A-shares market continue its weak performance in May, with CSI 300 index dropping 5.72%, or the fourth consecutive declining month. Most investors are only sidelining, and with only AI-related topics are still gaining attention, almost all other sectors are lacking of passions from investors.  

The weak sentiment could likely be a result of a weaker than expected macro data. Credit market, PMI and other related macro data (including weaker than expected real estate data) dampened investors’ appetite in A-shares. While macro research was never my field of expertise, I have always believed more in micro economics as the “reason” of economic activities, while macro data are the “result” of such activities.

From a micro point of view, there’s still a lot of improvements to be made: firstly, real estate sales and related business chains are still contracting. Secondly, employment data and income level are showing weaknesses, and thirdly there hasn’t been any improvement on local government debt issues. In this article, we would spend more time to look at such micro activities of the economy.

Who is the biggest winner after major shift in Real Estate sector?

After a rebounded sales in March, April and May have showed cool down in sales numbers from first and second tier cities, with second hand markets seeing increasing activities. On the other hand, real estate companies (those in financial hardships last year) lags behind their completion time schedule. This is a phenomenon only seen after 2021 where purchasing of new flats is seen to be risky: with the developers having financial difficulties, home-buyers are at risk with their investments potentially going down the water if the developer defaults, which seemed highly likely than not as compared to before 2021. Luckily, the government is highly concerned about home-buyer’s rights, and ordered that the local governments must make sure such development projects’ completion. What I don’t understand is that, such problems were never a concern before 2021, not to mention becoming a heavy-duty task for local governments to handle. With the latest listing rules in place, many privately owned real estate developers could be delisted -- the latest market mechanisms of stock price <$1 would be delisted and investor’s sell down pressure continues.  

It is heartbreaking to know some investor’s wealth has been wiped out due to real estate related investments. For normal investors, it is hard to believe that companies with hundreds of billions of revenue, billions of profit can see such devastating drop in stock price (which could end up with delisting). The kind of pain for one to lose most of his saving is unimaginable. I had painful experiences too, and if we carefully think of who’s also a victim in this scenario, questions arise around its stakeholders – financer for the company, high net worth individual investors of the trust products of the real estate companies, suppliers and construction workers for the developers, local government tax receivables… I can only see sufferers and losers in this situation, but yet no winner to surface. We believe that a solution would be reached at the point in the future.

How to avoid balance sheet recession?

Our research team has been focusing on updating and research 231Q earnings results, and our overall feeling is that, consumers market recovery speed is slower than expected. Mid-stream chemicals and raw materials are seeing pricing pressure, and such pressure are spreading towards upstream, especially we see coal prices correction quite significantly.  

We think it’s all because internal demand is still very weak in China: there has been a trend of wage cut last year, e.g. civil servants, teachers in Shenzhen and China, and financial industry in 2023. Companies are laying off more people to survive such economic hardships, e.g. As of Mar 31, 2023, Alibaba had 235,216 employees, laid off 24,100 employees (or 9.29%) in the past 5 quarters. Tencent has 106,221, laid off 9992 employees (or 8.59%) in the past 4 quarters. With the best money-making companies are continuously laying off its employees, it’s not hard to predict how the job market is now currently. One thing to bear in mind: if laying off is the solution for financial hardships, then no companies would fail during such difficult times. Policymakers must seriously consider what is the right way to lead the country out of these social problems.

“The Great Recession” by Gu Chaoming has received lots of noise from the economy sector, and meanwhile “Debt is the Key for Economic Restart” by professor Zhao Yanqing has also gained a lot of attraction and discussions. What’s mostly debated is whether or not China is undergoing a recession or a liquidity trap? While there are many rationales supporting both scenarios, and I myself has not been an expert in macro economics, I would prefer to leave the answer open. What I do observe, however, from the overseas markets and previous experiences in the capital markets, whenever there’s a larger pressure for economic downsize, policy making and its strength plays a key role to changing the end result of such recession.

From overseas capital market experience, the three greatest recessions are : 1929 the Great Recession, 1990 Japanese recession, and 2008 Financial crisis led by subprime loans. The regulatory framework, macro environment and policies deployed were all very different in the three events: as there were Fed back in 1929, macro policies were pretty much useless and the recovery were based on the economy’s endurance. The recession therefore lasted for a long period of time and cause great damage to the society. Meanwhile, the second recession in Japan were monitored closely by the central bank and government together, resulting better as compared with the first example, but still it took a long time for recovery. And the latest 2008 financial crisis, quantitative easing was deployed for the first time by Bernanke, a specialist in recessions. Markets stabilized in a short period of time, real estate and stock markets recouped losses and investors avoided falling into “balance sheet recession”. 2008 had the speediest recovery of all, and it is not hard to see that the avoidance of balance sheet recession is done by stabilizing asset prices! If prices weren’t stabilized, each aspect in the economy would undergo a negative downward spiral of selling of assets to deleverage, and to repeat as prices were drove down. So in order to avoid a balance sheet recession, we believe to stabilize housing and stock prices would be key.  

Recent Market Strategies

We have been emphasizing that 2023 is a year of laying foundations for investments instead of harvesting investment results. Market has been continuously declining since February, where many investors are now under water again. But do remember, volatility in markets is one of the characteristics in a Spring market.

It has been very difficult for equities investments since 2021, especially for those who invested in 2021. But one should remember, market is always working in cycles, and such cycles are often times against our psychological thinking. Maybe we should ask ourselves a different question: during the last “poor market”, “bad sentiment” or “worst time to fund-raise”, what actually happened next? We would like to end with the famous quote: To be greedy when others are fearful.  

WU Weizhi

4th June 2023

本期《偉志思考》簡體中文版鏈接：

伟志思考：避免资产负债表衰退的关键是什么？莫在低谷转身而去！