《2024 Year-End Review and 2025 Outlook - Hedging Risks VS Soft Landing》Part 2 Fu Peng HSBC Speech

During the 2006 supply-side reform, let me remind everyone that there are several misconceptions worth highlighting. Why are they wrong? As I put it, we must understand these points, but they don’t necessarily need to be known by the general public.

Take a simple example: the idea that the stock market can create a wealth effect to change the nation’s destiny—isn’t this something you often hear? What are you thinking? If real estate lacks income and rental yield, or even the basic function of habitation—in other words, if it doesn’t generate intrinsic value—then pure trading only reinforces the cycle of the rich getting richer and the poor staying poor. Can it create short-term wealth effects? Sure, just like the examples I gave you in 2015 and 2016—going all-in, leveraging up with margin loans and umbrella trusts, watching stocks hit limit-up after limit-up, and seeing your account flooded with cash. You go out and buy your wife a bag—that’s the wealth effect.

And then? When the stocks hit limit-down, do you know what you’ll regret? Not selling the stocks? Don’t worry, you won’t be able to sell because the market will open at limit-down. What you’ll truly regret is buying that bag for your wife. I often advise people: at least you bought your wife a bag—she still has that. If you hadn’t, she’d have nothing left. This trading game only leads to the rich getting richer and the poor staying poor, and the consequences will worsen over time. China is a classic example of this logic.

Don’t fool the public into treating bubbles as household wealth. It’s nonsense—divorced from income, corporate growth, and dividends. We all know this game is just about trading. If you treat it as wealth allocation, people will suffer, and the economy will end up like it is this year.

During trading frenzies, consumption looks great. Take China’s real estate, for example. The biggest surge wasn’t from 2008 to 2015—it was after the 2015-2016 stock market crash. I remember Beijing clearly: in 2009, during the property speculation boom, prices in the Asian Games Village were 17,500 yuan. By mid-2015, they were 25,000 yuan. By 2019, they hit 100,000 yuan. The black line shows year-on-year growth—70 major cities saw prices skyrocket. The 2015-2016 wave fueled consumption expectations, but as the data shows, this consumption was detached from income. It was built on wealth effects, but that wealth wasn’t supported by real income.

Here’s the problem. Four or five years ago, I made some short videos where I explained clearly: if real estate is just about trading, what is it really? If I buy a house for 2 million yuan and sell it to a young person for 6 million, what I’m taking is the present value of that young person’s next 40 years of earnings. I get to live freely for 40 years, while they’re saddled with debt. Without income growth, they’ll struggle for 40 years—they lose, and I gain their 40 years. It’s that simple.

The same goes for stock prices. What we’re trading is time value. As a major shareholder, I cash out now and live happily, leaving you trapped for 10 years. Maybe you break even after a decade—but are you happy? You’ve lost 10 years. Financial asset trading costs must account for the time factor—without it, it’s all nonsense. The issue is, without income growth, short-term wealth effects just mean short-term debt accumulation for others.

In other words, while we enjoy the ride, their debt reaches a tipping point, leading to a collapse. The asset bubble can’t sustain itself. Someone buys a house for 8 million, hoping to sell it to the next young person for 10 million—but there are no more young buyers. When the next generation can’t afford 10 million, their balance sheet deteriorates, and consumption plummets. That’s what happened after 2019.

Post-2019, things spiraled downward, reverting to real income levels. Never tell the public to treat stocks or real estate as household wealth. In the past, young people were our wealth—whether through stocks or property, they were the source. Let’s be honest: why did China’s real estate boom for 20 years? Because young people could buy homes, and we took their wealth. Our properties became their liabilities. What we’re all feeding on is household leverage—that red line.

Some analysts say China’s household leverage is lower than overseas because they just compare numbers. Let me tell you, it’s not low. Why? Our leverage isn’t backed by high welfare. High-welfare countries can sustain 70% leverage; low-welfare ones, 60%. Saying 60% is lower than 70% ignores the real pressure. Do you not realize how much you spend on education, healthcare, and elderly care? Are you comparing yourself to citizens of countries that built their welfare systems in the 1970s and 1980s? No. By all indicators, this leverage has peaked.

The capital markets are smart. From 2002 to now—about 20 years—they’ve bet on China’s consumption upgrade. Whether the Shanghai Composite is at 3,000 or 3,500 doesn’t matter. The big cycle for consumer sectors was the post-80s generation taking on leverage. Since 2019-2020, my take on China’s consumption has been: (1) structural shifts are happening, driven by generational change; (2) consumption is downgrading. Back then, I said in a speech: coffee prices won’t keep rising from 20 to 30 to 40 to 50 yuan—instead, it’s 9.9 yuan with a buy-one-get-one deal. Young people are saving coupons for KFC on Thursdays.

Young people’s consumption habits are changing. My daughter drinks tea, but not the way we do. She’ll grab a bottle of ready-to-drink tea, pour it into a cute cup, and call it a day. No brewing, no ceremony—that’s the older generation. In Japan’s peak economic era, they made premium sake and whiskey. After 1990, what took off? Suntory and Jim Beam Highball. Young people don’t want 1,000-yuan liquor—they want something sweet for 10 yuan, like RIO, to get a light buzz. Social scenes have changed—no more formal dinners. Now it’s two kids watching esports livestreams.

This era is here. Don’t think it’s not. The stamps and antiques you’re hoarding? They won’t be passed down. My son doesn’t even know what a stamp looks like—but he knows My Little Pony is valuable. That’s the shift: structural and quantitative changes in consumption. China’s capital markets reflect the economy accurately. Look at sector indices: real estate is over. Consumer staples, beverages, retail—done. Has the new energy vehicle boom ended? Wait and see.

Only one sector is expanding now: semiconductors. Do you get it? Banks have a motto: “Only add flowers to the brocade, never send charcoal in the snow.” The tagline? “Our bank.” If you’re struggling, the first thing we’ll do is pull your loan.

“Domestic debt isn’t debt as long as taxes exist.” Another uniquely Chinese economic secret is the “J, Q, K” game—something you won’t find overseas. “J” means “Come on, big spender!” “Q” is “Invest some money—let’s lock it in.” “K” is “Get out—KO.” China’s rapid economic growth is closely tied to this hand. Stock traders know: when the economy is weak, you bet on this hand moving. Some ask if China’s stock market correlates with the economy. Here’s the answer: at the extremes, it’s inverse; in the middle, it’s positive. At the extremes, when the economy is bad, the hand intervenes—creating an inverse relationship. In the middle, it aligns with the economy. At the other extreme, when things get too hot, administrative controls kick in.

Take 2015-2016. I posted on Weibo in the final month: “Whoever wants to play, go ahead. We’re out.” Luckily, I didn’t short China—I shorted Hong Kong. If I’d shorted China, I wouldn’t be here. Back then, I researched umbrella trusts and off-exchange margin financing in the Yangtze River Delta. When the CSRC acted, I said, “Play if you want. I’m out.” The hand is the key. Today, when people say “6,000 points is just the start,” what’s backing that? Once debt leverage unwinds, the game collapses—run. Don’t you see trouble coming? That’s the hand, not the economy. The middle phase is normal economic growth, but China’s index construction means it mostly reflects structure, not growth.

Now we have the A500, trying to mimic the S&P 500 by reflecting both growth and structure. What’s “JQK”? China is unique—it only does “JQ,” never “K.” “JQ” means: Is the industry rising? No. Does it have national strategic importance? Yes. Remember, we’re right-wing—our industrial policy leans nationalist. The goal isn’t profit; it’s existence. “JQ” is about political achievements, not economics. Veteran investors know: watching the news for stock tips isn’t about the economy—it’s about spotting what’s missing. At this stage, there’s no disproving—the state will pour all resources into it: land, tax breaks, local funds, even stock market financing. It’s the sweet spot.

But once you’re “far ahead,” the political goal is met, and you’re thrown into the market for the “K.” That’s when you see the truth about PPI. PPI cycles are simple: break them down by sector—production vs. consumer goods—and you’ll see the policy link. If something’s lacking, PPI stays positive. The state will ensure profits without competition. But once the goal is met and you’re in the market, competition explodes. In a normal market, competition is gradual—profits attract entrants, smoothing cycles over 30 years for a giant firm to emerge. In China, it’s five years. Under “JQ” protection, everyone thrives—but when protection ends, it’s a bloodbath. PPI turns negative, industries glut, and the government pushes new sectors.

This cycle-shortening approach has a cost: many industries quickly hit negative PPI. The survivors are those with strong debt capacity—households footing the bill. If domestic demand can’t keep up, crises erupt. That’s where we are now.

Retail investors see new energy penetration rates rising and ask why stocks keep falling. They misunderstand policy timing. Investing at maturity is futile—by then, profits are squeezed. The sweet spot is early-stage, when the state backs you. This ties back to supply-side reform, which few connect to the 2015 crash and property boom.

Back in 2015-2016, I spoke at a Shanghai conference on supply-side reform. I said it’s simple—look at Zhu Rongji’s 1997 playbook. China’s current cycle started in 2002, with positive PPI, core CPI, and effective demand lasting until 2012. Then supply gluts emerged, but demand could still leverage up. By 2009, supply and demand both fell—the end of China’s post-2012 supercycle.

The last end-cycle? The reform era through the late 1990s and early 2000s. Buy Zhu Rongji’s press conference transcripts on JD for 150 yuan—it’s all there: real estate bubbles, financial crises, urging public confidence. How did they boost confidence back then? “Where there’s heart, there’s hope—start over if you must.” That’s how Liu Huan’s song became a hit.

To curb youth unemployment, they expanded college enrollment—because students aren’t counted as unemployed. Delay unemployment by three years. Today, Tsinghua and Peking University have a 1:3 undergrad-to-master’s ratio—5,000 undergrads, 15,000 grad students. The result? Bachelor’s degrees lost value. Soon, master’s degrees will too. If the economy doesn’t improve in three years, they’ll push PhDs—delay employment until 30.

Parents, unless your kid is rich, stop the rat race. Rich kids don’t need it either. As I see it, chasing degrees is pointless now.

What else did they do? Bank risks—four AMCs handled bad debt. Supply-side reform, debt restructuring, stocks for debt swaps. To understand stocks’ role, study that era. Why did the A-share market drop in 2004 despite economic recovery? Everything was there. How is debt resolved? Simple: “As long as people exist, any debt can be resolved.” No people? Then it’s about tax rates. Can’t collect volume? Raise rates.

Some say China’s tax rates are high for households but low for firms due to rebates and subsidies. Understand this: when it’s time to raise rates, they will—or it won’t be enough.

This cycle is ending—that’s the core issue now, along with external shifts. Overseas, just invert the last 40 years: industries are returning, trade is reshaping. I just returned from Singapore, Southeast Asia, Malaysia, Indonesia, Vietnam. Since 2016, they’ve benefited from our disputes—their positive feedback loop is our offshoring.

One final chart matters globally: when fiscal expansion meets falling rates, and domestic demand lags savings, investment returns drop, and currencies weaken. Emerging markets face two pressures: rate differentials driving depreciation, and government debt exacerbating it, triggering capital flight. Raising rates to stem it crashes the economy—classic EM crises. Note: it’s not just U.S. rate hikes. China never collapsed because its returns outpaced the U.S. EM crises stem from domestic returns and debt.

People claim U.S. rate hikes “harvest” others. Joke’s on you—if you’re not over-leveraged and returns are strong, hikes don’t hurt. Conspiracy theories miss the point. The U.S. and Japan sustain stable currencies amid low rates and fiscal expansion by earning overseas—globalization’s carry trade backs their currencies.

I don’t buy the “Plaza Accord destroyed Japan” myth. Japanese officials were nationalist right-wingers post-WWII. Their memoirs blame the U.S., never themselves. Neutral analysts see it clearer: post-Accord, yen appreciation created low-yen, strong-currency carry trades. Firms like Mitsui, Mitsubishi, and Itochu became Japan’s overseas wealth holders. Government debt compensated citizens for education, healthcare, and pensions—no growth, but no physical hardship. Hence depression, anxiety, suicide forests.

When fiscal turns, rates fall, and carry trades use overseas assets to prop currencies, Japan’s earthquakes trigger global sell-offs as yen trades reverse. The U.S. post-1980 dollar carry trade created perpetual low-rate borrowing, with multinationals backing the dollar. Result? Rich executives, stagnant workers—until populism (Trump) reversed it.

China wants this but can’t do it. Rates can’t go too low, fiscal support is half-hearted, and the yuan can’t depreciate freely. The balancing act: ~2% rates, 7-7.3 yuan, and local bailouts. If trade wars worsen, rates may dip below 2%, yuan to 7.3-7.8, and fiscal expands further. These are our last cards—we can’t play them all at once. Without overseas markets, we’re just another EM.

This is China’s game now: stability, no stimulus. Understand domestic assets, and you’ll see next year’s playbook. Globally, war risks are rising—some assets price in decoupling, not rates. See Russia. Time’s up—any questions?

Audience Q: With such a large population and per capita income over $10,000, where are the structural opportunities?

Fu Peng: Focus on the rich or the poor—forget the middle class. Luxury for the rich (Hermès, not Chanel or LV), rentals for the poor (25 yuan/day for a bag). Young people’s tastes (anime, gaming) and elderly end-of-life spending (ICU beds) are the plays. Avoid indebted 40-somethings.

Q: What about semiconductors?

Fu Peng: Not yet. We haven’t declared “far ahead.” The state will back it, even if 9 of 10 firms are scams.

Q: Overseas asset allocation—U.S. stocks/bonds, EM bonds/stocks?

Fu Peng: EM bonds mean China. Early-stage EM lending (like Vietnam) mimics China’s past. U.S. stocks? This year’s anomaly (high returns, low vol, high valuations) won’t repeat. Buffett’s cash is zero-vol, 4.5% yield “stock”—not a market-timing bet.