Transcription
Hello everyone, welcome to the latest episode of "Stock Market C View." I am Li Haode. Our guests are Mr. Shi and my teacher, Professor Zhuang Tailiang, Executive Director of the Sino-Hong Kong Institute of Global Economics and Finance at the Chinese University of Hong Kong. Hello, Professor. In the first segment, let's discuss retail-related figures in China and Hong Kong. Latest data shows that China's CPI in May grew by 1.2%, lower than market expectations. Are people worried that this reflects insufficient domestic demand momentum? In recent years, the country has been very committed to boosting domestic demand. Do you two think that mainland policies to boost domestic demand need to do more? Professor, please speak first. Actually, purely looking at CPI, one might think demand is insufficient. But it's also possible that your production capacity has increased significantly. I think it's a bit of both. Because now we use robots and AI to produce a lot of things. But the current situation is that prices cannot be increased, there are some issues of internal competition. But before, there were also some stimulus policies, such as phone upgrades. The month of phone upgrades saw a slight increase, but then it disappeared. So, how to increase citizens' consumption desire ultimately requires a real and significant increase in income and a reduction in the unemployment rate. This is the long-term strategy. If short-term policies are implemented, they can only help temporarily. Understood. Mr. Shi, any observations? Actually, China's economy has developed quite well in some areas during this period. They call it "new quality productive forces," which are businesses with high technological content and at the forefront of the market, such as AI, solar energy, and chips. These areas have seen significant growth. Especially with AI, high-end chips are fully utilized by AI. For ordinary use chips, most are now produced in China. You will find that China's exports have improved a lot during this period. Despite internal competition in chips and electric vehicles, these products are actually cheap and good, occupying a large proportion of the global new car market. These reflect a good economy. However, the previous reliance on traditional real estate for growth has actually been suppressed by the government. After being suppressed, property prices have indeed fallen, and the decline is not insignificant, around 30-40%. But the proportion of property ownership in Chinese cities is actually much higher than in Hong Kong. Hong Kong is around 50%, but some places in China reach 70-80%, and some even 90%. This means that most people with accounts in cities own real estate. The significant drop in property prices makes citizens feel that their wealth has decreased a lot. However, for residential properties, it's basically unknown whether policies in the mainland require them not to pursue them, reducing pressure a bit. But the money is indeed not much. Therefore, consumption has been relatively weak during this period. Even with many government measures, it is difficult to stimulate it because the losses caused by real estate are too large, making it difficult to unleash purchasing power. However, the government's current policy is basically that they feel it has been suppressed enough. Going forward, policies to suppress real estate will be reduced, and supportive policies may increase. This might help consumption more. Interest rates have also been reduced. One is the evaporation of asset value, and the other is the reduction of daily burdens. These two figures are actually very different. Therefore, consumption is in a relatively sluggish state. Will it be like what the professor said, finding ways to increase citizens' income to stimulate consumption? Because there are many industries related to real estate. For example, real estate agents. Developers opening new projects this year, I believe, are less than half of the peak period. Developers are not starting construction, so how can I have houses to sell? Construction companies also have no work. In addition, home appliances and furniture are also affected. So, the old economy is widely affected. In the new economy, viewed independently, it is growing rapidly, but the beneficiaries may be fewer than those in the old economy. Therefore, some areas appear to be progressing by leaps and bounds, thriving, while others appear to be still recovering from pain. Besides the CPI figures, another figure that everyone has compared is the PPI (Producer Price Index). The increase in May was 3.9%. Some analyses suggest that the widening gap between CPI and PPI will eventually affect corporate profits, further slowing down wage increases or the recovery of other domestic demand. How do you two analyze this? Professor, please speak first. Actually, rising PPI is a good thing. Looking back at China's PPI changes over the past ten to twenty years, when it was negative, it was negative for several years, and when it grew, it grew for several years. PPI is the selling price of manufacturers this year compared to last year. Is it relatively more expensive or cheaper? If it has been cheaper for several years, manufacturers will naturally be unhappy. The current positive number is rare. Why is it positive? Because oil prices have risen in recent months, bringing it from negative to positive. Therefore, a positive PPI is good for Chinese manufacturers. But not all goods are sold locally; some are exported. Therefore, local CPI may not mean that companies cannot make money if prices don't increase, because overseas business might lead to price increases. So, there may not be a particularly strong relationship between the two. You mean that corporate profits are not necessarily under pressure because CPI is local consumption, and if it's exported, it may not be affected by CPI. Mr. Shi, have you seen corporate profits under pressure, or has your business been affected? In Hong Kong, due to increased real estate transactions, our competitors have issued profit warnings in the past two days, with growth of over 70-80%. We ourselves have grown by almost one fold, all driven by real estate. In mainland China, only a few property owners benefit, which is why CPI is at a relatively low level. Rising PPI is also a good sign. Previously, manufacturers faced internal competition, and now this competition sometimes extends to the international level, preventing price increases. Now that PPI can rise, the opportunities for manufacturers to profit should be better. Also, China's manufacturing exports account for a relatively high proportion. If ex-factory prices rise, it should be beneficial to manufacturers. There is another figure that everyone has noticed, regarding food prices. The latest figure shows food prices falling by 1.7%, with pork prices falling by 16%. The New York Times has a saying: "Falling pork prices, a bad omen for the Chinese economy?" Professor Zhuang, what is the economic impact of falling pork prices? Because food is a large component of our inflation figures, and in China, besides direct consumption of pork, there are also by-products like dumplings. Therefore, fluctuations in pork prices directly affect CPI. For example, in a more extreme case, India's inflation once rose from 2% to 7% in a very short period, within a few months. Why did it rise so high? It turned out to be due to a poor onion harvest. Why did a poor onion harvest cause such a significant impact? Because Indians eat curry all the time, and curry always includes onions. So, one event affected the entire inflation. Now, falling pork prices, is it due to oversupply or reduced pork consumption? Is it really a bad sign? Actually, cheaper food can be a good thing. It depends on the reason behind the fall in pork prices. Because the demand for food usually does not fluctuate drastically. We also need to consider whether there is an impact from swine fever, etc. Because the cost of producing pork is basically fixed, unless you can reduce costs, for example, if you can significantly reduce the number of days for raising pigs, such as through injections. If that's the case, it doesn't necessarily mean the economy is bad. It's difficult to measure the economy's health by pork prices. The mainland has always paid considerable attention to pork prices because Chinese people consume the most pork. If rising pork prices affect people's livelihoods, the government will intervene. Is the current fall in pork prices good or bad? You need to look at the reason for the price drop. If the economy is bad and people can't afford pork, leading to no one buying pork, then falling pork prices represent an economic downturn. However, I myself am involved in some charitable work in rural China, assisting farmers and agriculture. Recently, the pig-raising capacity has increased significantly. Better breeds with stronger disease resistance have led to a surge in production. The proportion of people who can afford pork has increased, so increased production should be good for people's lives. This is also caused by competition. Of course, if production exceeds a certain level and the pigs produced cannot be sold, many farmers I know are forced to make them into ham, cured meat, smoked meat, etc. Suddenly there's more. They need to make certain adjustments to balance. However, such situations will become more common in the development of China's agriculture. It's better than not producing at all. The US also often has to dump milk and cull pigs and chickens to regulate prices. One reason is the rise of pre-prepared meals. Restaurants' demand for fresh pork has decreased. If they all buy pre-prepared meals, fresh pork is not needed, or it is imported from Brazil or other places. This is also a reason why demand for fresh pork has decreased, especially from restaurants, which may lead to lower pork prices. In the past, the central government has tried to purchase pork for storage to support the market. Do you two think the central government should intervene and support pork prices this time? In the past, in an agricultural society, supporting grain and pork prices was important. Now, in a technological and industrial society, direct subsidies might be better. In the past, in an agricultural society, it was important to protect the majority of farmers. But now, pig farmers are not the majority. If there are real difficulties, direct cash subsidies are better. Subsidizing pork prices will perpetuate overcapacity. The government should not intervene by buying. They should let pig farmers sell their produce, and let them reduce production capacity themselves. If the government intervenes every time, it distorts market signals and gives wrong information to breeders, slowing down their adjustments or coordination. Therefore, the government has not intervened to support pork prices this time. However, they have met with e-commerce platforms. The mainland is in the midst of the 618 shopping festival. The Beijing Municipal Administration for Market Regulation has met with five e-commerce platforms, including Taobao, JD.com, Pinduoduo, Douyin, and Xiaohongshu. Do you two think this meeting has a significant deterrent effect, or is it a routine matter during major festivals, or does the market regulator take this matter very seriously? Because internal competition in the mainland is very fierce, and the purpose of doing business is to cut costs to gain market share first. This is a very unhealthy phenomenon. Of course, this is unique to China. Usually, it's when prices are too high that the government intervenes, not when prices are low. But if internal competition is not good, it will lead to reduced worker wages. Most importantly, there should be a healthy competitive environment, not a race to the bottom. All competition should be based on appropriate quality and regulation, otherwise, it will be "gutter oil" taking over the market. Therefore, the government will intervene to regulate. In the short term, it will definitely have an effect because in the mainland, as soon as the government speaks, behavior will immediately restrain. But it cannot solve the fundamental problem. The significant cost reduction and business models have not changed. Unless market quotas are implemented, for example, 20% or 30% cannot be changed, otherwise, everyone will compete for this market. Understood. Mr. Shi, what are your thoughts? However, predatory pricing is not unique to China. It often occurs in the internet world. I recall Amazon acquiring a supermarket, and they advocated "selling goods at cost price." If you sell goods at cost price, how do you account for rent and employee wages? Selling at cost price, as if thinking of consumers, harms your competitors. Relying on abundant capital to harm competitors is done worldwide. We ourselves developed quite vigorously in the mainland in the early days. But with the rise of the internet, many competitors used low prices to drive away rivals. After driving away rivals, they would then increase prices. For example, at one point, delivery rider income was very high, even higher than that of ordinary white-collar workers. But after some competitors were driven away, they significantly reduced wages and bonuses, so income decreased a lot. This means that after eliminating some competitors, they gradually operate under normal business models. But in this process, some competitors suffer greatly. Now the government is intervening. The mainland is called a socialist country, so the government's functions, power, and influence are much greater. The mainland also has anti-monopoly laws. I've read them before. If your pricing is clearly below your cost, the government or your competitors can argue that you are trying to monopolize through price. The government has mechanisms to do things, not entirely without them. However, which regulations are cited and which are not is not very clear in the mainland. So, it depends on which industry the government wants to focus on at this time, and which enterprises they want to target. As for effectiveness, being summoned by the government to chat is more effective than being called for coffee by the ICAC. I know some industry insiders who, after being met with once or twice, have their entire company trying to find ways to avoid being found with problems in the same area by the government again. So, it will have a certain impact, but it is a corresponding adjustment made to address specific local problems. However, overall competition in the mainland is still very fierce. Because Chinese people have a high proportion of starting businesses. In some industries, there might be a leading player abroad, making it difficult for others to enter. Young entrepreneurs in China are not afraid of "industry leaders" or anything like that. They will still compete with these large companies. So, competition is fierce. Fierce competition includes price wars. But the benefit is that the improvement in production capacity is also very fast. Some price must be paid in the process. Why is there "cut-throat competition" or low-cost operations in the mainland? The reason is that after successfully capturing a large market share, even without price increases, they can still profit. This is because it becomes a monopoly of the labor market. All workers are hired by me, so I can lower wages. Or there is only one supplier, so I can lower prices. Advertising can also be discounted. It's not necessarily from consumers. After capturing the market, they can press prices elsewhere, making prices really low. For example, if you buy something on Pinduoduo, at first glance, you might think it's fake. But when you buy it and find that the quality is not bad. For consumers, this kind of competition is beneficial. So, the mainland government may not always intervene. If capitalists lose money, let them lose money, but the common people benefit. It depends on the perspective. Understood. We will conclude our first segment here. When we return in the next segment, we will discuss the topic of Hong Kong's economy.