To save the economy and the market, when there is no other way, the only options are to issue government bonds or start the printing press. This is an ironclad rule, the same for all countries.

China has bid farewell to land finance and ushered in the era of government bond finance. Currently, with government bond yields being snapped up by the market, the yields are relatively low, making it an opportune time to issue bonds. Simply put, government bonds are a way for the state to borrow money from the wealthy to stimulate the economy. The three drivers of GDP are exports, investment, and consumption. Against the backdrop of a cooling global economy and increasingly frequent international trade disputes, it is difficult to significantly boost exports. As for investment, land finance is already unsustainable, leaving consumption stimulation as the only viable option. Moreover, consumption is directly linked to the well-being of the people and should be the primary focus of stimulation. Coupled with the ongoing trend of consumption tax reform, consumption will be the national priority for the next decade. With local governments gaining this new tax revenue source, the motivation to improve the consumption environment and promote spending will be strong.

Looking at the development history of various countries, the shift from emphasizing manufacturing to prioritizing consumption is universal, aiming to maximize domestic production and sales. The process of promoting consumption also coincides with the improvement of living standards for the people. My view differs from many investors in consumer stocks—I don’t believe that essential consumer companies are more worthy of investment than discretionary consumer companies. Investment worthiness depends on product differentiation, not whether the products are essential or discretionary. However, current market valuations are baffling. Essential consumer companies are inexplicably overvalued. For instance, Haitian Flavouring & Food Co. Ltd. (603288.SH), despite falling for nearly four years, still trades at a P/E (TTM) of 35. Similarly, Wilmar International (47 P/E TTM) and Nongfu Spring (22 P/E TTM) remain highly valued. Many valuations make no sense to me. Since these are essential consumer goods, they affect the lives of even the poorest families, and the products themselves lack significant differentiation. Where is the room for price hikes or consumption growth? With the population plateauing, there’s little room for expansion. How can the stability of net profits justify such high valuations, comparable to government bonds? These companies have never distributed 100% of their net profits as dividends, and their capital expenditures and maintenance costs are not low. Do they deserve such high valuations? Market valuations are irrational most of the time. Essential consumer stocks are severely overvalued, while discretionary consumer stocks are undervalued.

Value investors in China must capitalize on these market mispricings. During market downturns, the market often provides seemingly acceptable reasons for the less resolute and less insightful investors to sell, creating opportunities to acquire high-quality assets at attractive valuations. This nearly four-year correction has set the stage for another wealth redistribution—a feast for value investors. The real growth stocks are those that can generate excess profits, sustain future growth, require minimal capital expenditures, and offer generous dividends. Why bother with so-called pseudo-growth companies? Years of investment experience have shown that these pseudo-growth companies are mostly riding valuation roller coasters, with little real profit to show. The times are advancing, and technology is evolving, but not all cutting-edge technologies are worth investing in. Many require years of capital expenditure before reaching a stable harvest phase, with ongoing high costs. How many individuals can endure years of losses for an uncertain future?

$Tencent Holdings (00700.HK)$ $Kweichow Moutai (600519.SH)$ $Wuliangye Yibin (000858.SZ)$