Decoding China’s Economic Slowdown: Perspectives on Manufacturing, Real Estate, Services and the Path Forward

  There are many subjects that can be learned well by reading the textbooks. The economy is probably an exception. To truly understand the economic operation in reality, reading more textbooks is still not enough.
  The economy is not only related to the grand purpose of running the world and benefiting the people, but also the allocation of various resources. It is also the daily life and choices of everyone. An economy that only rises but never falls will surely adjust, and an economy that falls but never rises is even more stressful. There are too many riddles of policy and human nature hidden in the ups and downs.
  Some people feel that the economy is in recession now. What do you think? what to do? Let me start with a few details that have touched me recently and share some new thoughts.
What happened to the economy?

  A person in charge of a single champion company in the manufacturing industry that has direct investment overseas and built many factories told me: “Our production capacity is prepared for the whole world.” As soon as he said this, he knew where the problem lay
  . China’s manufacturing is developing too fast, its production capacity is constantly increasing, and it can meet the needs of the world in many industries. But if the world market begins to become segmented, securitized, and circled by friends, then our entry will not be so smooth.
  China’s large and internationally competitive production capacity must go out, otherwise it will be “suffocated”, but now various barriers have been added. If it is direct investment, you will encounter restrictions on the equity ratio. If it is a merger and acquisition, you will encounter more unfriendly eyes. If you bypass places such as Southeast Asia and try to circumvent restrictions by changing the identity of the country of origin, you may also be penetrated, because the United States not only needs to see where the finished products are produced, but also the proportion of parts produced in the location. In short, we hope that more and more Chinese supply chains will leave China.
  Emerging economies welcome Chinese companies to invest, but they are not without concerns. The economic minister of a certain country asked a Chinese entrepreneur: “We have too many mines. The discovered parts alone can be mined for 150 years.” The entrepreneur said: “If Chinese companies are allowed to mine, we will not eat or drink for 30 years.” We can finish mining.” The minister was silent. In fact, the country has requested that it not only come to mine, but also keep more processing links locally.
  Made in China is very happy to be exported wherever it goes. However, affected companies, labor organizations, and industry associations in other countries will lobby the government to block it. If we only consider internationalization and do not consider the localization demands of other countries in all aspects, it will be difficult to gain a long-term foothold, and we may even be kicked out under various unreasonable excuses.
  As far as foreign trade and enterprises going global are concerned, today’s difficulties may be due to the fact that yesterday’s development was too fast, production capacity was getting bigger and bigger, and we thought that the world market would also get bigger and bigger. But now, new questions arise about who will digest it and how.
Back to the domestic market, what about the situation?

  I visited a private manufacturing company that was newly ranked in the Fortune Global 500 this year. The founder said: “Market competition is like a competition. Everyone only remembers the gold medal. The second and third place can only win silver and bronze medals. The fourth and fifth place can only win silver and bronze medals.” All I have to do is make an iron sign or a wooden sign by myself.”
  He judged that in the future, in the heavy asset field where he is located, the first in the industry will take most of the profits, the second in the industry will be able to repay principal and interest and develop sustainably, and the third in the industry will be in the industry It’s no problem when the business is booming, but it’s a loss when the industry is in a downturn. The implication is that after that, it is difficult to have any return on investment.
  The person in charge of the individual champion company mentioned earlier has a similar view, “The strong will always be strong, the market will become more volatile, and a large number of small and medium-sized enterprises will disappear in the future.” In economic terms, this is “clearing”.
  Due to brutal competition, leading companies often put pressure on their suppliers, such as further lowering prices and requiring longer payment terms. “If you don’t do it anyway, there are others who will.” It is already difficult for small and medium-sized enterprises to obtain financing, and the repayment period is often half a year or even longer, making life even more difficult.
  The founder of this Fortune 500 company said: “Going big (expanding) if you are not strong is equivalent to jumping into a pit of fire.” The
  person in charge of a single champion company said: “Since you are in the market, you must accept this cruelty. How to live? Just to be the first, even if it is in a small link or part, ‘it has to be me’.”
  Another problem that is seriously involved is overcapacity. In many industrial parks, there are either “factories but equipment that cannot be operated” (because of insufficient utilization), or “there is output value but no taxes” (because they are all subsidized).
Then from manufacturing to real estate and finance

  An entrepreneur from a medium-sized manufacturing company communicated with me. He said that he spent tens of millions of yuan to buy a financial product from a financial-controlled real estate company, but it was in vain. He sued in court and lost the case because of the risks of private equity products. At your own risk.
  ”The underlying assets corresponding to many products in the wealth management market are real estate. If real estate fails, a lot of wealth will disappear, and no one can stop it.” He said that now when he hears about wealth investment, he
  thinks it is a bubble, and he can only sell it to customers. The machine is real.
  China’s economic growth is reflected in the wealth side. In the past, there were two main types of prosperity:
  1. Productive prosperity, which accumulates wealth by providing products and services.
  2. Property prosperity, wealth obtained through investment and asset appreciation.
  There is no distinction between the two, and they are also integrated with each other.
  The real estate boom once made a great contribution to China’s industrialization process, and infrastructure and real estate are huge industries in themselves, which also led to the development of many related industries (such as construction machinery).
  There is now a kind of discrimination against real estate developers, as if they are the cause of all problems. In fact, today’s situation is the result of everyone impulsively moving forward together, rushing too fast and too hard, and eventually backlash.
  There are reasons for the shrinking real estate sector, and for residents to bet against the asset. However, the end of this prosperity that was too hasty, too fast, and too large will objectively lead to a decline in the wealth of residents, especially those in the middle class and above. If they are still mortgaged, it will be difficult to balance their mentality. They have to use 10 or even 20 years of labor income to buy an asset whose price is falling. What a feeling!
  People who know little about finance often regard finance as a virtual activity, but the loss of financial wealth is the loss of real money, not virtual, but real pain. At the same time, the wealth-related market originally provided many high-paying jobs, but now it is like an iceberg that continues to melt and move downward as the temperature rises. This is also true and has a great impact. And I don’t know how long it will take to use my accumulated labor income to make up for the rapid evaporation of wealth losses.
  Another point is that if the manufacturing industry reduces overcapacity to a certain extent and the equipment operating rate increases, it will regain its vitality. However, it is not easy to restore vitality due to the real estate and financial downturns, especially when structural factors such as demographic changes are superimposed. If we really lose confidence and everyone pursues absolute safety, then there will be no future for the wealth market. The shrinking sense of wealth will also have a negative impact on consumption.
  Some of my investment friends are switching to real companies, saying they see no future in financial investment. That era has passed.
  There are also many industries and occupations that have undergone various adjustments and rectifications in recent years, all of which have a shrinking effect, causing the basic meridians of the market economy to become disordered and influencing each other. I won’t go into detail here.
Don’t be pessimistic
After talking about so many problems, is it difficult to be pessimistic?
  I often communicate closely with entrepreneurs. My answer is usually: It’s hard and it won’t end quickly, but don’t be pessimistic.
  To put it bluntly, the current situation is essentially based on the hard work and strong desire of the Chinese people to get rich. They worked together in all aspects to create conditions and work quickly. It took decades to condense the path that others took for one or two hundred years. It’s over. In the past, all we looked at were our achievements. It was the various hardware, airports, roads, bridges, communications, and park greening that were better than those in many developed countries. It was the strong competitiveness of Chinese manufacturing that “wins wherever we go.” It was the fact that Shanghai’s housing prices have exceeded Tokyo and New York, but we have not seriously thought about the price of being fast and strong, how long the real estate boom can last, and whether listed companies that only think about financing can create value for investors. And how much unsustainable fanfare and wishful thinking went into the great prosperity of the past.
  This is the path we have walked ourselves. If this is fate, there is nothing unacceptable.
  On the other hand, if China had not fully mobilized people’s desires and abilities in the past few decades according to “development is the last word”, what would it be like now? Maybe India? In 1978, China’s per capita GDP was lower than India’s. Today it is five times that of India. China’s concentrated development is extensive and costly, but how many Chinese people want China to become India?
  There is the problem of development if there is development, and there is the problem of lack of development if there is no development. It is the same problem. Which one would you choose?
  Last year, I wrote, “Everything is going hard, difficulties are everywhere, and everyone is suffering.” Then there are a few words, “There is no need to blame each other, we can only work hard, work skillfully, persist, and innovate. Let’s unite and work together.”
  This is not to sing a high-key tone, but from the champion companies that I have seen with my own eyes that are still moving forward in the storm of internationalization, from the young scientific and technological enterprises and new consumer entrepreneurs, and from the milk tea shop salespersons who earn about 3,000 yuan a month. We can see the existence of resilience and motivation from the grassroots civil servants who are scratching their heads in the face of various constraints and still want to promote development. They are “guaranteed no rest on Saturdays and no guarantee of rest on Sundays.”
  My basic confidence comes from a market of 1.4 billion people, countless workers running around every day, entrepreneurs with innovative ideas, entrepreneurs who are solving problems every day, and the increasing competitiveness and innovation of Chinese enterprises.
The slowly upward path is also quite good.

  Some time ago, I went to Gaoyou, under the jurisdiction of Yangzhou, for research, and I realized that “stopping your hands and speaking your mouth is your destiny. Only through struggle and innovation can you live happily and peacefully.” After that, I went to Xinjiang and Lijiang, Yunnan. It was quite difficult to look at figures such as GDP per capita and local general public budget revenue alone. Last year, the fiscal revenue of many places in Yunnan fell, or even dropped significantly.

  But after staying for two days in a place called Yuhu Village in Yulong Naxi Autonomous County, Lijiang, I had some new feelings. There are more than 400 households and more than 1,000 people in this place. Its development in the past few decades has roughly gone through three stages. At first, it made a living by cutting down virgin forests, and later by mining stone. In 1994, the BBC filmed the documentary series “Yunzhinan” (Beyond The Clouds) made Lijiang known to the world, and it began to slowly transform into tourism.
  Due to the beautiful natural landscape, some real estate developers wanted to develop a group of villas here in the early 21st century. Xu Ziwang, a Shanghainese who happened to invest in education and industry, visited this place and told the village that if villas were developed densely together, the lakes, mountains and grassland here would be alienated, and the whole village and the surrounding landscape would be gone. As the government became more and more strict on land use approval, the villa complex was not built in the end. Xu Ziwang happened to meet Li Xiaodong, an architectural design professor who was teaching at the National University of Singapore at the time. They worked together for several years to build a Miaolu house covering an area of ​​6 acres.
  Miaolu’s courtyard feels closed, protected, and meditative. It is separated from the outside world through design elements such as stone walls and pools, but it is open on the side facing Longnu Lake. Xu Ziwang didn’t ask for property rights, he just had the right to use it. This building has won multiple international design awards and has become a local attraction. Many people take wedding photos on the grass in front of it. Moreover, the newly built B&Bs in the village were influenced by it, and the level of design and construction has been improved.
  I chatted with the young man who took me to the airport. He said that because of the good environment here and the famous Locke Former Residence Exhibition Hall (the former site of the National Geographic Society’s China Yunnan Expedition Headquarters), the tourism business has grown in recent years. There is a local entrepreneur who worked hard outside and accumulated capital and experience. Then he came back to cooperate with the village in overall tourism development. He gave the village a guaranteed minimum of 3 million yuan a year. The village can also share 30% of the profits above 3 million yuan. Farmers here grow corn mainly for horses to eat, and tourists like to ride horses when they come. His family has seven members and receives nearly 20,000 yuan a year from the village. His father helps lead horses. He usually does odd jobs at the village’s construction sites and also drives tourists during peak tourist seasons. This is his own income. Their yard covers an area of ​​500 to 600 square meters, which is quite large because they have to raise horses. The horse will go out to the fields to eat, and there is a locator to call it back at night. If the family is separated, the newlyweds will also have a homestead. The area is not as large as before, but it is still about 150 square meters.
  Yuhu Village gives me the feeling of tranquility and peace. It is the tourist season and it is very popular. The people here are very content and know how to be grateful. For example, they are grateful to Shanghai for helping to build a road that connects the village with the highway outside, and for helping to build a village square.
  I suddenly felt that GDP is not that important, or that GDP cannot measure people’s mental state and satisfaction. Of course it needs to develop, and this village is also developing, but slower and more natural may be a better choice. From this, we also thought, what is the relationship between GDP and national welfare? Our per capita GDP is 5 times that of India, and is our physical and mental health also 5 times higher? The per capita GDP of the United States is 6 times that of ours. Is the actual national welfare also 6 times?
  I also thought that if it is a slowly upward road, even though it is slow, my mentality will be better because it is upward. If it’s too fast, you’re overdrawn, it peaks early, and it drops again, you’ll feel very frustrated.
  Judging from the downward growth rate, weak asset prices, and overcapacity, the current economy is really not easy, and it may last for a long time. Warren Bennis, the “Father of Leadership,” said, “Just as wind and rain shape the shape of a mountain, problems shape leaders.” Leaders and all of us are being tested now. How you recognize a problem determines how you solve it. And I believe that the new solution is by no means a simple return to the prosperity of the past, and there will be no return.
Where are the new directions?

  We must maintain the foundation of manufacturing, which is the foundation for China’s economy to survive.
  At the same time, there may be more room for service industries.
  A few months ago, I saw Xing Yuqing, an economist who teaches in Japan, being interviewed by the Economic Observer. He said that China needs to create more knowledge-based employment opportunities. For example, nurses and pharmacists are typical middle-class positions in developed economies, but their income in China is very limited.
  Why are there so few dentists in China? Why are nurses’ incomes so low in China? Why can’t China’s pharmacist industry develop? Many pharmacies in China have no pharmacists at all and still sell prescription drugs. Many beauty salons in China do not have real doctors, causing many accidents. There is one dentist for every 1,600 people in Japan, and one for every 28,000 people in China.
  One of Xing Yuqing’s explanations is that due to policy reasons, hospitals cannot give nurses reasonable remuneration for the knowledge and technology-based services they provide, which prevents nurses from becoming a profession that supports middle-income employment opportunities. The same goes for pharmacists. I asked a classmate who is a leader in a tertiary hospital, and he said yes, the nursing charges are too low, and the hospital is losing money in this regard.
  Made in China brings sufficiently high cost performance to the Chinese people, but in the service fields of medical care, education, culture and entertainment, social security, real estate, finance, social care, consulting, R&D outsourcing, etc., there is still a big gap with customer expectations. It can’t all be about riders and online ride-hailing. The service industry also needs a large number of specialized middle-income jobs with increasingly fine division of labor. This can only be created by the full development of the legalized market. The regulation of the service industry is much higher than that of the manufacturing industry, which may be a key to restricting its development and inhibiting its value.
  Finally, what I want to say to everyone is that it is difficult, but don’t interpret difficulty as a negative. Pass through difficult passes, face them with wisdom, calmness and courage. Once they pass, they will be transcended. You can’t avoid it by hiding, not even by being reckless.