Haitong Jiang Chao: Change the development model driven by the real estate bubble to turn to the innovation drive

The big era of China's innovation is coming! ——Also on the importance of capital market reform and opening up (Haitong Macro Weekly Exchange and Thinking, Issue 265, Jiang Chao, etc.)

Source: Jiang Chao Macro Bond Research

The big era of China's innovation is coming!

——On the Importance of Reform and Opening up of Capital Market

(Haitong Macro Weekly Exchange and Thinking, Issue 265, Jiang Chao, etc.)

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ZTE 000063, shares of attending War, US hegemony logic. Recently, most people are saddened by ZTE’s ban on sales. The US Department of Commerce announced that the US Department of Commerce will ban US companies from selling to ZTE because Chinese telecom equipment maker ZTE has not fulfilled some of the agreements in the settlement agreement. The device may last up to 7 years.

In 2016, Americans accused ZTE of violating US export control policies against Iran, issuing a large fine of 1.192 billion U.S. dollars to ZTE, and demanding that ZTE conduct internal control rectification. ZTE has invested huge amounts of time and money in compliance development over the past two years, but Americans only identified ZTE as a result of ZTE’s failure to deduct bonuses in time for certain employees involved in historical export control violations. A false statement was made to the US government and a refusal order was issued to activate ZTE Corporation.

This behavior may cause our second-largest telecom equipment company to face a catastrophe overnight. The chairman of ZTE said that the sanctions have caused the company to fall into a state of shock. Because ZTE needs a large number of key hardware and software equipment and parts manufactured by US companies, including processors, memory, chips, operating systems, etc., which are from companies such as Google, Intel, Micron and Qualcomm. If all the companies in the United States stop supplying, because there is no substitute in the country, ZTE will not be able to produce and sell products.

In our view, the accusations of Americans on ZTE seem to be justified. In fact, they are guilty of what they want to add. Just because ZTE did not reduce the bonuses of 35 illegal employees, ZTE will be put to death, leaving 80,000 ZTE employees laid off, 80,000 families, 300,000 shareholders and hundreds of millions of consumers and partners around the world. The interests of the United States are impaired, and the hegemonic logic of the Americans is evident.

Suppress China's development and trade under the heavy hand. In our view, ZTE is only a scapegoat for Sino-US trade wars. Without ZTE, there will be other Chinese companies. In essence, the United States has launched a trade war against China, whether it is a huge tariff on Chinese imports. It is still forbidden to export products to Chinese companies, all of which are to curb the development of China's economy.

In the history of the public, whenever the newly emerging power threatens the interests of the old power, the two are prone to conflict. It’s just that the way of conflict is different. It used to be a military war, but it was mainly a trade war. For example, the rise of Germany and Japan in the early 20th century and the conflict in the United Kingdom, followed by two world wars. The United States replaced Britain as a global leader in the mid-20th century, accompanied by a comprehensive trade war. In the late 20th century, Japan re-emerged, and it was killed by Americans with trade wars. Now that China has risen in an all-round way, China’s GDP in 17 years is equivalent to two-thirds of that of the United States. China has become the world’s second largest economy and the largest trade body. The existence of China has begun to make Americans feel threatened. Trump's coming to power and various discrimination policies against the Chinese economy and enterprises.

From the experience of Japan in the 1980s, although the bursting of its bubble economy has its own policy to deal with the mistakes, but the source is still the US pressure on Japan, the square agreement allows the yen to appreciate significantly. At the same time, the Americans have repeatedly forced the Japanese government to sign various agreements restricting the export of Japanese automobiles and semiconductors to the United States and expanding the imports of American automobiles and semiconductors. This has led to the disappearance of the competitive advantage of the Japanese semiconductor industry. Trump’s trade war with China is aimed at the high-tech industries that China’s manufacturing 2025 pushes. This shows that the Americans are well prepared. The era of our sullen and big fortune is over. We must lose the illusion of restless things. The future living space depends on our own efforts to strive for development. The development is the last word.

Suppress the bubble economy and turn to the innovation economy. In the long run, this ZTE incident is not necessarily a bad thing for our economic development, because we have known our weaknesses and found the right direction for development. In the future, China must make up its mind to curb the property bubble and turn to innovation-driven development.

Why Americans can easily hold our necks because we are not as good as people, and a lot of core technologies and products depend on imports. Take ZTE as an example. Although it is the fourth largest manufacturer of communication equipment in the world, 60% of the parts in the equipment are supplied from outside, and half of this 60% comes from the US market. Not only ZTE, China's entire chip industry is extremely dependent on imports. In 2017, China's integrated circuit imports amounted to US$260 billion, and the trade deficit was as high as US$193.2 billion. Integrated circuits have already surpassed oil to become China's largest import commodity. In the past 17 years, it ranked among the top ten semiconductor companies in the world, and none of them are in China.

Therefore, although our economic aggregate is already two-thirds of that of the United States, it is already large enough in terms of quantity, but it is still insufficient in terms of quality. There are a lot of bubbles in our GDP, and this is especially true as a macro researcher.

When we analyze the quality of China's economy, we must first analyze the real estate market. Every time we want to stimulate the economy, we must stimulate real estate. As a result, the economy will rebound in the short term, but the real estate bubble is getting bigger and bigger. But for the Chinese real estate bubble economy more harm than good: If house prices rose every day, and that anyone looking for a bank loan to buy a house last year, 603,883 Chinese people, attending to find shares of Bank loans 8 trillion, a full 10% GDP of Borrowed by residents, such a large debt, what about future economic risks? If the house price rises every day, who is willing to go to the ground to do research and innovation? If you only look at the housing prices, the Chinese do have money now. The problem is that the house is not tradable. The high price can only be enjoyed in the country. Can you take the Chinese house to replace the parts of ZTE?

Therefore, we believe that in the future, the Chinese economy must change its development model driven by the property bubble and turn to innovation-driven. The new government proposed to turn to high-quality development in the future, in fact, it has pointed out the direction for us. In the future, we will no longer pursue the quantity of economic growth, but pursue the quality of economic growth.

The question is, what do we have to rely on to turn the Chinese economy over and turn to innovation and quality? We found that the key is to change our financing structure from debt financing to equity financing.

The old economy depends on money, and the quantity depends on borrowing. The reason why we have embarked on the road of debt development in the past is actually the inevitable result of the industrialization era, because debt financing is the best way to develop quantitatively.

In the 40 years since the reform and opening up, we have started vigorous industrialization. There are two major driving forces behind this. One is the demographic dividend. We have more than 10 million people born each year, and the other is urbanization. Every year, 20 million farmers enter the city. It is equivalent to an additional demand of 30 million people every year. They want to buy a house, buy a car, buy furniture and home appliances. Therefore, the government has defined the past 30 years as an era in which residents pursue material life satisfaction. The goal of Chinese residents is to meet the material life of food, clothing, housing and transportation. Quantity requirements.

Correspondingly, the task of Chinese companies is to produce a large number of houses and cars without special care about quality. Therefore, at this stage, the most suitable financing model for China is a bank-based debt financing model. It can be found that the first generation of China's richest people, including the owners of countless real estate, steel and other enterprises, are born of peasants, do not need much professional knowledge, and they all rely on bank loans to make money, because as long as there is more With more loans, you can buy more land, build more houses, and build more factories.

For the country, more loans mean more investment, and more GDP is faster development. Therefore, past debt financing did help the Chinese economy achieve industrialization.

The new economy depends on people, and innovation and development depend on equity. But facing the future, China's demographic dividend has ended and urbanization is coming to an end. The various durable goods in urban households have been basically popularized. The future life of Chinese residents is definitely not satisfied by Santana. Car, which means that companies must put product quality first, and better quality must be achieved through innovation.

The foundation of innovation is intellectual property, which is human capital. In the industrial age, you can make a fortune without reading, because they are all simple and do not require knowledge. The basis of innovation is a variety of professional knowledge, relying on scientists, engineers, these are human capital.

The key to stimulating human capital is equity financing. Liu He, the vice premier of the State Council, once wrote an article in 2001 about the relationship between the new economy and the capital market and venture capital. At that time, the new economy was the future development trend, and the core characteristics of the new economy were people-oriented. Human creativity and market pursuit are the driving force, while venture capital is the most critical factor driving the expansion of new economy. Venture capital must be exported by capital market. Equity financing is the best mechanism to share risks and stimulate innovation.

We have studied the lessons of the success and failure of the transformation of the United States and Japan, and found that they have all fallen into the trap of debt development, but the Americans have successfully come out, and Japan is deeply mired in the bubble economy, the key is that the financing structure is different. After 2008, Americans relied on PE financing and equity financing to stimulate a group of new enterprises to grow and grow. The Japanese have always relied on banks to manage enterprises, and few outstanding companies have since been born.

We can see that in the new economy, almost all great companies are nurtured by equity financing. For example, Google, Facebook, etc. in the United States are all cultivated through the capital market. Ali and Tencent, the representatives of China's current outstanding enterprises in the world, are also nurtured through the capital market.

Therefore, we believe that the key to stimulating Chinese enterprises to innovate is to change China's financing structure. On the one hand, it must compress debt financing, squeeze out the real estate and financial bubbles, and promote the real economy. At the same time, we must vigorously develop equity financing and encourage the development of innovative enterprises.

Reform and open up the capital market to help the development of innovative enterprises. We have found that the important feature of the new government is that the experts are governing the country. Whether it is Vice Premier Liu He or President Yi Gang, they are experts and scholars in the economic field. I believe they will do professional things, not Take the old road of free water.

Judging from the reform of government institutions in the two sessions this year, we found that such a change is that the CSRC will be listed separately, and the CBRC and the insurance association will be merged into the MCRC. In our view, the meaning behind this should be to significantly increase the status of equity financing, because the stock market under the supervision of the Securities and Futures Commission represents equity financing, and bank loans mainly represent debt financing, so this arrangement means future equity financing and debt financing. Equally important.

On the other hand, this year we began to appeal to Chinese outstanding overseas companies to return to A-shares, while releasing domestic outstanding companies to list, although the current listing and pricing mechanism remains to be discussed, but this direction is worthy of recognition.

At the same time, it is even more noteworthy that the Hong Kong stock market system has undergone important changes this year, and shares of different stocks and loss-making companies will be implemented this year. As we all know, China's current chip, software and pharmaceutical industries need to develop. These industries are full of hope, but at the same time these are high-input industries, and they are high-input and high-risk. Government investment may not be successful. The capital market can actually help these industries develop.

Need to invest a lot of money in research and development, and in the short term may not be effective, then you need to allow loss-making companies to go public. At the same time, if you want a lot of financing and don't want to lose control, you need to allow the same shares to have different rights. Why the United States can become a global innovation center because the US equity system was previously the most advanced. At that time, Ali chose to go public in the United States because of the different rights of the same stock. The giants such as Amazon and Tesla in the United States have long lost money, but they have become the giants of the industry thanks to the continued support of the capital market. The price of China's innovative pharmaceutical company Baekje Shenzhou has increased nearly 10 times since its listing in the US. The logic is that listed financing can help these companies develop faster.

In our view, these positive changes in the Hong Kong stock market are worthy of recognition. Therefore, at the beginning of this year, we made it clear that the Hong Kong market is promising for a long time, because Hong Kong is no longer a cyclical market representing finance and real estate, but will be transformed into Tencent. In the future, it may include a group of emerging companies such as Xiaomi and Ant Jinfu. It represents China's transformation and innovation. If you are optimistic about China in the future, you should be optimistic about the long-term opportunities of Hong Kong stocks.

Similarly, if we have confidence in Hong Kong, we can actually have more confidence in the future of A-shares. Because Hong Kong is China, the change in Hong Kong is not an independent event, but a link in the reform and opening up of China's capital market. We know that direct reforms are often very resistant, but if we push reforms through openness, for example, after implementing so many favorable mechanisms in Hong Kong, if China’s good companies all go to Hong Kong, does that mean A shares? Is the system necessary to change? Therefore, we believe that these systems in Hong Kong should be there in the future. And if we can increase the intensity of reform and opening up of the capital market and establish a system to encourage innovation, then China's innovation will be promising.

R&D creates value and the era of innovation comes. From the macro perspective of China's economic data, the biggest change in the past few years is the change in statistical caliber. Since 2016, the National Bureau of Statistics officially recorded R&D innovations in GDP statistics. Therefore, the growth rate of China's GDP in the past two years does not seem to change, but in fact, the structure has undergone earth-shaking changes. In short, it is R&D and innovation. Start to create GDP.

According to the data released by the government in 2016, after considering R&D, the total economic output in 2015 was 880 billion more than before the revision, accounting for 1.3% of the total GDP of the year. The revised GDP growth rate was 0.05% higher than the previous average. .

But in fact, the contribution of the new economy is not only 0.05%. Starting from 2017, the government began to announce the information service industry, which represents the growth rate of the new economy on a quarterly basis. We found that its growth rate is close to 30%, and its current ratio of GDP is 4%, so its contribution to economic growth has exceeded 1%. Last year, the high-speed growth of the new economy actually stabilized the economy.

In fact, overseas people have long included R&D innovation in GDP, but this is not only an official statistical act, but also a market behavior, that is, R&D is actually creating value and needs to be repriced.

For example, the famous American Amazon company has a market value of 740 billion US dollars. It has continued to lose 20 years. It will only have a net profit of 3 billion US dollars in 2017. It is converted into PE more than 200 times. Why is the market giving it such a high valuation? An important reason is that in 17 years, it invested US$22.6 billion in research and development. If Amazon does not do research and development at all, its 17-year profit can reach US$25.6 billion, which is 29 times that of PE, which is lower than other major technologies. the company. This shows that in a mature market like the United States, it is of great value to the company's research and development costs.

And Amazon's R&D not only creates value for shareholders, but also directly creates GDP. Compared with 16 years, Amazon's R&D expenses have increased by US$6.5 billion. If this new R&D expenditure is directly included in GDP, it is almost equivalent to 17 years in the US. Adding 1% of the $760 billion in GDP, this is only a contribution from Amazon.

Looking at China again, China’s growth stocks led the rise this year, and it was also satirized by many people as a bubble. After 15 years of the GEM bubble burst, and after the past two years of rising white horse stocks, many people have begun to buy banks and Real estate stocks are regarded as value investments, and buying growth stocks as speculation is really true? In our view, this view is a big mistake and is missing a major opportunity for China's economic transformation.

Why Hengrui Medicine 600,276 this year, attending stocks so well? On the surface, Hengrui's valuation is as high as 80 times PE, because the profit in 17 years is only 3.2 billion, and the market value is as high as 240 billion. However, we can see that its 17 years of research and development costs are as high as 1.76 billion. Accounting for 13% of total revenue. If Hengrui does not do research and development, its profit can reach 5 billion, and the valuation is reduced to 50 times. If the US stock market can give companies a huge amount of research and development costs, why can't we?

The same logic, we can find that a series of companies that have risen in the pharmaceutical, semiconductor, software and other industries this year are actually companies with a relatively large proportion of R&D expenses. The reason why Huawei has become the pride of Chinese companies is that it is the most costly R&D expenditure among Chinese companies. The annual R&D expenditure is close to 90 billion, accounting for 15% of total revenue.

Moreover, we can look at China in the future. Since R&D and innovation are recorded in GDP, we have a more stable growth method. In the future, we do not need to release water to stimulate real estate. Instead, we can stimulate the equity market by invigorating the capital market. At the same time, through tax reduction for innovation and R&D companies, and steady growth through R&D innovation.

And let's go to see these financial real estate companies. Which ones are making money by their own efforts? Which are making money by monopoly and bubble? In the future, if the government is determined to open up the market, break the monopoly, curb excessive currency, and encourage innovation, then who is more valuable in the future?

Therefore, as long as the government is determined to leverage and fill shortcomings, it will control the shadow banking and currency over-supply, curb the real estate bubble, let finance and real estate promote the real economy, liberalize capital market development, reform the capital market system, and promote innovative enterprises. Development, then we firmly believe that China's future is full of hope, but it is not financial real estate, but a real economy and innovative enterprises.

I. Economy: Production rebound in April

1) Differentiation of downstream demand. In the first half of April, the sales of the 37 major cities in the first half of the year fell by 33% year-on-year, and the decline was basically the same as that in March. Among them, 15 third- and fourth-tier cities saw a decline, and the decline of 25 first- and second-tier cities narrowed. In the first two weeks of April, the growth rate of passenger car wholesale and retail sales was 25% and 14.2%, respectively, and the growth rate remained strong.

2) Production rebounds at a low level. In the first half of April, the power consumption of coal power generation in the six major power plants increased by 4.7% year-on-year, and the growth rate rebounded significantly from -2.4% in March, but it was still lower than the average growth rate of 8.9% in the first quarter. This means that industrial production in April will improve from March, but still not as good as the 1st quarter average.

3) Inventory has dropped significantly. Last week, the coal inventories of Qinhuangdao and the six major power plants all dropped significantly. The steel inventories of major cities also dropped significantly, which means that after April, they gradually entered the peak season. With the recovery of downstream demand, industrial inventories began to decline significantly.

Second, price: inflation short-term consolidation

1) Food prices have stopped falling. Last week, vegetable prices rose slightly, pig prices and poultry prices continued to fall, and food prices stopped falling.

2) The CPI dropped slightly in April. Since April, the Ministry of Commerce, food prices fell 2.3 percent, the Ministry of Agriculture 000061, attending stocks wholesale prices fell 2.9%, we expect the April CPI food chain fell 1 percent in April CPI dropped slightly to 1.9%.

3) PP I short-term rebound. Last week, steel prices and oil prices rebounded, coal prices continued to fall. As of April, the price of port futures was down 0.1% from the previous month. It is predicted that the PPI will fall by 0.1% in April, and the PPI rebounded slightly to 3.5% in April.

4) Short-term consolidation of inflation. Since the beginning of this year, the CPI has been ups and downs, and the PPI has continued to fall. Since the beginning of April, the prices of production materials have shown signs of falling, and with the low base in the same period last year, we expect the PPI in the second quarter to rebound in the short term. The food price of CPI has fallen sharply. It is expected that the CPI will still be low at around 2% in the second quarter, and short-term inflation may enter the consolidation period.

Third, liquidity: the central bank comprehensively lowered the standard

1) Short-term rebound in interest rates. Last week, the average value of R007 was 98bp to 3.81%, and the average value of R001 was increased by 45bp to 3.01%. DR007 is up 24bp to 2.94%, and DR001 is 21bp to 2.73%.

2) The central bank has placed a large amount. Last week, the central bank reversed the repurchase of 490 billion yuan, and the reverse repurchase expired 20 billion. Other treasury cash and MLF were flat, and the net open market was 470 billion.

3) The exchange rate has once again depreciated. Last week, the US dollar index rebounded, and the renminbi rebounded against the rebound. The onshore and offshore renminbi rose to 6.3, 6.28 respectively.

4) The central bank comprehensively lowered the standard. The central bank announced last week that it would cut the reserve ratio of one point and use the released funds to repay about 900 billion medium-term lending facilities (MLF). The central bank's net investment is about 400 billion. We believe that the central bank's overall investment has been basically zero this year, so the monetary policy has not been significantly released. However, due to the strengthening of shadow banking supervision, the off-balance sheet financing continued to fall, and the central bank's monetary policy is no longer tightened, so the supply and demand of funds will tend to improve.

Fourth, policy: foster innovation and develop advanced manufacturing

1) Develop advanced manufacturing. Liu He, Vice Premier of the State Council, pointed out in the investigation of the Ministry of Industry and Information Technology that it is necessary to fully understand the importance of the real economy, especially the advanced manufacturing industry, and to make the development of manufacturing industry, enhance industrial competitiveness, and build a modern economic system as important goals.

2) Cultivate the power of innovation. Xiao Yaqing, director of the State-owned Assets Supervision and Administration Commission, said that it is necessary to focus on breaking through the key core technologies in the strategic and forward-looking fields. It is necessary to make great efforts to cultivate a number of innovative forces that can support the country's major strategic needs, lead the future direction of technological change, and participate in international competition and cooperation.

3) Development of Xiong'an New District. The "Planning Outline of Hebei Xiong'an New District" was recently approved by the Party Central Committee and the State Council, marking the beginning of a new phase in the construction of Xiong'an New District. The reply pointed out that Xiong'an New District, as a non-capitalized centralized depot of Beijing, formed a new Beijing wing with the Beijing City Sub-center, which is beneficial to effectively alleviate Beijing's “big city disease” and explore new models for optimizing development in densely populated areas; The 2022 Beijing Winter Olympics and the Winter Paralympic Games will take the opportunity to promote the construction of the Zhangbei area to form the two wings of Hebei, which will help accelerate the short-term development of the regional development and enhance the quality and level of regional economic and social development.

V. Overseas: Trump slams high oil prices, the European Central Bank expects the economy to peak

1) Trump issued a document to attack high oil prices. Trump issued a special offer last week. "There are record-breaking crude oil reserves in various countries around the world. There are also tankers on the sea. The price of oil has been artificially raised." After that, both oil and WTI crude oil fell by 1%. In fact, the recent sharp rise in oil prices, in addition to the OPEC countries' production cuts, is more driven by geopolitical concerns triggered by tensions in Syria and the continued weakness of the US dollar.

2) The ECB expects the economic growth cycle to peak. Last week, Bloomberg reported that the European Central Bank may postpone the decision to end QE in July, and officials want to wait and see if the economic slowdown in the first quarter is only a temporary phenomenon. On Friday, ECB President Mario Draghi also said that economic growth in the euro zone may have peaked, and protectionism may have had some negative effects on global sentiment indicators, and adequate monetary stimulus is still necessary.

3) The Fed No. 3 still insists on gradually raising interest rates. Williams, who will be the chairman of the New York Fed, said the Fed will continue to raise interest rates gradually on the grounds of US and global economic growth, fiscal stimulus, a strong labor market, better wage growth and stable inflation. He said that the current neutral interest rate (3%) appears to be much lower than the level of 10 or 15 years ago (4.5%).

4) Ten-year US bond yields approached 3% again. The recent 10-year US Treasury yield rose to 2.96%, approaching 3% again. Since the Trump administration imposed a new round of economic sanctions on Russia, commodity prices, including aluminum, copper and nickel, have risen and inflation expectations have strengthened. This has intensified the pressure on the market to sell US debt.