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Why Discuss Quality Growth at Present?丨 Deep Web interview

Date: 2023-10-27Views:

Source: Tencent News "Deep Web"

Author: Ye Zhen

In "The Godfather," there is a saying: Those who can see through the essence of a person in one second and those who spend half their lives without understanding the essence of a thing are destined for vastly different fates.

With the frequent occurrence of "black swans" and "gray rhinos," Song Xiangqian, the founding partner and chairman of Harvest Capital, believes that this is an era of unprecedented systemic overhaul, where macro issues become crucial and profoundly impact the structural development of industries. The three major challenges of education, healthcare, and real estate are facing issues such as low birth rates, low growth, and low consumption.

Harvest Capital is an investment institution focusing on consumer sectors. Song Xiangqian believes that investors need to have a "broad and solid" perspective. "Broad" means understanding macro policies and the unprecedented changes of the century, while "solid" means staying grounded, understanding the industry, and providing valuable advice for the development of enterprises.

After forty years of reform and opening up, the era of abundance is coming to an end. In Song Xiangqian's view, "the present is a time of crisis and opportunity because we need to clear out some zombie enterprises. In the future, it will be an era where good people make money. The old paths cannot be taken anymore; we need to take new paths, wear new shoes. How should Chinese enterprise management proceed in this process? It must rely on Drucker-style management science and technological progress."

The following is a transcript of Tencent News "Deep Web" recent dialogue with Song Xiangqian.

01“Japan's governance experience is worth learning from”

Deep Web: You have always mentioned that the Chinese economy is undergoing a significant transformation once in a century?

Song Xiangqian: For a large country like China, the distribution of national wealth and the depth, breadth, and total volume of economic development are all related.

In 2016 and 2017, it was advocated to transform shantytowns, and the real estate quickly entered the so-called 'three highs' model—high debt, high turnover, high leverage. The real estate sector experienced rapid development with a frenzy, and local dependence on land finance deepened. I think the analysis of China's economic phenomena should still start from the fiscal and tax system. The household sector is leveraged again, the social macro debt is also high, non-financial businesses are also leveraged, and debt accumulates quickly, and the upward trend is relatively fast. On the other hand, economic growth is slowing down, creating a scissor gap.

Deep Web: What is the impact?

Song Xiangqian: Just now I talked about high leverage and high debt. The balance sheet needs to be adjusted, and this process may take a long time. As Mr. Gu Chaoming said, a major recession in the balance sheet puts pressure on all aspects, which is not a favorable factor for economic development. This big environment first has a restraining effect and crowding-out effect on consumption, and the overall economic development pressure will be relatively high.

Deep Web: How long will this process take?

Song Xiangqian: Everyone expects 5-10 years.

Deep Web: Does Japan's experience have reference value for China?

Song Xiangqian: Carefully studying Japan's monetary policy and fiscal policy over the past 30 years, Japan's fiscal policy has made tremendous efforts. The outside world has focused on the quantitative easing policy adopted by the Bank of Japan. In fact, Japan's fiscal policy effectively fills the investment gap of the household sector and enterprises. Japan's overall GDP is still maintained at a relatively high level. Although GDP has not declined, the per capita income level has not increased, but it is also maintained at a relatively high level.

This year, Japan's economy performed very well, entering an environment of enhanced inflation. The Bank of Japan is considering exiting negative interest rates and low-interest rates, which is not easy for a country like Japan that has been in a long-term recession, and the growth is still good. Japan's economy has experienced a successful transition from a deflationary environment to an inflationary environment on a global scale, and this governance experience is worth learning from.

Deep Web: What is the current environment we are facing?

Song Xiangqian: Real estate, as the main business, accounts for 15%-17% of the total economy. However, with the decline of the real estate market, real estate companies face high turnover and high debt. Some real estate companies even experience sudden collapses. At present, there is no pillar industry that can replace real estate.

Consumption is not something that can be achieved overnight. The success of driving the domestic demand market and successfully establishing internal circulation is a medium- to long-term goal. The key lies in the increase of per capita disposable income. Not only does the per capita income level need to be improved, but also the consumption habits of the people need to be transformed. The reason why people are willing to spend money and dare to spend money depends on a series of supporting factors, mainly relying on the improvement of the social security system, the stability of the employment market, and the development of market entities.

In this sense, economic development is the overriding task. Returning to the basic line with economic construction at the center needs to be vigorously promoted and truly posted in the hearts of the people as a peacekeeping notice.

Deep Web: How do you view the 40 years of high-speed growth in the past?

Song Xiangqian: An economy that has grown continuously for 40 years at a high speed. We are accustomed to an environment of high growth and suddenly entered an environment of quality or low growth, which we are not used to. Managers are not used to it, entrepreneurs are not used to it, and ordinary people are not used to it. In this environment, there is indeed a period of transformation pains. Now is the period of transformation.

At this time, we need to be more calm, maintain strategic stability more, and be more soberly aware of our advantages and conduct profound reflection. Then, dividends should be obtained from the system, fair competition, infrastructure, industrial structure, and sustainable growth of per capita income level. In the next 20-30 years, the Chinese economy will gradually undergo a positive reversal.

02 “System Reinstallation Clears Zombie Enterprises”

Deep Web: What do you mean by system reinstallation?

Song Xiangqian: The reason I propose system reinstallation is that many people in China do not value macroeconomic research and do not pay attention to structural changes in society. Currently, we are facing a threshold period of transitioning from a middle-income to an upper-middle-income country. Because the current per capita income is $12,000, according to the United Nations standards from the 1980s, entering the threshold of a high-income country is $12,800. For the United States, it is $77,600. Compared with Singapore, Japan, South Korea, and our Hong Kong, the gap is quite large.

From a per capita perspective, China is still a developing country. China, with a population of 1.4 billion, faces a highly complex economic situation as a large developing country moving towards a high-income threshold. The economic volume is large, but the quality is not high, especially the per capita income level has not truly benefited the people.

Research reports from Beijing Normal University show that 600 million people have a monthly per capita income of less than 1,000 RMB, and they have not used toilets. One billion people do not have passports, have not traveled abroad, and have not taken airplanes.

The current international political and economic environment is relatively unfavorable, posing challenges to the safe development of the Chinese economy. National security is a very important matter. Under the condition of national security, stable, long-term, healthy, orderly economic development is a highly dynamic management issue in the context of a grand narrative, which will greatly test the ruling party and Chinese society.

Deep Web: What are the costs of system reinstallation?

Song Xiangqian: To put it metaphorically, whether using Windows or MAC, no matter what source code is used to create this desktop system, the basic logic of the underlying system operation is basically the same, but the use effect requires a long test. This means that socio-economic development has entered a deep area of reform. In the past, we were feeling our way across the river, and now the bridge is built, so we can walk directly on the bridge. Why go into the river to feel the stones?

The second is to understand the complexity of the Chinese economy. Chinese society lacks modernity, and there is a long way to go in establishing a modern national system and improving the modern national governance system.

Third, many people also underestimate the resilience and elasticity of the Chinese economy. This resilience and elasticity do not come from the simple application of quantitative tools but more from the institutional dividends released by institutional reforms and the improvement of total factor productivity. In the era of stock game, the efficiency revolution brought about by institutional reforms is truly worth looking forward to.

Deep Web: When you say underestimate, are you referring to the resilience of the Chinese economy?

Song Xiangqian: No. Everyone thinks that the Chinese economy has resilience and elasticity, but I think everyone's understanding of resilience and elasticity is insufficient. Because resilience and elasticity are considered a total relationship, but the core is quality and efficiency. Currently, the Chinese economy also needs a reboot. Why? Because we need to pursue quality growth, not blindly pursue speed and total quantity.

The era of big water and big fish is over. We cannot simply believe that large scale is good or fast is good, such as the Fortune Global 500.

Currently, there are opportunities in the crisis because we need to clear some zombie companies. For example, in the electric vehicle sector, there are too many so-called new forces that have gone bankrupt, with countless casualties, and no one is reflecting on it.

Everyone is discussing the resilience and elasticity of the Chinese economy. When discussing resilience and elasticity, everyone is hoping for policy issuance, hoping for higher economic growth, and hoping for a larger total. This is a mistake. The true resilience and elasticity of the Chinese economy lie in reform, in institutionalization and legalization, in the allocation of production factors, in adhering to the principle of a market economy, and in releasing the dividends of the system.

03 "An Era Where Good People Make Money"

Deep Web: You just mentioned that an era has arrived where good people make money?

Song Xiangqian: Currently, we are in an unprecedented era, and the era of big waters and big fish is gone. Simple input of factors does not lead to growth. The old paths are no longer viable, and we need to explore new paths, wear new shoes. In this process, entrepreneurs in China must rely on management science, like the management philosophy of Peter Drucker, and on scientific and technological progress. We need to shift from extensive operations to refined and meticulous work. Whoever can place market resources in the most effective and suitable positions, establish adaptive and modern corporate systems, has the chance to gain the compounding value of time.

Deep Web: How do you view cycles in this era?

Song Xiangqian: Economic cycles, based on different time lengths, can be categorized into four types: 3-4 years of Kitchin cycles, 7-10 years of Juglar cycles, 15-25 years of Kuznets cycles, and 50-60 years of Kondratieff cycles. The Kondratieff cycle is the longest. Understanding cycles is crucial in the face of big cycles. China has entered a once-in-a-century era of systematic overhaul, and macroeconomics becomes very important and exceptionally sensitive in this era. It will profoundly affect the structure of industrial development and some structural variables in society, such as population issues. Education, healthcare, and real estate face the situation of low birth rates, low growth, and low consumption, possibly even long-term decline.

With less than 8 million new births this year, there is a cliff-like decline in population. Many people are not aware of the upheaval caused by reaching the peak population. Our current total fertility rate is only slightly higher than that of South Korea, ranking among the last three in the world. Kindergartens, schools, elementary and middle schools, and even universities may face mergers due to a shortage of students. Meanwhile, labor supply is limited because labor is becoming scarcer and more expensive, leading to significant changes in the cost structure of many industries. Entrepreneurs are not fully aware that these slow structural variables will profoundly change the way China's socio-economic life operates, the development trend of Chinese industries, and the competitiveness of Chinese enterprises.

Population, land resources, technology, financial resources, environmental resources—all are reaching their peaks. In this environment, our development bottlenecks will soon emerge. This situation is a typical way of switching growth in the middle of stock environmental competition and incremental environmental competition, requiring a thorough transformation into high-quality growth. In this environment, there will be an initial period of pain, where everyone needs to honestly address debts, adjust balance sheets, and increase cash flow. The era has come for real competition among entrepreneurs, facing the challenges and clearances, fastening their seatbelts.

Investment is essentially an act of buying future growth. In addition, industrial layout is crucial. As an institution focused on consumer investment, we seize essential, high-frequency needs, focus on people's livelihoods, pursue ultimate cost-effectiveness, and contribute to the construction of basic living infrastructure. Even without the so-called era and demographic dividends, we earnestly engage in work, seek management efficiency, and optimize operations.

The relationship between people, goods, and the market is at the highest level of business operations. Over the past forty years, the focus on goods and markets has been continuously adjusted. Ultimately, putting people at the center, creating products and services that benefit consumers, and creating surplus value for consumers, will win people's hearts in the long run. People will vote with their feet to support you and with their hands to buy your stocks. Good products and good services are positively correlated over time, effective in the long term.

Time is the scale of enterprise value, and profit is the by-product of doing things right. In the face of these macro environmental changes, slow structural changes in production factors, Chinese entrepreneurs need to practice their internal strength, improve management, optimize operations, refine technology, and strengthen value.

Chinese enterprises are facing an era of clearance, even a micro-profit era. Turning crisis into an opportunity, turning danger into safety, the competitiveness, level, and structural competitive advantages of Chinese enterprises are slowly starting to be nurtured and grown. It's a good thing in the face of such competition, clearance, downturn, and crisis. This is a real test for entrepreneurs, industries, products, services, and brands, a baptism by fire, a phoenix rebirth.

Deep Web: Will the market make selections?

Song Xiangqian: Those that need to be cleared should be cleared. Of course, we cannot say that pouring water to bathe the child will also pour the child out. There must be distinctions. Through institutional dividends, market attributes, and structural optimization, let the market actively screen. Those with competitive strength, structural competitive advantages, truly good people and good companies will undoubtedly win in the market competition. This is emphasized in "On the Moral Disposition" or "The Wealth of Nations." Therefore, this adjustment is timely. It is a good reflection on the past era of big waters and big fish, a good phoenix rebirth. High-quality growth must bid farewell to the past. It's correct to cut off a limb; we cannot have it all.

Deep Web: What kind of companies will you invest in?

Song Xiangqian: A good track, a good entrepreneur, a good person—these three must come together. He must be a well-rounded student to have a chance to win in the future competition.

Business is inherently profit-oriented, while ethics is selfless. Whenever a businessman talks about ethics, it seems as if even God would laugh. However, all common sense has its adaptability to the times, and society has undergone a trend shift. Market is now rewarding those with ethical values.

Deep Web: In the future, what is the most important cognition for investors?

Song Xiangqian: Presently, the requirements for investors are higher. Investors need to be "broad-minded and grounded." "Broad-minded" means you need to understand macro policies, understand the unprecedented changes in a century, understand our industrial changes, understand our institutional changes, and also understand the environmental changes brought about by our future society's high-quality development, including what I mentioned about the slow variables in economic structure.

"Grounded" also requires investors to be truly down-to-earth, to actively participate in business operations, empower enterprises, and engage in the movement of creating value. Don't just stand in the boardroom saying irrelevant things. Most of those words are compromises, seeking common ground while respecting differences. In fact, they do not bring revolutionary and decisive changes to enterprise growth and operations. Investors need to be good staff officers for enterprises, not just standing idly by, but offering valuable and industry-savvy advice, deeply participating, becoming business partners, external CEOs, second-tier employees, and champion super trainers in the operation of enterprises.

Deep Web: Which investment institution does Gahua benchmark?

Song Xiangqian: I know who I want to become. Because investment is indeed a benevolent social act, not just an economic one. It fundamentally helps with the adjustment of social economic structure, optimization of industrial structure, development of industries, and the welfare of people's social lives. Therefore, it carries a lot of social responsibilities. Society aggregates wealth and entrusts it to you for management. Through your specialized work, create better products and services for the general public.

Secondly, I believe in entering the world, empowering people's lives, supporting Chinese consumption, and helping national brands. This thing is big enough, long enough, and the track is wide enough. China, in the context of unprecedented changes in a century, needs to stimulate domestic demand. In the future, society will transition from a production-oriented society to a consumption-oriented society. The savings capacity of the people needs to be transformed into consumption capacity. What is our basic contradiction? It is the contradiction between the increasing demand for a beautiful life by the people and the unbalanced and insufficient development. What is lacking is what we need to supply.

The essence of the supply-demand relationship is the balance between supply and demand. Currently, there is a shortage of high-quality supply, and there is great potential in China's consumption and service industry.

Deep Web: How do you view past investments in new consumption?

Song Xiangqian: Essentially, there is no distinction between new and old consumption. The media likes to create buzzwords or attract attention. The essence of consumption is still centered around people, providing products to everyone. Food is for eating, transportation requires vehicles, whether bicycles, cars, or airplanes. Hotels are physical places, and their essence has not changed. Even though we use the internet, electronic payments, and other means, the ultimate delivery of products and services has not changed.

There is a distinction between innovative consumption and traditional consumption, but there is no distinction between new and old consumption as reported by the media. This concept essentially creates opposition and conflict, manufacturing concepts and trends, rapidly obtaining dividends from the capital market. The goal is not to manage a company well. Looking at the essence through phenomena, the enterprise is still the same enterprise. The methods, techniques, and technological capabilities may differ, but the content of products and services remains the same.

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