer to the upper limit. Therefore, the central government requires “enhancing domestic resource production guarantee capabilities”, “improving comprehensive agricultural production capacity”, maintaining the bottom line of energy and food security, and at the same time “promoting comprehensive resource conservation, intensive and recycling utilization” to reduce consumption and improve efficiency.
  Fourth, with regard to preventing risks, the central government has emphasized the main responsibility of enterprises for self-help. Recently, the credit risk events of private housing enterprises have continued to ferment, becoming the main risk point in my country’s economic growth. The central government especially emphasized that local governments, financial regulators, and industry supervisors should perform their respective duties, especially “compacting the main responsibility of enterprises for self-rescue.” Individual problem companies cannot be “too big to fail” and need to pay for the aggressive expansion in the past. On the other hand, under the requirements of “stabilizing the overall situation” and “macro-prudence”, the regulatory authorities also need to “coordinate and coordinate, implement classified policies, and accurately defuse bombs” to prevent the spread of risks.
  Fifth, the Central Economic Work Conference finally corrected the problems existing in the implementation of the “dual carbon” work. The meeting clearly called for unswervingly advancing the “dual carbon” work, while emphasizing that “it cannot be done in one battle”, not to short-term goals, fragmentation of system goals, and not to turn protracted wars into assault wars. It is expected that the phenomenon of sports carbon reduction will be curbed in the short term, and the long-term path of my country’s low-carbon transformation will be more gradual and smooth. The gradual withdrawal of traditional energy should be based on the safe and reliable replacement of new energy.
  In short, this year, my country is under great pressure to “maintain growth”, and there are some problems at both ends of supply and demand, which need to be actively dealt with by macro policies. And the social cognition deviation of some major theoretical and practical issues needs to be corrected in time, so that we can truly face it bravely and not be afraid of the future in a difficult situation.