Milestones
Variables! Standing on the eve of rational prosperity | Harvest Capital New Year's Message
Date: 2022-02-02Views:
Written By Song Xiangqian (Alan Song)
CEO of Harvest Capital
The new three years, the old three years, patching and mending for another three years.
Since the first case of unexplained pneumonia was reported in Wuhan on December 1, 2019, this is the third time we have bid farewell to the old and welcomed the new—hidden surges, subversions, never calm. Time, measured in years, serves as the page-turning key for this weighty book called the world, with one page awakening in spring and another page descending into winter. It seems to be saying that regardless of how much chaos you experienced in the past year, a new world is thriving in another chapter.
However, the variables in the real world are often continuous, meaning that events usually intertwine. In the midst of continuous variables, everyone is busy reacting quickly, often making short-sighted judgments. But when the emergency period passes, society as a whole will reconsider and reflect on the contingencies and inevitabilities of variable occurrences in the context of normalized social upheavals. Society will return to a state of calm along the course of events, making decisions with a longer-term perspective.
In 2021, we are in the phase of normalizing global responses to the pandemic. Everyone must realize that from politics and economics to social livelihoods, some things have completely and permanently changed.
Firstly, as I repeatedly emphasized at the beginning of last year, Chinese society is undergoing a systemic reboot. This means that the underlying logic of social development has changed. In the first forty years before the reform and opening-up, we sprinted along the path of heavy commercialism with an emphasis on "efficiency first, while considering fairness." However, the core idea of economic development has now shifted to the construction of a "more emphasis on fairness and justice" in modern and new social relationships.
In 2021, the most important theme of national development is the "livelihood economy." As stated in the 19th National Congress, we need to establish a modern national governance system and improve modern national governance capabilities. This policy is resounding, outlining the long-term blueprint for China's economy. More importantly, the Party and the government have the capability to "implement this blueprint to the end."
Those who doubted this have fallen hard in 2021.
The social environment has changed, with young people resisting burnout, refusing to have children, unaffordable urban housing prices, and the burdens of a 996 work culture. Disorderly subsidized businesses have been repeatedly suppressed, the education and training industry has undergone significant changes, star projects have gone public only to see their market value drop by more than 90%, Chinese stocks have been bloodied, many companies have never returned to historical highs, and by the end of the year, the live streaming industry lost its leading position. Instances of tax evasion and tax fraud became the target of crackdowns.
Symbolically, the unexpected reserve requirement ratio (RRR) cut came at the end of 2021. With the release of approximately 1.2 trillion yuan, the deposit reserve ratio entered the range of 8.4%—the regulatory space of monetary policy has been nearly flattened. Does this precisely demonstrate that the enormous economic downward pressure has become a consensus from top to bottom?
Everyone thought they were Sisyphus pushing a huge stone uphill, striving upwards, but they did not expect that at the moment the boulder rolled down, the world had already shattered into a storm.
In the clear line of systemic reboot, maintaining a "moderate sense of pace" is a hidden thread, especially in industries closely related to the capital market.
In late 2021, the Beijing Stock Exchange officially opened, and economic pilot zones were established in various regions such as Zhejiang and Shandong. By optimizing the role and exit paths of production factors in the real economy, the government's regulation has become more effective, the market effects of factor allocation have strengthened, and the negative effects of information asymmetry are gradually diminishing.
This is the "systemic reboot at the grassroots level" that we have been anticipating for many years and is gradually deepening.
It is worth mentioning that consumer investment, in the hot trend, is also gradually cooling down. Cooling down will never make those who are truly confident, willing to face competition, and enter the industry fear. For focused and long-term institutions, only when the froth settles can the rich aroma of coffee emerge.
We are gradually realizing that the country has determined to solve the problems that were not solved in the past, to achieve the big things that were thought of in the past but not done—matters related to the people's livelihoods, urgent and difficult issues. For enterprises, going with the flow is always the best choice. Whether it is a phased or long-term corporate goal, it should be based on the trend of China's social development, grasp the changes in underlying logic, and dynamically adjust their direction and pace.
As I mentioned in an article at the beginning of last year, "Understanding the systemic reboot means understanding the future of China. Life is a wave, and going with the flow, adapting to the situation, makes it easier to reconcile with change. Truly standing on the same side as the lives of 1.4 billion people, resonating with the largest common denominator in society, at the historical turning point of the systemic reboot, it is naturally easier to harmonize with time and be compatible with the system."
Furthermore, the guidance of the ideology of common prosperity signifies that we have elevated the importance of "fairly dividing the cake" to the same level as continuously "expanding the cake." At this moment, enterprises are bound to be placed under the glaring spotlight, subject to scrutiny from society: Today, does your business model create opportunities for fair transactions? Does it contribute to the improvement of the living standards of the people? Does it align with the national positioning of "force through one hole"?
The concept of "common prosperity" has a long history. In November 2021, it was once again mentioned in the resolution of the Sixth Plenary Session of the Nineteenth Central Committee of the Communist Party of China on the major achievements and historical experience of the Party's hundred years of struggle. Those who are observant know that only significant matters find their way into resolutions on historical experiences and issues, not trivial matters.
In the history of the Party's governance, there have been only three resolutions of the same level on "issues of historical significance." The first was in 1945, during the Seventh Enlarged Plenary Session of the Sixth Central Committee, where the resolution clearly defined the core task as seizing complete victory in the revolution under the correct leadership of the central authority. The second was in 1981, during the Sixth Plenary Session of the Eleventh Central Committee, where the Party's resolution affirmed the correct path established since the Third Plenary Session of the Eleventh Central Committee, gradually establishing "building a socialist modernized strong country suitable for China's national conditions." It outlined the direction for China's socialist construction and the Party's work.
November 2021 marked the third instance. The Sixth Plenary Session of the Nineteenth Central Committee passed a resolution pointing out the historical significance of the Communist Party of China's hundred years of struggle, summarizing the "Ten Adherences," and proposing new requirements for achieving the second centennial goal. In this stage, what consensus is the country consolidating?
The flavor of the times is hidden in the resonance of the timeline.
Lastly, when looking at the societal system reboot from a future perspective, besides the changes that have already occurred, there are more potential market elements undergoing significant transformations, which we may not yet be fully aware of. In China, many indicators of production factors have not truly become market-oriented, and a tangible example experienced by the younger generation is the recent attention on power restrictions in the northern regions after entering winter.
Once the visible hand is withdrawn, critical production factors like energy will inevitably move towards marketization. This will lead to a rapid rightward shift in the cost curve for enterprises, increasing the cost pressure on the supply side. Combining with the discussions above, this rapidly rising cost pressure, seemingly originating from the pandemic, is fundamentally a consequential outcome of structural changes—rapid increase in marginal costs on the supply side, sluggish demand, and the overlay of multiple factors indicating a weakening trend. This will undoubtedly add variables and uncertainties to the algorithm for future economic growth in China. At this point, the crucial question is whether the demand side can bear the transfer of supply-side costs.
If our residents' effective demand cannot be generated, per capita purchasing power does not see substantial and effective improvement, and the plan for doubling national income cannot be realized, then under the rapidly increasing pressure of supply-side costs, which cannot be transferred to the demand side, a "blockage" is formed. The upstream surging torrent pours down, and the fragile domestic demand market is instantly overwhelmed. China is likely to move towards "stagflation," and the economic transformation pressure can be anticipated.
Therefore, to counter stagflation and establish a robust and risk-resistant industrial foundation, backward capacities with low profits, low turnover, and low technological content will inevitably be pushed outward under the warning of stagflation crisis. The large-scale clearance of backward industries is a time cost that must be paid to traverse the "middle-income trap" and achieve common prosperity. We'll have to go through the economic challenges that the United States is experiencing.
This is also a signal released by the national economic fluctuation since the beginning of supply-side reforms. For investors who are always "Long China," receiving and interpreting signals are crucial. In such an environment, we need to focus more on structural value.
The theory of structural opportunities reflects the saying of Charlie Munger: "Macro is what we must endure, micro is what we can act upon." Standing under the logic of the top-level system reboot for improving people's livelihoods and achieving common prosperity, consumption, as the endogenous driving force for the economy, will be more emphasized. This is the significance of actively arranging on the micro-level structure.
As seen in the events that have taken place in the A-share market in recent years, some may see it as the A-share market climbing for more than a decade and returning to a position above 3000 points. However, others, starting from the perspective of medium-term structural opportunities, see opportunities of 20 times or even 200 times in industries such as consumption, pharmaceuticals, and advanced manufacturing in the A-share market. This is what we emphasize as structural opportunities. Macroscopically, China's economic development has already departed from the ultra-high-speed range of over 10%, but drilling down, there are still "structural values" waiting to be uncovered at specific points.
Taking the chain industry as an example, due to the fundamental changes in the construction of the underlying economic structure, theoretically, China's "thousands of stores model" and the logic behind opening stores need to adapt to this change and be reconsidered. I also believe that those who can see through and understand this trend, willing to plan for the long term and strategize for the long term, will still have significant opportunities.
So, where is the value? Let me boldly share my perspective.
Firstly, under the guidance of common prosperity, consumption, as the main driving force of the three major drivers, will further open up space in total domestic demand. On the one hand, the middle-class group is expanding, and on the other hand, basic consumption needs, under the bottom-up structure of people's livelihoods, the volume of demand in these two areas will be released more and more rapidly. Clothing, food, housing, and transportation—the direction of people's hearts—is also the solid foundation supporting stable demand in the future.
Who should we stand with? It's still with the people's livelihood.
Secondly, the rigid costs in the field of people's livelihoods will inevitably be reduced, the externalities of public services will continue to overflow, and business models competing for profit with the people will be vigorously suppressed. What industries can bring to the people will either be real and tangible consumption benefits or improvements in efficiency and experience. Establishing barriers in the daily lives of the people, adapting to adjustments, and having stronger adaptability will be struck by the fortunate arrow of the times.
Behind what seems accidental are threads laid by fate, running through thousands of miles. I believe that after many years, time will also verify whether we have captured the variables of Chinese society and whether we are walking on the same frequency as the times.
Looking at history, all the policy adjustments currently taking place in reality invariably point towards one thing—improving people's livelihoods and achieving common prosperity. The contradiction presented by the leaders, regarding the "increasingly growing beautiful life needs of the people and the imbalance and insufficient development," is indeed the most fundamental issue facing the current Chinese economy. It signifies a new, systemic change with significant turning-point implications. The emphasis on this significance cannot be overstated.
Investing for the greater good, in today's deep adjustment of capital and labor relations, strategically positioning in the lives of the people, creating consumer surplus, and tightly binding with the worldly affairs is truly a benevolent action for the benefit of the country and the people. Even though life's harsh realities are clear, I still love its tumultuous journey through storms. Not for anything else, but because I am still on this sea. And this is the reason for our journey and the enduring value we uphold.
This New Year's message is dedicated to the more splendid 2022 belonging to the nation and the people. We are about to welcome the Beijing Winter Olympics, and once again, the vast land of China will be adorned in silver, greeting the attention of the world as a major global power. This is a commitment that comes once every four years, and we wholeheartedly accept it. Just as facing the unknown and monumental changes, we are sure to face them calmly.
The world may find it difficult to return to the time before 2020, but I remain confident—Long China, continuously supporting Chinese consumption!
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