Unlike the new crown coping model of direct cash subsidies to nationals in major countries such as Europe and the United States, China’s economic model for 2020 is one in which the government borrows and invests, thereby indirectly subsidizing its citizens. It is certainly necessary to take a deeper look at this model.
Annual Changes in Fixed Asset Investment (Excluding Farmers) since 2010
First of all, the data of fixed asset investment from 2010 to the present are given (the source is the official website of the National Bureau of Statistics of China). It is clear from the data table that 2018 was the peak year for fixed asset investment in China, and has been declining continuously since then. 2019 saw a sharp contraction of 13.2%, with secondary industry investment (also known as industrial investment) shrinking by a whopping 31.5%. 2020 saw fixed investment shrink by 5.9%, against the backdrop of speculation on various odd and so-called new infrastructure investment concepts. Among them, the secondary industry investment shrank by 8.5%. Of course, the position of real estate investment remains solid, with a 9.9% increase in 2019 and a 7.0% increase in 2020.
The interesting thing is that after these two years, the scale of real estate investment and industrial investment has been very close. 97.8% higher than the scale of industrial investment in 2018, only 23.4% more in 2019, and then in 2020, only 5.5% more! According to this trend, in 2021, the scale of real estate investment will overwhelm the scale of industrial investment and become the most important industry capital investment in China.
This is actually very interesting, the new infrastructure concept that is popular in 2020 is actually all invested in various industries, such as data storage centers, 5G base stations, charging piles and so on. At the same Time, the financial system issued the strictest ever property financing “three red lines” policy, trying to stop the flow of funds into the real estate development sector. However, at the end of the day, when we look at the data, real estate investment is still winning over industrial investment. It seems that no policy can really dampen the enthusiasm of funds pouring into the real estate sector. Of course, this must also mean that in 2021, real estate control policies will continue to increase.
Honestly, I really don’t believe that the growth rate of China’s industrial investment will outpace that of real estate investment in 2021, and the general environment of respect for industry simply doesn’t exist. China’s most profitable manufacturing category is the electronic equipment industry, according to the database of China’s National Bureau of Statistics, the average industry data: the average size of the enterprise employs about 860 people, all the hard work and overtime to work hard to engage in production, the annual input cost of 530 million, but a year to earn back the profits of only 28 million, which is the industry average. Take the 530 million to do something bad? Buy treasury bonds can have 25 million interest income, why do you have to continue to do industry? If you take the 500 million to speculate in real estate, a minute is 100 million to hand; if you go further, take it to do real estate development, doubling is possible. As for the employment of more than 800 people, the so-called social responsibility issues, that is what entrepreneurs need to consider?
The most important factor driving investment is, of course, debt. No one will invest 100% with their own money, of course, borrow money to invest and give leverage to investment, is the way to go. So, in the following, to put out the table of the evolution of the relationship between investment and debt from 2016 to date. Note the concept of financing conversion rate in the table below, investment ÷ financing, that is, for every dollar of financing on average across society, how much money can be converted into investment in fixed assets.
The evolutionary relationship between investment and debt
In 2018, China’s financing conversion rate reached a maximum of 2.83, which means that for every additional dollar of debt, there can be 2.83 yuan of investment in fixed assets, a financing efficiency that is actually quite good. After that, the marginal effect of debt-driven investment emerges. 2019, the financing conversion rate drops sharply to 2.15, and then in 2020, it drops directly to 1.49. For every dollar of debt added to society, only 1.49 yuan of investment can be added, which is already a terrible thing. On this trend, the financing conversion rate will probably drop to about 1 in 2021.
What does this mean? It means that society as a whole simply can’t get its own money to invest anymore! Every penny of investment depends on debt growth. If the situation continues to deteriorate, the conversion rate of financing falls below 1, the new dollar of debt, bringing investment significantly less than a dollar, then how the entire social economy will continue to function, beyond the theoretical framework of modern economics, simply can not be interpreted and understood.
To be honest, there has been no progress in the field of macroeconomics since the 1960s. While the natural sciences have made some modest progress in the last 60 years, the social sciences have remained completely stagnant. The Asian financial crisis in 1998 and the global financial tsunami in 2008 can be attributed to the disorderly expansion of debt, but no one has made any deep introspection and theoretical conclusion afterwards. The global debt expansion pattern started again after 2008 and has continued until today – China, finally, is in a situation where the financing conversion ratio is about to fall below 1.
The only thing that is certain is this: every day after this, we can witness history.
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