This is the third installment of the China 2020 Economic Review, which is about debt-driven investment. Unlike the Epidemic response 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 debt to invest and thus indirectly subsidizes its citizens. It is certainly necessary to take a deeper look at this model.
The first thing given is the data on fixed asset investment from 2010 to the present (the data source is the official website of the National Bureau of Statistics).
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 (i.e. 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 a very interesting thing, folks, because the new infrastructure concepts that are popular in 2020 are 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 three red line policy for real estate financing, 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, it is still the real estate investment that steadily wins over the 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 industrial investment in China will surpass that of real estate investment in 2021, the environment of respect for industry simply does not exist. China’s most profitable manufacturing category is the electronic equipment industry, according to the National Bureau of Statistics database, the average data of the industry is now: the average size of the enterprise employs about 860 people, all the hard work and overtime to work hard on production, the annual cost of 530 million, but a year to earn back the profits of only 28 million. This is the average level of the industry. What’s wrong with taking this 530 million to do something? Buy treasury bonds can have 25 million interest income, why do you have to continue to do industry? If you take this 500 million speculation, a minute is 100 million to hand; if you go further, take to do property development, doubling is possible. As for the employment of more than 800 people, the so-called social responsibility issues, that is the entrepreneur need to consider the matter?
—- The dividing line of investment —-
The most important factor driving investment is, of course, debt. No one is going to invest 100% with their own money, but of course borrowing money to invest and adding leverage to the investment is the way to go. So, below, I’m going to put up a 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.
(Source of social financing data is the official website of the Central Bank)
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 fixed asset investment, and this financing efficiency 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. That’s already scary. 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 financing conversion rate drops below 1, and the new $1 of debt brings investment significantly below $1, then how the entire social economy will continue to function is beyond the theoretical framework of modern economics, and is simply impossible to interpret and understand.
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 – my country, China, is finally in a situation where the financing conversion rate is about to fall below 1.
The only thing I can say for sure is: every day after this, we can witness history.
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