China's consumption has continued to be poor since the COVID-19 pandemic. After President Xi Jinping's third term began, policies aimed at common prosperity emerged, which included forcing down wages while trying to raise the incomes of low- to middle-income individuals. However, these policies have not been very effective, and the median consumption has been declining. To compensate for this, the country has been relying on low-cost exports. However, starting from the second half of this year, the situation for production, exports, and consumption has all worsened. 

From last year to the first half of this year, the Chinese economy can be summarized in two words: production and export. Everything else was ignored, focusing on production and exports. Strategies involving robots and low-cost production were implemented, leading to a significant increase in low-cost supply and production to sustain the economy through exports. This has been the overall economic structure of China from last year to the first half of this year. But the problem is recent developments.

As the U.S. economy gradually weakens, the U.S. is also lowering interest rates. Lowering interest rates indicates that the economy is not performing as well, which suggests that even if China lowers its export prices, it will be difficult to increase the volume significantly. We are already seeing signs of this situation. There are various important factors when it comes to exports, but one of the most critical is the exchange rate. To supply at a lower price, the exchange rate needs to be lower. However, due to the poor economic conditions, China has been maintaining a low exchange rate, but now the possibility of the U.S. lowering interest rates is increasing. Since all exchange rates are relative, if the yuan strengthens against the dollar, it will complicate China's ability to export at low prices.

The situation is becoming a bit challenging as we see a picture that stimulates production. China's overall economic scale, particularly its GDP, has the largest share of consumption. As you all know, consumption has not been good since the COVID-19 pandemic. In response to this, we have been compensating through low-cost exports, focusing on production and exports. However, starting from the second half of this year, the outlook for production, exports, and consumption is all unfavorable, leading me to think that the situation in the second half may be more difficult than in the first half. In the context of the three-tiered economy, we will be drawing a long-term picture, and there is not much emphasis on short-term fiscal policies or stimulating elements. It is indeed true that China's consumer market is crucial, as it is directly linked to consumption levels. This is especially relevant in real estate. The government's regulatory attitude towards real estate is now shifting completely, as they begin to relax regulations and work towards revitalizing the real estate sector.

The direction in which the market is heading has been a point of interest, as it could ultimately revive consumer spending. However, there have been very few mentions of this. Real estate continues to be a problem here; debts need to be reduced, and while the population in China is decreasing, new supply has been continuously increasing. This trend of reducing supply has led to a continued decline in housing prices. When housing prices drop, it becomes difficult for the consumer market to recover. Therefore, there is a significant perception of disappointment. China seems to be facing multiple challenges at once; there have been several negative developments occurring simultaneously. First, there was a trade dispute right before the COVID-19 pandemic, followed by the outbreak of the virus itself. Additionally, a third issue arose when President Xi Jinping introduced the catchphrase of common prosperity, which aimed to create many jobs.

There have been regulations on industries that create jobs, especially concerning platform companies like Alibaba, Tencent, and Baidu, which satisfy a significant demand for employment among college graduates. As you know, the gaming industry is somewhat easier in this regard. However, with the regulations imposed on these companies, including Alibaba and others, they have not been able to create many new jobs. Additionally, there have been regulations in healthcare as well. The idea behind healthcare is that everyone should enjoy the same benefits at the same price, but there have been calls to lower prices. This sector also employs many college graduates and has faced regulations. In fact, the private education market in China is quite large, and with the regulations in place, the number of people transitioning to teaching roles has significantly decreased. Consequently, the job market has worsened, and then came COVID-19, along with trade issues.

It is true that China's export economy has indeed faltered due to the ongoing disputes. As various factors have combined, China's consumer economy has not recovered at all, even though the COVID situation has ended and the reopening has taken place. We can observe the effects of this in the job market. If we look at the wage growth rates by occupation in China, we find that the high-ranking sectors, which I mentioned earlier, primarily include platforms, IT, real estate, and high finance. However, when we analyze the average wages over the past year, we see that the wage increases for those in high-paying jobs have actually dropped to the mid-low tier. The mid-low tier workers predominantly reside in regions that we categorize into three major areas, primarily around the eastern coastal region centered on Shanghai.

This area can be considered a kind of affluent neighborhood, but the average disposable income per person here and the wage increases have recently declined the most sharply. This is the richest area in China, which also holds a significant share in the economy, and these individuals have made the greatest contributions. However, the fact that their salaries and various disposable incomes have worsened suggests that the median value has dropped. Given that these individuals originally held a large share of the overall economy, they tended to consume more. Now, even they are shifting towards value-for-money and lower-priced consumption. As a result, the overall quantity of consumption has decreased, and there is a growing tendency to focus on lower-priced items. These two trends combined ultimately impact the entire Chinese consumer market.

We are seeing a situation where it is very difficult to recover. China's foreign direct investment (FDI) has never decreased this rapidly since the data has been compiled. Based on the collected data, foreign capital flowing into China is decreasing at the fastest rate ever, and particularly, the funds entering through bonds have significantly decreased. Typically, funds that are invested long-term are seen as bond investments, while those that are invested short-term are considered stock investments. However, in the first half of this year, there was a slight inflow of foreign capital into stocks. Although it is starting to decline again in the second half, it can be observed that funds invested in bonds, which are viewed as long-term investments reflecting China's growth potential, are continuously being withdrawn.

Currently, these funds are primarily flowing into regions like India, which is quite the opposite of the situation. India is viewed positively in terms of long-term growth potential, leading to a steady influx of bond investments. Additionally, there are significant investments in equity, with many funds entering India to establish production facilities or directly set up joint ventures (JVs). Conversely, China is experiencing a prolonged outflow of these funds, which has been strengthening over time. 

As a result, the MSCI index, which represents how global funds are flowing, shows that within the emerging market category, the largest shares belong to China, India, Taiwan, and South Korea. At its peak, China's share was around 40%, but it has recently fallen to 26%. In contrast, India's share has increased from 8% to approximately 16%, effectively doubling.

It can be said that the increase has mostly been taken by India, especially with the decline in China. It is not an exaggeration to say that funds categorized as emerging markets are turning their backs on China and heading towards other countries. The Economist often uses the term alt-shift to describe this transition from Asia, excluding China, to other regions. This trend is likely to continue in the future. 

One trigger for global investors turning away from China and moving to other countries seems to be the significant decrease in policy consistency. China is a one-party dictatorship governed by the Communist Party, and its economic plans are typically outlined in five-year plans, providing a long-term direction. Therefore, there has been a low tendency for short-term policy changes. However, since President Xi Jinping began his third term, we have suddenly seen the implementation of industrial regulations and policies aimed at common prosperity.

Recently, there have been welfare policies aimed at raising the wages of low- and middle-income earners while trying to forcibly lower the salaries of high-income earners. However, the policies to increase the income of those in the low and middle-income brackets are not working effectively. On the other hand, the wages of high-income earners are declining, which leads to a decrease in the median consumption, as I mentioned earlier. Ultimately, the stock market is influenced by corporate profits, and it is looking to see how much these profits will improve. It is a very challenging environment for profit growth. Furthermore, the policy direction here lacks consistency; regulations on industries are suddenly introduced and then quickly lifted. Such fluctuations have led to a significant loss of trust from global investors. For those residing in China, I think this situation is quite concerning.

It is hard to say that there is much consideration being given to this, but when I travel for work or interact with acquaintances, I hear from people in the Chinese financial sector that wages are being cut by at least 20% every year. I have experienced slow wage increases, but I have never experienced a wage cut, so it seems very challenging given the various cash flows that are going out. This leads me to think that the proactive aspects of working for certain companies are significantly diminishing. As a result, the atmosphere of shopping malls is bleak, with fewer people and many businesses closing down. When viewed in connection with the employment market, it becomes clear that my perspective is becoming more defined. Overall, the economic indicators in China are deteriorating.

Is Spin's commentary ignoring this issue? This is not the case. There is a nuance or signal that they are continuously monitoring the problem. What the Chinese market and economy desperately desire right now is a fiscal policy; ultimately, they need to spend money for immediate and strong effects. However, China is currently not in a position to spend heavily. This situation needs to be analyzed in two parts: Is it that they have the money but are not using it, or is it that they cannot use it because they don't have it? I tend to lean towards the latter. A significant portion of China's fiscal revenue comes from land, as the government owns the land. By effectively selling the 70-year lease rights, the revenue and profits generated from this account for about half of the total. Everyone knows that the real estate situation in China is not good, and from this...

As revenue is decreasing, China's financial situation is not particularly abundant. Therefore, it is quite difficult for the government to implement large-scale measures to stimulate consumer spending. While there are expectations that if China were to distribute consumption coupons like in the past and slightly revive the real estate sector, the economy could significantly improve with a reopening, the reality is that this cannot happen because China is not able to spend its finances effectively. It's not that China has no finances at all; however, since consumer spending is the largest and most important area, there is a thought that money should be concentrated here. Nevertheless, President Xi Jinping has already changed the constitution to enable long-term governance, and the likelihood of this happening is quite high. Therefore, rather than focusing on short-term perspectives, it is essential to consider the long-term competition between China and the United States.

We are focusing intensely on the areas where we can gain an advantage in the power struggle. Therefore, we are significantly strengthening investments in high-value-added industries, such as AI and semiconductors. Currently, the proportion of funds flowing into AI and semiconductors is quite large and is expected to continue to grow in the future. If we think long-term, it is true that China's population is declining. In this context, we should not excessively invest in real estate. It is correct that we should not revive the real estate market. As a result, the consumer market is likely to recover slowly. However, with the population decreasing, the market size is also shrinking. We need to secure labor that can supply production at lower costs to offset the population decline, and investments in this area should be linked to semiconductor investments, which is why financial investments in this sector are crucial.

As it strengthens, there is a possibility that surprising articles will emerge. If we look at the reports that are already coming out, it is said that despite U.S. sanctions, China has succeeded in the 7-nanometer semiconductor miniaturization process and is advancing towards nanotechnology. We can connect these achievements to the fact that China's finances are flowing into this sector. Therefore, it seems appropriate to view China's approach to economic resolution as somewhat different from ours. Regarding the U.S. presidential election, whether it is Trump or Harris, there is no disagreement that it will not lead to a favorable direction for China. However, the direction and the scenarios themselves may unfold differently. In the case of former President Trump, he mainly exerts pressure on China through tariffs, so China...

Low-cost production can be seen as a significant risk factor. If this happens, prices will rise considerably, making low-cost production for goods entering the United States less meaningful. This could lead to a situation where, due to poor consumption in China, the country had to rely on production and exports to sustain its economy. However, it will become increasingly difficult to continue this approach in the future. Therefore, there needs to be contemplation on what model China will adopt to sustain its economy. From China's perspective, they have set a target economic growth rate of 5% for this year, but they might find it challenging to achieve this goal. Secondly, if Harris were to become the candidate, she would likely implement regulations against China similar to those established by Biden, such as the IRA, with allied countries joining together to impose restrictions on China.

They are talking about taking charge of what is being produced. These strategies are becoming more detailed. In fact, China's low-cost production itself may be relatively acceptable, but particularly in high value-added areas, such as semiconductors used for AI functions, China is showing some results in the advanced manufacturing processes mentioned earlier. However, it may become increasingly difficult to find breakthroughs in these advanced processes. There is a strong possibility that regulations will be tightened significantly regarding access to semiconductor chips and technological capabilities that go into China. If that happens, it may become somewhat challenging for China to strengthen its direction towards humanoid robots. In any case, it seems likely that China's economy and its medium- to long-term growth strategy may be set on a path that could lead to complications, making it a difficult battle for China.

It appears that this could be about the loss in Japan, which could be ten years or even thirty years. There are various discussions on this topic, but I do not believe it will completely lead to a full Japaneseization. However, there seems to be a possibility of developing in a similar direction. First of all, it is obvious that the United States has the greatest influence in the global market. Given that the likelihood of the U.S. weakening its sanctions against China in the future is quite low, we can see that in the speech delivered by candidate Harris, she emphasized that China is not the main player leading the overall market. This suggests that the U.S. is indeed trying to contain China. In this context, while China will certainly prepare various means to overcome U.S. sanctions, we have seen that China's high GDP growth rate has been above 7%.

These situations seem unlikely to return for quite some time. Therefore, China, at least for now, does not have a small domestic market, so it will focus more on resolving issues through domestic means. Additionally, China will look to its allies, particularly Russia and countries in the Middle East, to see how they can address these problems through trade despite U.S. sanctions. Although the GDP growth rate may decline, I believe they will establish economic policies and various industrial directions on how to counter U.S. sanctions in the future.

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"다시 살아나긴 힘들다" 뼈 아픈 몰락을 겪고 있는 중국 (박수현 팀장 2부)

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