Inflection point Where will the Chinese economy go from the beginning of the new cycle?

China’s economy is still filled with a lot of pessimistic atmosphere, the economic growth, government and corporate debt, foreign exchange reserves and the RMB exchange rate can maintain stability, growth and the rise of emerging industries and a series of problems are still widespread doubt. Often, pessimists are always more concerned about the public.

But in this article, we want to express is: a series of evidence that the US economy has been through the difficulties, the Chinese economy seems to have experienced a long cycle of inflection point.

So in the moment, we think about the way the future is:

1, the rhythm of China’s economic recovery is gentle or strong? Continue to pessimistic may be the direction of China’s economic and financial misjudgment.

2. What is the difference between the new cycle of China’s economy and the previous growth cycle? What is the risk of the weak recovery process?

3, how to laugh on some seemingly unexpected, but in the reason of the “black swan”?

4, taking into account the policy stimulus and market incentives, some seemingly innovative real bubble or the industry may shrink or even burst, how to attach importance to the value of asset allocation, return to tradition?

Our thinking is:

1, the Chinese economy has reached a long cycle of inflection point, or the beginning of the new cycle, but the huge pessimistic inertia and inflection point vulnerability, leading to about two years to get decision-making and public recognition;

2, the beginning of the new cycle to confirm the point is very important, it determines the next five years or even longer time, China to maintain 6% -7% in the high-speed growth is more likely to determine the relative between China and the absolute The economic gap continues to shrink rapidly;

3, high risk, weak recovery and lack of overall innovation kinetic energy of the new cycle determines the value of investors gradually return to chase the speculative speculation quickly tide;

4, the new cycle of China’s strategic opportunities for the development of the period even if not to the end of its form and content has also undergone significant changes, slightly passive to the outside world must be active and “along the way” and other strategic integration, and strive to create and extend Conducive to China’s strategic opportunity.

First, the long cycle of the world economy inflection point: pessimistic diffuse in the fait accompli

When we make some judgment, intuition is not to prove that this judgment is correct, but often try to prove that we are wrong, unless there is a strong evidence chain, to prove that the abandonment of this judgment is not feasible. Similarly, since the subprime crisis, the inflection point of the long cycle of the world economy may have come, at least for the US economy.

One of the most surprising in 2016 has three economies:

First, Brazil, its annual total of about three quarters of the President did not actually perform their duties;
Second, Russia, subject to Western economic sanctions and involvement in the Syrian conflict;
Third, Turkey, political instability and the West and the evil.

The economic growth, prices and exchange rates of these three economies were far better than expected; at the same time, the strong rise in Brazil and Russia’s stock market was at the forefront of the world.

It is difficult for us to say that these economies are surprising in their performance, how well the government has to control, and how much the economies are accelerating into the world. The recovery of the resource can be partly explained but the intensity is insufficient, so what can explain the performance of these economies?

2016 Russia and Brazil economic growth picked up, Source: WIND

Russia and Brazil stock market rose strongly in 2016, Source: WIND

Second, the most encouraging in 2016 is the US economic recovery is clear.

Most of the US macroeconomic indicators are getting better. Such as economic growth, current account deficit, price, employment and so on. In addition, the dollar index rose strongly in the past three years, the US stock market hit record highs. The only slower variable is the long-term interest rate of the United States, with 10-year Treasury bonds as a sign of the long-term interest rate upward trend, which was finally established in the fourth quarter of 2016. From most of the economic indicators, the US economic recovery of the inflection point, is likely in the fourth quarter of 2014 and the first quarter of 2015. In view of this, the United States in the end of 2014 to withdraw the amount of wide, and in the past two years, respectively, raising interest rates is a keen and appropriate, the current March and June interest rate expectations is almost to the point where no doubt. According to this, the US subprime mortgage crisis after the recovery point has been about 2 years, but why this clear recovery did not get the market and the researchers agree?

US economic growth and inflation in 2016, Source: WIND

US unemployment rate fell to low, labor participation rate stabilized, Source: WIND

Third, the most tangled in 2016 is the Chinese economy.

From the perspective of Sino-US economic relations, a large number of studies have proved that the economic exchanges between China and the United States are profound and complicated. Vice Premier Wang Yang used “husband and wife” to describe Sino-US relations.

After 1995, economic growth between the United States and China, prices and interest rates tend to show a continuous strengthening of the synchronization. In short, the United States is good China, the United States is not good China is not good, the US economic cycle ahead of China 2-6 quarter. If the end of 2014 the US economy embarked on a steady recovery path, then the lag in six quarters projections, the Chinese economy should be the latest in the second quarter of 2016 also showed a recovery. So, is there a long-term inflection point in the Chinese economy? There are many signs that from the second quarter of 2016 to the present, China’s economic growth exceeded expectations, prices rebounded, the real economy profit gradually improved, and even interest rates began to rise. However, why, until now, some of the views are still partial pessimistic judgment on the Chinese economy, the end of 2016 the central economic work conference will be the main tone is defined as anti-risk, 2017 two sessions of the State Council will still target growth target of 6.5%.

China ‘s GDP growth and government growth targets, Source: WIND

China CPI and PPI year-on-year rebound, Source: WIND

A rough judgment is that perhaps at the end of 2014, the US economy is starting to recover; perhaps by the end of 2015 or early 2016, the Chinese economy is starting to recover. The US-China economic cycle is still synchronous. Taking into account the US-China economy in the global economic growth in a pivotal position, the US-China recovery can not not lead the world’s major economies, the trend gradually clear.

Second, different from the previous cycle: high-risk weak recovery

We want to emphasize that the long-term inflection of the world economy may have gradually emerged, the dawn of the world economic recovery, may gradually appear. But why the moment the people have formed a cycle of inflection point, so doubt or even turn a blind eye There may be many reasons, but the US economic recovery is weak, lack of innovation and full of twists and turns of the recovery, determines the people to determine the inflection point of strong doubt.

One is virtual and not real recovery.

The previous cycle is that the monetary cycle – the profit cycle – the inflation cycle, that is, monetary stimulus will bring real economic profit improvement, and then bring the rise in inflation. Since the subprime mortgage crisis, the monetary stimulus of the major economies has been strong enough, but the real economy’s profitability has improved weakly, and the subsequent rise in inflation is not particularly ferocious. Explain the strong currency, weak profit and weak inflation is the possibility of the rapid expansion of asset prices, that is, more liquidity, part of the absorption of the real economy, but some of the stock economy and other virtual economy absorbed. In fact, there are real estate prices in the United States, especially the expansion of stocks and real estate prices, are also efforts to promote the financial industry out of reality, the revitalization of the real economy. Inflation and asset bubbles have always been a lingering shadow of a threat to economic recovery.

US stock market continued to rise, Source: WIND

US housing prices continued to rise, Source: WIND

Second, the chaos in the recovery of noise.

Especially the changes in the global pattern and the impact of Trump. The old pattern of the world is minimalist, is the United States, the European supporting role, Japan, “Little Three”; and the current new pattern is the United States led the Chinese supporting role, Japan, “Little Three”, Europe in the lost. The impact of this pattern of quietly changing is still continuing. In addition, the impact of Trump and the conservatism and isolationism of Western political ecology became increasingly strong, which greatly deepened people’s pessimism. Perhaps after the upsurge of globalization in the Soviet Union after the upsurge of globalization, but after all, the current global pattern is still better than the Cold War; after all, based on the real isolation and conservative, but also the face of the Middle East chaos and part of the Islamic forces continue to expand the stress mechanism.

Three is expensive and long recovery.

Since the subprime mortgage crisis, the major economies of the “helicopter throwing money” and large-scale fiscal stimulus are unprecedented. For example, during the Obama period, the US federal government debt jumped from 10 trillion to 19 trillion; Obama’s health care reform as the core of the welfare policy makes the US middle class miserable. The Fed spent up to three years time, only from the gradual withdrawal of excessive width to the clear rate hike. China’s situation is similar to this, from the “three superimposed” to the current “three to one drop a fill”, but also in the staggering load in the line. There is not much encouraging new growth point in the United States. This painful and expensive recovery has made people still skeptical of the sequelae of stimulus policies rather than focusing on the recovery itself. If the withdrawal from the Federal Reserve to the width of the two rate hike, to 2017 since the interest rate improvement has taken more than three years time, which makes the public finally confirmed the recovery of the facts, the turning point of China’s economic recovery may need us Have great patience to continue to wait for the repair and recognition of public sentiment.

But if we look at most of the economic indicators of the United States, observe the expected economic performance of Brazil and Russia, and observe the synchronization of the US-China economic cycle, we may have to admit that the US-China economy has survived long-term inflections, Is fait accompli. We are facing a weak recovery, not two, but in the future, the future of the world economy and the Chinese economy, we should hold the attitude is cautiously optimistic, rather than continue to pessimistic; we are facing a weak recovery, not two Recession.

Three, not accidental black swan: logical overlooking

If the United States has been the first to reach the long cycle of the inflection point of this judgment is established, then what will happen in 2017, in our view should be expected in the black swan event? We guess there are four black swan events that are important. Top-down analysis helps us understand the trend of macro variables, but it does not help us to identify the state of individual companies from bottom to top.

One of the black swans is that the euro zone’s economic performance and the stock market performed better than expected.

The logic of making such judgments is simple, since Russia’s Brazil is more than expected in 2016, another area of ​​economic depression, the euro zone will be staggering to the better, rather than into a deeper quagmire. Even if Europe is facing political righteousness, the complexity of the security situation plagued, the recovery may also come late, rather than absent. Even the showdown in the Syrian situation and the overall right-wing of Europe, the European economy may not be a bad thing. Europe’s right-wing iconic starting point may not be this year’s German, French, Dutch election, nor is the Trump phenomenon in Europe, but the British off Europe.

Black Swan II is a large number of phenomenal enterprises.

Since the subprime mortgage crisis has been such a long time, the government and entrepreneurs are constantly trying to seek new changes, which led to a large number of capital into the field of innovation. But innovation is always scarce, and we harvest more of a bubble. Crisis in the traditional disappointment and desire for innovation, so that people without assets, no research and development, no profit, no prospect of a large number of enterprises to take a very tolerant attitude. However, the arrival of long-term inflections means that people’s tolerance and patience with innovative firms are shrinking, the volume of liquidity is down and the real economy is taken seriously, and innovative firms must be profitable and landed quickly, or they will be drowned. Over the past few years, some phenomenal companies, such as Uber’s valuation, are higher than the sum of the two major US airlines, and may be revised to just the equivalent of a better traditional taxi company’s valuation level; Airbnb’s estimate The value will not be greater than the intercontinental group plus Marriott Group, but back to a middle hotel management group valuation; Snapchat may not worth it. And a large number of innovative enterprises in China, such as sharing bicycles and online meals may be struggling or shattered, and ant gold clothes and other so-called unicorn enterprises valuation may also be significantly worse than expected. People will harshly look at innovation with traditional indicators such as capital, capital, profitability, growth, and risk, and carefully identify bubbles and innovation. From this perspective, the Nasdaq future differentiation or even adjustment, it may be difficult to avoid. Phenomenon-level enterprise’s reality, nothing more than people’s investment in resources and output become more rational.

Uber valuation and the three major airline market value comparison, Source: WIND
   

Airbnb valuation and the United States two major hotel market value comparison, Source: WIND

Black Swan’s third is the bulk of the commodity as a whole bull market.

If people gradually confirm that the US-China economic inflection point has passed, the so-called second bottom of the risk will be forgotten, optimistic about the future expectations of the real economy and the continued growth of the momentum of recovery, will promote the bulk of goods to the overall bull market, rather than simple Structural bull market, one of the most eye-catching may be non-ferrous metals. We can not ignore the global real economy, especially the US-China real economy to a good driving force. Commodity’s mild bull market and the resulting inflationary shocks and transmission are unpleasant and may even affect the recovery itself. But when we say that innovation is scarce, it is almost that traditional industries will remain the protagonist, which determines the status of commodities than the subprime crisis before the weakened, but has not yet been subversive. Which will to some extent worsen China’s terms of trade and shrink foreign trade surplus, and make the government part does not re-determine the coal and steel industry to the production rhythm.

Since 2016 IMF commodity price index rebound, Source: WIND

CRB index rebounded since 2016, Source: WIND

Black Swan’s fourth is that the exchange rate in 2017 does not depreciate or rise.

We believe that if people realize that China’s economy has been through the long-term inflection point, then the capital outflow will converge, foreign capital into China (especially the bond market) may heat up; foreign trade will expand, but the trade surplus may not expand. US-China economic relations need to be rebalanced, and rebalancing can be discussed and reached the premise that China’s appropriate interests of the United States to transfer. Therefore, the exchange rate trend depends on the long-term economic fundamentals, short-term depends on market expectations, with China’s economic inflection point has been and the market expected to stabilize the good, the RMB exchange rate is likely to be short-term adjustment, once again to the depreciation of the turning point.

RMB against the US dollar exchange rate trend, Source: WIND

If these black swans appeared in 2017, then our judgment on the long-term inflection point may be further confirmed, and if these black swans do not appear, our inflection point may be disappointed. To two years for the cycle, we may wish to wait and see.

Fourth, the starting point of the new cycle of the Chinese economy: step by step “nail”

So how do we view China’s economic and financial trends in 2017? Many people in the study of last year’s central economic work conference and the “two sessions” of the material, from the next two or three quarters, China’s economy and finance may show the following turning point. China’s new economic cycle of the beginning of the vaguely visible, but the recovery can only be a step by step nail difficult course.

One is from the inflection point again to doubt again.

If we look down on the subprime mortgage crisis since the Chinese economy down adjustment,