China Food

Will 2022 be a capital winter?

“ 
put aside emotions and return to facts.
 ”
Half of 2022 has passed. In the past six months, many people have been concerned about the financing environment. Affected by local conflicts, epidemics, energy, debt, inflation and other factors, the capital markets in China, the United States and Europe have fluctuated to a certain extent this year. Even China and the United States have industry views, and have reiterated the term “capital winter”.
In the fourth quarter of last year, U.S. stocks, Hong Kong stocks and A-shares successively peaked and fell. Affected by the conflict between Russia and Ukraine in February, the epidemic has occurred repeatedly since March, affecting China’s Yangtze River Delta and other key regions of GDP. According to the report of “wall street news” in May, the S & P and Dow Jones Indexes in the United States have also experienced cumulative declines, and the Nasdaq 100 has reached a milestone low. There is indeed a “chill”.
However, if we explore it carefully, we will find that the “cold winter” of China’s and America’s capital markets may not be the same in fact, and they are not necessarily pessimistic signals.
From the perspective of Fengrui, we have always been optimistic. In May this year, at the Fengrui internal meeting, we made clear the strategy of “investing as much as possible” for good projects. In the four months from March to June 2020, Fengrui’s new projects and invested projects were added, which was 1.25 times that of the same period in 2021. Even now everyone says that consumption and investment are cold, we are actually very positive. From Q4 in 2021 to June this year, we have invested in seven new consumption projects (including delivery and delivery after the meeting). In contrast, from Q3 in 2020 to Q3 in 2021 – a period of hot consumption and investment, we have remained cautious and only invested in four new consumer brands.
This push is the first in the 2022 macro series. In this series, I want to discuss with you the changes and ups and downs of the capital market, the situation and opportunities in recent years, and the reasons behind the differentiation of Sino US VC companies.
In the first part of the series, I will try to answer from the three dimensions of short-term, medium-term and long-term: is 2022 a cold winter in the Chinese and American capital markets? I hope to provide a new perspective, and I look forward to communicating and discussing with you.
Before entering the text, I would like to share some main points:
  • If the economic cycles of the two countries are compared to the four seasons of the year, the time point at which the United States is now should be “late autumn into winter”, while China is more like a “late spring cold”.
  • In the short term, if the U.S. financial system is affected, it will bring relatively large fluctuations to the residents and social wealth. In contrast, Chinese residents’ assets are less affected by the fluctuations of the financial system, and China’s main sources of social wealth and supply have not been hit hard at present.
  • In the medium term, the United States is at the end of a financial cycle, and there may be a large number of foam in the capital market, with a long adjustment cycle. In contrast, the problems faced by China’s capital market are phased. After policy stimulus and the recovery of market sentiment, it will usher in a better turn.
  • In the long run, China’s capital market (or primary and secondary market financial instruments) has gradually become the mainstream financial instruments for economic development. By lengthening the time dimension, the scale of China’s capital market will be larger, and the scale of direct financing will also be larger. The value of U.S. capital market / GDP is far beyond the measurement range of Buffett index, which can be said to be seriously overestimated.
  • Generally speaking, the situation in 2022 is no worse than that in 2020, the recovery elasticity of various macro indicators is better, and the intensity of stimulus policy is no less than that in 2020. The overall recovery process will also be like 2020.
  • This year and next, which country can achieve the relative growth under the horizontal comparison caliber first will be able to win the favor of global funds earlier.
First of all, a general conclusion: the time point of the U.S. capital market is more like late autumn and winter, and the adjustment and recovery cycle will be longer, while China’s capital market is like experiencing a late spring cold, and the adjustment and recovery cycle is relatively short.
To explore the difference between the “chill” of capital between China and the United States, we need to put aside our emotions, return to the facts, and compare the current, medium-term and long-term important differences between the two countries.
Short term factors

▎ the financial system has a great impact on the wealth of American residents and society, but a small impact on the wealth of Chinese residents and society

“Capital winter”, as the name suggests, is that money in the capital market becomes less. So, is there a large-scale wealth eradication effect between China and the United States?
At present, the impact on the U.S. financial system will bring relatively large fluctuations to the residents and social wealth; Chinese residents’ assets are less affected by the fluctuations of the financial system, and the source and supply of social wealth in China have not been hit hard at present.
Why do you say that? We can take a look at the composition of assets of residents in China and the United States.
According to the data released by the Federal Reserve, the U.S. Treasury Department and the people’s Bank of China in 2019, the main asset allocation of Chinese residents is residential assets, accounting for more than 65%. Financial assets have increased in recent years, but the overall proportion is relatively low, only 20.4%; The asset allocation subjects of American residents are equity, insurance, pension, investment funds, stocks and other financial assets, accounting for more than 50%, while residential assets account for only 23%.
To some extent, the proportion of residents’ financial assets in the composition of assets determines the extent to which residents’ assets are affected by the fluctuations of the financial system. Simply put, because financial assets account for a large proportion of the assets of U.S. residents, the elimination effect of the financial crisis or financial market turmoil on the wealth of U.S. residents will be much greater than that of China.
At present, it is relatively certain that there has not been a large-scale wealth elimination effect in China. Here, wealth refers to the basic wealth of the whole society, including resident wealth, enterprise wealth and government wealth.
On May 13, according to the financial statistical data report of April 2022 released by the people’s Bank of China, the loans of residents, namely consumer loans, housing loans and business loans, decreased at the same time, reflecting the objective existence of the reduction in demand brought about by confidence.
However, while the growth rate of loan balance slowed down, household deposits and non-financial enterprise deposits increased respectively in the first to fourth months of 2022 compared with the same period last year. There are many reasons behind the increase in deposits held by households and non-financial enterprises. One important reason is that the large-scale wealth elimination effect has not yet occurred.
Because the composition of Chinese residents’ wealth is mainly real estate based physical assets.
On the residential side, if there is a systematic price problem in the real estate industry, it does not mean that no one buys a house, but that the house depreciates sharply, and there may be a large-scale wealth elimination effect on the residential side.
Before 2016, real estate has become the “upper limit” of China’s economic growth, and has long played a role as a locomotive of economic growth. However, since 2016, China has no longer used real estate as a counter cyclical regulation means, but as a long-term regulation object, and proposed “real estate without speculation” as the keynote of real estate market regulation. Nowadays, the economy is no longer driven by real estate. To some extent, real estate has become the “lower limit” of China’s economy, that is, the economic chassis, because of its huge volume, which is the main component of China’s residents’ wealth.
Although the stock market has fluctuated violently in the past three quarters, as just mentioned, from the perspective of residents’ wealth in China’s overall social wealth, the impact of financial assets may not be as great as you think.

▎ why did the Chinese and American capital markets fall? Liquidity factor vs phased factor

The capital markets of China and the United States have declined to varying degrees this year. What is the reason?
First of all, the preliminary conclusion is that the decline in the U.S. capital market is affected by liquidity factors triggered by monetary and fiscal policies, while the decline in China’s capital market is mainly affected by phased factors such as policies, epidemics, local conflicts and so on. Therefore, the performance and corresponding adjustment strategies of the capital markets of the two countries are different.
To explore the reasons for the decline in the U.S. capital market, we might as well see under what circumstances the U.S. stock market will rise? Historically, there are two main reasons why US stocks have changed from decline to rise for a long time:
1. The fundamentals of the U.S. economy have improved, superimposed on scientific and technological innovation, and the profitability of enterprises has recovered. The data support the market’s expectation of higher profitability fundamentals.
2. The Federal Reserve uses long-term quantitative easing policy to release liquidity, and uses reverse repos and other means to promote US stock yields.
However, over the past 12 years, the prosperity of American financial and capital markets is not entirely due to the improvement or increase of good enterprises, but the huge liquidity foam has pushed up asset prices.
In order to promote economic recovery, the Federal Reserve has used the means of printing money, issuing money, and reducing taxes to the limit. In 2021, U.S. corporate bonds have expanded to $10trillion, most of which went to the stock market, bringing a record number of listed company repurchases. The large-scale bond issuance and repurchase seemed to raise the share price, but did not promote the substantive development of the company.
In 2020, in response to the global tide of the epidemic, the Federal Reserve accelerated interest rate hikes due to the huge inflation. Due to high interest rates, it is difficult to borrow new bonds and renew old bonds that have matured on a large scale since 2021. Even if they can borrow new ones, the cost is higher than the growth rate or dividend rate of large enterprises. The capital market is facing the crisis of Foam Burst and cyclical recession, and deleveraging is imminent again. At the same time, before the US dollar raised interest rates in the first quarter of 2022, taking advantage of the last window of opportunity, US stocks set off another wave of repurchase boom. Goldman Sachs’ data showed that the approved share repurchases in the first quarter of 2022 reached a record of more than $300billion.
We can see a strange phenomenon. During the epidemic in 2020, most enterprises in the United States stopped production, but its stock market still rose all the way, hitting a record high in the S & P index in January 2022. This also shows that the US stock market has deviated from social fundamentals.
As we mentioned earlier, stocks and other financial assets account for a relatively high proportion of the asset structure of U.S. residents, so the liquidity of capital is good. Once the Federal Reserve implements stimulus, the effect can usually be quickly reflected on the market side. At the end of the financial cycle, under the severe inflation situation, the aggressive interest rate increase and table contraction strategy passively carried out by the Federal Reserve has forcibly tightened the market liquidity, raised the financing cost of enterprises, further restricted the source of funds of enterprises, and intensified the volatility of the stock market, which has stimulated the asset foam again.
Signs of the bursting of the US asset foam have begun to appear. According to the report of “wall street news” on May 25, since the beginning of this year, the S & P 500 index, the US benchmark stock index, has fallen by more than 20%, and the Dow Jones index has fallen by nearly 14%. The first 100 trading days of the S & P and Dow Jones indices will usher in their worst start since 1970, while the Nasdaq 100 index, dominated by technology stocks, has reached an all-time low.
Let’s look at the situation in China. In March 2022, we set an expected target of 5.5% of the annual GDP. However, in the first half of the year, we suffered from the external impact caused by the conflict between Russia and Ukraine and the internal impact caused by the Omicron epidemic.
Among them, although the external shock occurred before the release of the government work report, the duration and depth of impact exceeded most people’s expectations at the beginning of the year, while the internal shock occurred after the release of the government work report. Compared with the external impact, the internal impact is more sudden and influential. As mentioned above, the government is also using various incentives, such as issuing a large number of local special bonds, to maintain the basic market and stimulate elastic growth.
On the whole, the amount of special bonds approved by the state in 2021 and 2022 is almost the same. However, if we take a closer look at the cumulative issuance speed curve of national special bonds in 2021 and 2022, we will find that the overall rate of issuance of special bonds rose steadily last year, but this year’s special bond issuance speed curve suddenly peaked in May and June. What does this mean?
Generally speaking, the government will move forward to use special bonds, because it often takes a quarter or two before a special bond can play a role in economic stimulus and economic growth. Increasing efforts in May and June this year and making perfect use of the quota in the first half of the year will help fully support the growth in the second half of the year.
It is also worth mentioning that in 2020, in the face of the impact of the COVID-19, most major countries in the world adopted monetary easing policies far beyond those during the 2008 financial crisis. In contrast, China did not adopt radical monetary policies.
Since Q2 2020, the U.S. government leverage ratio has reached a high point of 123.9%, while from Q1 2020 to Q1 2022, China’s leverage ratio has always remained in the range of 40% – 47%. This means that compared with the United States, we have sufficient debt reserves and room for fiscal policy operation.
In addition, both China and the United States are facing domestic and international inflationary pressures.
According to the data released by the United States in May, the inflation rate was 8.6%, slightly higher than the 8.3% inflation rate last month, reaching a record high, and higher than the 8.2% – 8.4% expected by the market.
China is also facing certain inflationary pressure. The inflation rate has increased since the end of the first quarter, but on the good side, we have many countermeasures. For example, we have an ultra long industrial chain that can absorb inflation in multiple links; For example, the finished product price of bulk products we buy is relatively low, which saves costs relatively.
In addition, we can also observe two important inflation indicators of the two countries – consumer price index (CPI) and producer price index (PPI).
CPI index is usually an important indicator reflecting market economic activities and government monetary policy. In economics, CPI growth of more than 3% is generally defined as inflation, and more than 5% is relatively serious inflation. The obvious increase of CPI index is a signal of serious inflation, which is often not good for economic growth. PPI is producer price index or product price index, which is usually used as an indicator to measure international inflation.
Generally, international price inflation (PPI) at the material end will be transmitted to the end of the industrial chain, resulting in commodity price inflation (CPI). From the data side, both China and the United States were affected by international inflation in 2022. The rise in commodity and energy prices made the PPI index rise year-on-year from the first quarter.
However, after China’s rapid regulation of commodity and energy prices, the PPI index fell in the second quarter. In addition, another important reason for the fall of PPI is that China’s ultra long industrial chain can absorb inflationary pressure in multiple links.
Looking at the PPI index of the United States, there was also a relatively obvious year-on-year growth in the first and second quarters of 2022. The overall index was high, and it began to stabilize in the second quarter.
But if we continue to look at the CPI index of the two countries, we can find some interesting phenomena. We can see that although China’s PPI value was high at the beginning of 2022, the growth of terminal CPI index was relatively moderate, which fell significantly compared with 2020, and was not greatly affected by the rise in intermediate prices.
On the one hand, this phenomenon is because the main component of China’s CPI is the price of agricultural products, and the main component of PPI is the price of industrial raw materials. Therefore, the conductivity of China’s PPI to CPI is not strong. On the other hand, China’s ultra long industrial chain has digested the upward pressure of PPI, so that it does not affect the CPI end much.
Let’s take a look at the CPI index of the United States. The latest data released by the U.S. Department of labor in June showed that the U.S. consumer price index (CPI) rose 1.0% month on month in May, up 8.6% year-on-year, hitting a new high in 40 years, and its growth trend is almost consistent with that of the PPI index.
On the one hand, in 2020, in order to deal with the epidemic, the Federal Reserve used an unprecedented flood to push up the foam of global asset prices, once again opening the door to runaway inflation. On the one hand, compared with China, the United States did not carry out much policy intervention in the PPI index, which led to the impact of the rise in PPI being mostly transmitted to the CPI end, leading to the rise in commodity prices at the CPI end.
From this point of view, we can at least infer that if the internal chain impact caused by the epidemic basically ends in the second half of the year and the economic stimulus measures also begin to play a role, China’s economy will surely recover better in a short time. And because China has a relatively good ability to absorb and adjust to inflation, we are likely to see better or even higher than expected growth in foreign trade in the second half of the year.
Medium term factors
Having said the current situation of the capital markets of the two countries, we will extend the time to see the fluctuations faced by the capital markets of the two countries from the differences of some medium-term factors.
Judging from the current situation of China and the United States, the United States is at the end of another financial cycle, there may be a lot of risk of foam bursting in the capital market, and China’s capital market is also facing difficulties, mainly due to the impact of repeated epidemics on the market and sentiment, as well as the external impact of international disputes and other factors. However, after the policy stimulus, it can generally usher in a turnaround for a period of time.

▎ United States: a large number of foam accumulated in the past may burst

Financial cycle generally refers to the cyclical fluctuations caused by the expansion and contraction of market financial variables, and the end of this cyclical fluctuation is called the tail of the financial cycle.
In the history of American economic and financial development, there have been three complete financial cycles, and at the end of each of these cycles, there have been major economic crises, such as the great depression in the early 20th century, the savings and loan crisis in the late 20th century, and the subprime mortgage crisis in the early 21st century.
The causes of these crises are usually related to the tightening of government monetary policy, the adjustment of regulatory system, the expansion and contraction of social credit and the innovation of financial instruments in a financial cycle.
In order to illustrate what kind of correlation effect the corresponding policies in a financial cycle will cause, we might as well focus on the third financial cycle experienced by the United States in the early 21st century. After the subprime mortgage crisis, in order to stimulate economic recovery, the United States launched a series of monetary and fiscal policies, and caused a series of chain effects.
In 2007, a large number of foam in the U.S. capital market mainly came from real estate, and then the real estate foam burst and the financial crisis occurred. In order to stimulate the economic recovery, the Obama administration injected a large amount of funds to start a large-scale economic stimulus plan. The Federal Reserve not only announced that it would reduce the federal funds rate to 0% – 0.25%, implement the zero interest rate policy, but also introduced three consecutive rounds of quantitative easing (QE) policies from the end of 2008 to November 2014.
Later, the Federal Reserve launched QE 2, QE 3 and QE 4 successively from November 2010 to June 2011, September November 2012 and December 2012 to November 2014. During the QE implementation cycle, US stocks basically maintained an upward trend.
From the perspective of purpose, quantitative easing is to reduce enterprise borrowing costs, financing costs, stimulate consumption, support economic growth, and avoid deflation risks; However, the long-term unlimited quantitative easing model may also spawn an asset foam, stimulate the growth of inflation, and bury the hidden dangers of the financial crisis – whether it is the stock market foam in the 1920s, the Internet foam in the 1990s, or the real estate foam in the early 21st century. The several rounds of QE implemented by the Federal Reserve in 2008 seem to have brought the same results.
According to Reuters, in the first quarter of 2021, the sale of junk bonds in the United States reached a record level, and the U.S. stock market also showed signs of entering a highly speculative stage. According to relevant Reuters reports, the S & P 500 index of the United States was close to the highest point in history in the same year. The inflation index released by the United States in may also continued to rise and was higher than market expectations.
These phenomena seem to indicate that after the superposition of four rounds of quantitative easing from 2010 to 2018 and the unlimited QE in the face of the external impact of the COVID-19, the current US stocks have produced a huge foam. Now, these foam may burst at any time, which is affected by another policy – the Fed began to enter the cycle of raising interest rates and shrinking the balance sheet after stopping quantitative easing.
With the gradual correction of the U.S. economy, from April 2015 to December 2018, in the face of the rising total national debt and inflation rate, the Federal Reserve gradually stopped quantitative easing policy and entered the cycle of raising interest rates and shrinking the table, trying to bring monetary policy back to normal.
To put it simply, the Fed’s interest rate hike is an increase in the federal funds rate. This measure is mainly beneficial to the profit space of commercial banks. The reduction of the table is to recover the money issued during quantitative easing by selling government bonds and MBS. This measure usually leads to a shortage of market funds, which has a great impact on the liquidity of the money market, US stocks and US bonds.
The Federal Reserve raised interest rates five times from December 2015 to December 2017. With the good trend of the real economy, the Fed’s interest rate hike and contraction can be regarded as a conventional means of market regulation, and this round of interest rate hike and contraction is more like the short-term emergency measures passively taken by the fed in the face of an increasingly large balance sheet, economic growth stagnation and inflation, with a very high frequency.
At this time, U.S. stocks are full of a large number of foam left at the end of the financial cycle. The Fed’s frequent interest rate hikes and contractions in recent years without a buffer period are likely to burst these foam and trigger a series of capital market crises. Adjustment and recovery may take a long time.

▎ China: the impact will not be particularly lasting, and it is expected to “fast in and fast out”

China is now facing a different situation. The economic fluctuations in China in the past three years are related to the epidemic, and there are certain similarities in performance.
At the beginning of 2020, the COVID-19 broke out, and our economy was affected to a certain extent. In the first quarter, GDP fell by 6.8% year-on-year, becoming the lowest quarterly GDP data since 1992, and the unemployment rate soared all the way. On April 8, Wuhan was unsealed. According to the economic data, China has entered a “new normal” since May. The national economy has gradually rebounded, and the GDP has gradually turned positive from the negative growth in the first and second quarters.
In addition to the domestic effective anti epidemic policy, this turning point also occurred because of the inflection point of people’s emotions. We began to learn how to travel, live, work and so on during the epidemic. With the “new normal” based on the unsealing of Wuhan, China’s economic development gradually returned to normal in the second half of 2020, and everyone’s confidence gradually recovered. Stimulus policies are also helping pull the economy back.
Under the dual stimulus of economy and policy, while the national economy gradually recovers, some new phenomena have also appeared in the primary market.
Although everyone was discussing the “financing difficulty” in early 2020, the number and amount of investment and financing in the early stage indeed decreased significantly compared with 2019, from the transaction data, the reason behind the “financing difficulty” is that high-quality companies have obtained a higher premium. In 2020, the average amount of each transaction in the primary market reached 226million yuan, a record high.
Back in 2022, China’s capital market experienced another round of fluctuations, with A-shares falling continuously, and the primary market reappeared “financing difficulties”. In addition to the conflict between Russia and Ukraine, the Federal Reserve raised interest rates and other external factors, it is also related to the repeated outbreaks in major domestic economic cities.
How long will this fluctuation and decline last? I tend to think that it is short-term and the country has reintroduced stimulus policies. According to the relevant statistics of the National Bureau of statistics, by the end of May, the central government had implemented a stimulus no less than 2020 in the first two quarters of 2022 to help the economy. The fiscal stimulus this year is no less than that in 2020, and it is more cash flow oriented.
Although the data of June has not been released yet, it is predicted that the “new normal” of the epidemic has begun in June.
We can already see some signs. For example, from the official unsealing of Shanghai in early June to the permission of Tangshi at the end of June, some large scenic spots have gradually resumed normal business. Another example is the official announcement of canceling the “asterisk” mark on the communication travel card these two days. The control policies of personnel access in various cities across the country are also gradually relaxed.
In 2020, the part of flexible consumption recovered slowly, and the total retail sales of social consumer goods did not become positive until the third and fourth quarters. Considering the decline in the risk of severe illness and death caused by the Omicron mutant, the recovery of consumption this year may be more flexible than that in 2020. In other words, the elasticity here refers to the growth rate of consumption recovery when the factors affecting consumption growth are controlled. Faster recovery means better flexibility.
We might as well compare the data of February and march with poor macro performance in 2020 and April and may with poor macro performance in 2022. The same point is that both of these two periods of time are under the greater impact of the epidemic in China, and from these two time nodes, there are some signs of recovery.
Let’s first look at the total amount of social retail sales. In 2020, the total amount of social retail sales increased significantly from March and April, and leveled off in the fourth quarter of the third quarter. In March 2022, the total amount of social retail sales decreased significantly, and began to rise positively in April and may.
However, if we compare horizontally, whether in terms of absolute scale (reflected in the length of the histogram in the chart) or from the year-on-year growth rate, the total social zeros in April and may 2022 are no worse than those in March and April 2020.
Let’s look at foreign trade export. The year-on-year growth value of export value in 2022, even at the low point in April, is still on a par with the same period in 2020, and the recovery slope, that is, what we call elasticity, is also good. Compared with 2020, the total export value in 2022 is also larger.
Some people may wonder, that is, in the first half of 2022, Shanghai, as China’s largest container port, was affected by the epidemic. Why was the export value of foreign trade not significantly affected in the same period? To answer this question, let’s take a look at the figure below
By 2021, China has accounted for seven of the world’s top ten container ports. Therefore, although the epidemic in the first half of the year has limited the logistics in the Yangtze River Delta and the Pearl River Delta, ports in other cities can still better share the pressure of foreign trade logistics, which will also support the growth of foreign trade in the second half of the year.
Another data that we are more concerned about is the unemployment rate. Data show that the national urban survey unemployment rate rose by 0.3 percentage points to 6.1% in April 2022, which may be another high since February 2020. However, by comparison, the situation in April and may 2022 is at least slightly better than that in February and March 2020, and may have crossed the high point of the unemployment rate at present.
However, one of the challenges of this round of economic recovery is actually investor confidence. Compared with the above macro indicators, the investor confidence index is a relatively soft indicator, but it is also very important for market recovery.
Because people usually focus on safety, survival, and then feelings, development, and opportunities.
Take the change of investor confidence index in 2020 as an example. After the outbreak of the epidemic, the confidence index has decreased significantly, which is largely because everyone has concerns about safety and survival in the face of the epidemic and related unknowns. After the epidemic was gradually controlled, the confidence index gradually recovered. In March and April, survival and safety were basically guaranteed, and people began to pay more attention to feelings, so there was another wave of confidence decline. Until April began to enter a new normal, the confidence index rebounded.
Looking back at 2022 (green line), we will find that compared with the ups and downs of confidence in 2020, the trend of confidence index in 2022 is relatively flat, which may also be because after the first two years, we have relatively expected all kinds of situations of the epidemic. However, we can also see that the growth elasticity of investor confidence in 2022 is not as good as that in 2020. This is mainly because compared with 2020, when the epidemic repeats in 2022, our feelings about emotions are more direct than survival, safety and other factors.
So, what will be the economic development in the second half of 2022?
If we say that the current strategic focus of the United States is to slow down the bursting speed of the foam and promote a soft landing of the economy, from the perspective of public information, our strategic focus is to maintain the basic market first, and then pull elastic growth.
In early April this year, the Symposium of economic situation experts and entrepreneurs stressed the need to stabilize the economic fundamentals and maintain the economic operation within a reasonable range. “We should not only strengthen confidence, but also face difficulties.” On May 23, the executive meeting of the State Council decided to implement 33 measures in 6 areas to stabilize the economic fundamentals. On May 25, the State Council held a “national teleconference on stabilizing the overall economic market”. On June 15, the State Council held an executive meeting to deploy measures to support private investment and promote projects that achieve more with one stone, so as to better expand effective investment and promote consumption and employment.
What is a basic disk? You can see the following three pictures.
First look at the leftmost one. In 2021, China’s GDP increased by 8.1%. The main contributions are consumption, foreign trade and fixed asset investment.
From another perspective, from the perspective of the proportion of industry added value, the GDP growth in 2021 is the middle figure. China’s total GDP in 2021 exceeded 114 trillion yuan. How does this added value form? The so-called “basic market” mainly refers to the industries with a relatively high proportion in the middle, such as industry, real estate and construction, wholesale and retail, finance and so on.
As we mentioned earlier, it is difficult for us to rely on real estate to quickly stimulate the economy after 2016. Our rapid “growth” is mainly based on the yellow part in the left figure, that is, “consumption”, which is more elastic. The epidemic in the past two years has had a great impact on consumption. If we can effectively stimulate consumption, the growth elasticity it brings will also be higher, even higher than expected. The picture on the far right shows the composition of household consumption expenditure by industry.
However, back to the current situation, in order to protect the economy after a lot of unexpected conditions, it may be necessary to return to the industries that account for a relatively large proportion of GDP value-added and protect the lower limit of basic disk growth. Next, let’s look at how to improve growth elasticity and growth space.
There is a small favorable premise for growth in the fourth quarter, that is, the base number in the fourth quarter of last year was low.
In addition, we expect that the primary market this year should be similar to that in 2020, and there should be a wave of heat in the fourth quarter. First, in the face of various chain effects brought about by the epidemic, we need to take time to slowly adapt to this new normal. Second, the government’s generous stimulus measures in the second quarter usually take 1 to 1.5 quarters to implement and take effect. Therefore, it is expected that there may be good news from the beginning of the fourth quarter.
To sum up, in the short term, the current capital markets of China and the United States are going through a certain test, but the test of the United States is a large number of foam left over from several rounds of financial cycles in history, while the test of China is to maintain the basic market under the influence of epidemic, international relations and other factors, and promote elastic growth as soon as possible. Comparatively speaking, the challenge of the United States is greater, and our challenge is short-term.
Long term factors
Next, we will discuss the long-term prospects of the capital markets of China and the United States in terms of the market value of the capital market and the proportion of GDP.

▎ overvalued US stocks

A basic logic is that the higher the ratio of capital market value to GDP, the faster the stock market will grow relative to the economy. We can usually judge whether the stock market is falsely high by this value.
There are often some special nodes in the change process of the market value / GDP of the capital market in the United States. For example, when the stock market foam appeared in 2000, the market value of the U.S. capital market was nearly 1.5 times of GDP. For another example, last year, the Federal Reserve carried out a global flood in response to the epidemic, pushing up the global asset price foam, increasing global debt by about $50 trillion, and the U.S. capital market was close to twice GDP.
What does the performance of U.S. market capitalization / GDP show last year? If according to Buffett’s measurement index, the scale of a country’s capital market reaches 80% to 120% of GDP, which is a relatively reasonable range, then the market value of the U.S. capital market will begin to deviate from this range in the whole year of 2021 or at the end of the second half of 2020, which also reflects that the U.S. stock market may be seriously overestimated and there are a lot of foam.
Although the aggressive fiscal and monetary policies of the United States did stimulate economic growth after the outbreak of the epidemic, and the gradual control of the epidemic also promoted the recovery of the consumer side, the overall economic situation is still far from the pre epidemic level. And with the gradual decline of growth drivers such as policy stimulus and social liberalization, U.S. economic growth may face new challenges.

▎ China’s capital market has stepped into the main channel of economic development

Let’s look at the situation in China. In the process of GDP growth, the market value of China’s capital market is also increasing.
At the end of 2014, the total market value of a shares was 37 trillion yuan. At the end of 2015, the total market value of a shares reached 52.96 trillion yuan. After about seven years of development, by the end of 2021, the market value of A-share will exceed 90trillion yuan for the first time. At the close of trading on May 20, 2022, the total market value of a shares was about 83.44 trillion yuan.
Therefore, if we look at this long time line, even if the capital market had been very foam before the “stock market crash” in 2015, the market value would be less than 60% of GDP. This year, even after so many challenges, the total size of China’s capital market can still account for 80% of GDP.
The share of capital market has increased from less than 60% before 2015 to more than 80% in 2021. This change shows two problems:
1、 After seven years of development, the total scale of the direct financing market represented by China’s capital market has gradually increased to and close to the volume of GDP. At the same time, referring to Buffett’s measurement indicators, the market value / GDP ratio of China’s capital market is still in a reasonable range.
2、 The status of China’s capital market has been completely different. Seven years ago, the capital market was only a supplementary means of economic development and economic regulation. Today, China’s capital market (or primary and secondary market financial instruments). This means that it has become the mainstream financial instrument for economic development.
In the future, as China’s economic growth rate returns to normal, the volume of the capital market will inevitably rise. Our next question is: where will the new money come from?
A reference data is the total amount of social financing, that is, the money released to the market every year.
Total social financing is divided into direct and indirect financing. Indirect financing mainly refers to financing through banks. Direct financing includes equity financing (i.e. capital market) plus corporate bonds. At present, the proportion of direct financing, especially equity financing, in the whole financial system is still low. Data show that by the end of September 2020, China’s direct financing stock had reached 79.8 trillion yuan, accounting for about 29% of the stock of social financing scale. During the “13th five year plan” period, 38.9 trillion yuan of direct financing was newly increased, accounting for 32% of the increase in social financing scale in the same period.
Compared with the American market. The United States is a global financial center, and the financial services and derivatives markets are very developed. According to sina finance and economics, in 2020, the U.S. direct financing market accounted for almost 80% of U.S. financing. In the future, it is difficult to drive the economy through large-scale social and financial growth, not to mention that the capital market / GDP value is far higher than the Buffett index.
Increasing the scale of direct financing is also the future development direction of China’s capital market. As clearly stated in the “14th five year plan” and the 2035 long-term goal outline, we should improve the basic system of the capital market, improve the multi-level capital market system, vigorously develop institutional investors, and increase the proportion of direct financing, especially equity financing. By lengthening the time dimension, the scale of China’s capital market will be larger, and the scale of direct financing will also be larger.
In the long run, the changes in financing scale and the increase in the proportion of direct financing may have the following impacts:
1. It is good for the establishment and development of private equity investment funds. In the future, the exit mechanism of funds will be more diverse, sound and secure.
2. The multi-level capital market structure is more valued, and the financing needs of enterprises at different stages of development may be better met.
3. The composition of financial assets in the composition of residents’ wealth will increase, and the stimulus of monetary policy and fiscal policy will also be reflected in the economy faster.
To sum up, the chain effect caused by the change of financing scale has a long-term and far-reaching impact on the industry and market.
Therefore, whether in the short term or the medium to long term, from the perspective of money supply or the role of money, compared with the United States, China and the United States are currently not so much in a “capital winter”, which may be more like a late spring cold. Although there are some restrictions, Fengrui’s investment pace and quantity have not been affected much.
Therefore, you don’t have to worry too much. The overall situation in 2022 is no worse than that in the same period in 2020. The resilience of macro indicators is relatively better, and the strength of stimulus policies is not reduced. I believe we will soon see the warmth after the late spring cold. We tend to think that those who are willing to stick to entrepreneurship in the cold or under challenges usually have the right intention, enough ability and toughness.
Finally, from the current capital market data, China and the United States, including Europe, have their own difficult experience. China should make progress while coping with “domestic and foreign aggression”. The United States should try its best to avoid the bursting of the foam and make the economy soft landing, while Europe needs to deal with the problems caused by war and inflation. In the next year, which country can obtain the relative growth under the horizontal comparison caliber may be able to obtain the favor of global funds earlier.
本篇总结
核心观点

把影响两国资本市场的短中长期的因素放在一起比较看来,现在美国所处的时间点应该是深秋入冬,而我们更像是在经历一场倒春寒。

Short term factors

中美两国当下的资本市场都在经历一定的考验,但是美国的考验是历史几轮金融周期遗留下来的大量泡沫,调整和恢复都可能更久一点。
而中国的考验是在疫情、国际关系等阶段性因素的影响下保住基本盘,并尽快拉动弹性增长。这更像是阶段性的调整和挑战。

Medium term factors

美国金融系统受影响,就会在居民端和社会财富端都有比较大的波动,与之相对的,中国居民资产受金融系统波动影响比较小,中国社会财富来源和供给当下也没有遭受重创。
两国资本市场当前下跌原因不同。美国是流动性因素居多,中国的市场下跌则主要围绕政策、疫情、局部冲突等原因,因此两国市场的表现和对应的调整策略都有所不同。

Long term factors

美国资本市场的直接融资比例极高,股市被严重高估,可能存在较大泡沫,因此很难再通过直接融资拉动经济增长。中国资本市场通过提高直融比例来获得增长的空间很大。

Author: Li Feng; Source: Fengrui capital (id:freesvc), reprint has been authorized. Reprint authorization and media business cooperation: Amy (wechat: 13701559246);
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