Through the Fog: Economic Reflections in the Tide of De-globalization

Introduction

We are in an era fraught with crises and rapid changes, where the pains of economic transformation intertwine with the setbacks of globalization, presenting the Chinese economy with an unprecedentedly complex situation. The coexistence of insufficient effective demand and excess supply, along with geopolitical risks exacerbating asset uncertainty, compels us to re-examine traditional economic development logic and thinking patterns. Meanwhile, Trump's return to the political arena raises concerns about whether history will repeat itself—will he once again initiate a trade war, pushing China into a new round of economic crisis? Compared to 2016, the current international political landscape leans more towards de-globalization, with significant resistance to globalization processes, from tariff barriers to the return of manufacturing. Against the backdrop of insufficient domestic demand and excess supply, it is increasingly difficult for China to digest excess capacity through expanded exports, and the path for external demand expansion is becoming narrower.

This article will analyze the current economic situation from multiple perspectives, including demographic structure, consumption capacity, interest rate status, economic growth status, and market supply-demand contradictions, revealing the deep logic hidden behind the data. At the same time, through reflections on asset allocation, economic policies, and globalization trends, it will explore how to break free from inertia in a complex environment, providing new perspectives and ideas to address current challenges.

1. Insufficient Effective Demand

1.1 Deterioration of Population Age Structure

Source: China Statistical Yearbook Figure 1.1

From 1982 to 2023, China's population age structure has undergone significant changes. The proportion of the population aged 0-14 has gradually decreased from nearly 30% to around 16%, indicating a significant decline in birth rates and a continuous reduction in the proportion of young people. Meanwhile, the proportion of the working-age population aged 15-64 steadily increased from about 60% to nearly 70% between 1982 and 2010, before beginning to decline gradually due to low birth rates and the intensification of aging trends. At the same time, the proportion of the elderly population aged 65 and above has risen from about 5% in 1982 to 15% in 2023, making the phenomenon of population aging increasingly evident.

Source: China Statistical Yearbook Figure 1.2

Combining the trends in birth rates, death rates, and natural growth rates, it can be seen that China's population growth is undergoing a transition from rapid growth to low growth and then to negative growth. The birth rate has dropped from over 20% in 1978 to below 10% in 2023, while the death rate has shown a gradual upward trend, increasing from 6.25% in 1978 to nearly 8% in 2023. Affected by these dual changes, the natural growth rate has rapidly contracted from over 15% to its current negative value.

The intensification of population aging and the reduction of young people are significant reasons for the insufficient effective demand. As the proportion of the elderly population continues to rise, their consumption capacity weakens, and their tendency to save increases, limiting their overall contribution to consumption; at the same time, the decrease in young labor force, along with the continuous decline in marriage and birth rates, not only weakens the consumption expenditure of young families but also suppresses the demand growth in housing, education, and other areas, thereby overall inhibiting the enhancement of social effective demand.

China's population structure differs significantly from that of Europe and the United States, a difference rooted in cultural traditions and developmental paths. China's population expansion primarily relies on its own fertility growth, while European and American countries largely depend on immigration for population expansion. This allows European and American countries to alleviate aging issues to some extent through the influx of foreign populations, while China relies more on its own structural adjustments. Therefore, this different development model also leads to significant differences in the aging processes and coping strategies of the two.

Source: U.S. Census Bureau Figure 1.3

1.2 Accelerating Decline in Middle-Class Consumption Capacity

China's effective demand largely relies on the leverage of population income, with the middle class being the core force. As the largest and most dynamic group in the consumer market, their consumption capacity directly affects the stability and sustainability of economic development. Why? The rise of the middle class in China is an important achievement of reform and opening up, benefiting from rapid economic growth, urbanization, and significant increases in income levels. Since 1978, China's GDP has averaged a growth rate of 9.5%, the urbanization rate has increased from 17.9% to over 65%, and per capita disposable income has grown approximately 138 times, laying the foundation for the formation of the middle class. By 2022, the middle class had reached about 400 million, accounting for nearly 30% of the national population, becoming the main force in the domestic consumer market. Their consumption has shifted from basic needs to quality demands, driving rapid development in education, health, tourism, and other industries, and further releasing consumption potential through the popularization of consumer credit and the internet economy. The consumption capacity of this group directly stimulates China's economic growth and injects lasting vitality into the consumer market.

Source: MacroMicro.com Figure 1.4

As shown in Figure 1.4, China's core consumer price index (core CPI) has experienced multiple fluctuations over the past nearly 20 years, with the 2008 global financial crisis and the 2019 COVID-19 pandemic significantly impacting the core CPI, leading to negative values. This reflects the significant suppressive effect of major economic shocks on the consumer market. However, in the absence of similar macroeconomic risks, the core CPI has shown a continuous downward trend. As of October 2024, the year-on-year growth rate of the core CPI was only 0.2%, close to zero. This trend indicates that the momentum for consumption growth in China is weakening, especially as the economic vitality of the middle class, as the core force in the consumer market, is clearly contracting. At the same time, high debt levels and reduced asset appreciation potential further limit their willingness to consume. This decline in consumption capacity not only directly impacts the vibrancy of the domestic consumer market but also weakens the driving force of the internal economic cycle, exacerbating the issue of insufficient effective demand.

Another noteworthy point is that mass media such as television dramas and movies, as "lagging descriptors" of social phenomena, have frequently presented visual expressions of the declining consumption capacity of the middle class in recent years. For example, recent popular shows like "Ordinary People" and "Reverse Life" depict scenarios where senior managers and senior programmers are laid off or even switch to delivering takeout, which is a reflection of social reality. In real life, such cases are not uncommon, including some extreme incidents caused by layoffs. The interplay between these plots and social phenomena, widely disseminated through media, not only reinforces the public's perception of economic downturns but also intensifies the anxiety and insecurity of the middle class. Panic emotions are continuously amplified through the effects of dissemination, further prompting the middle class to adopt consumption downgrading as a way to cope with economic pressure. This "forced economic contraction" behavior not only reduces their consumption capacity but also weakens the overall effective demand in society, posing more challenges for economic recovery.

2. Excess Supply

The issue of excess supply is particularly prominent in the Chinese economy, closely related to the characteristics of our country's interventionist economy. Chinese enterprises generally have a policy-oriented nature; when the government provides policy benefits or conveniences to a certain industry, a large influx of capital and enterprises enters that industry. Initially, early market entrants often benefit from policy dividends and lower market competition, but as more and more enterprises join the market, competition gradually intensifies, leading to fierce internal competition.

This internal competition in the market means that enterprises must maintain competitiveness through price reductions, capacity expansion, and cost-cutting measures to seize market share, ultimately resulting in a significant shrinkage of overall industry profit margins. At this point, when market supply far exceeds demand, the industry may reach a critical point, facing the risk of systemic collapse. This phenomenon can be visually reflected through PPI (Producer Price Index) data. PPI reflects the profit levels of enterprises; when PPI is negative, it indicates a general decline in enterprise profits, and even the risk of losses.

Source: MacroMicro.com | LIBO Figure 2.1

It is noteworthy that since the end of 2022, China's PPI has remained in negative territory. This indicates that the overall profit level of enterprises has continued to decline, and price wars within industries have intensified, leading to exceptionally fierce competition. A large number of enterprises are struggling to survive under low profits or even losses, while only a few enterprises with scale effects, technological advantages, or resource monopolies can survive. Prolonged negative PPI not only reflects the severity of excess supply but also has far-reaching implications for the stability and healthy development of the economic structure.

3. Interest Rate Status

In recent years, China's interest rate levels have undergone significant changes. From the interest rate change chart over nearly the past decade, it can be seen that interest rates have shown a continuous downward trend, with the government lowering interest rates to "inject liquidity" as a means to stimulate the economy and promote consumer spending. In traditional understanding, interest rate cuts and low interest rates are usually seen as "good news," indicating more capital flow, lower borrowing costs, and stronger consumption capacity. However, whether this logic applies in China requires deeper consideration.

Source: TradingView Figure 3.1

3.1 The Impact of Main Income Sources on Perception of Interest Rates

The perception of interest rates is influenced by the structure of residents' income sources and the way social wealth is accumulated. Decades ago, when interest rates were high, people's perception of them was not strong, as most residents' income came from labor, and wealth growth primarily relied on the accumulation of labor income. However, with economic development, the rise of capital markets has changed this situation. In recent years, more and more residents have turned their attention to capital markets, hoping to gain wealth through investment, while labor income's share of total income has gradually declined.

In stark contrast, in the United States, a significant portion of residents' income comes from capital market returns, such as investments in stocks, funds, and retirement accounts. Due to this income structure, low interest rates are clearly favorable for American residents. Low interest rates mean lower financing costs for enterprises, increased capital market returns, and thus promote stock market prosperity. For American residents who rely on capital markets for wealth, low interest rates not only enhance investment returns but also further stimulate consumption willingness, creating a positive "wealth effect."

In China, residents' consumption and investment behaviors are often influenced by a negative "wealth effect." The root of this wealth effect lies in the enormous attraction of the real estate market and capital markets. Most people enter the capital market or purchase real estate not because labor income growth has provided them with more investment capacity, but to quickly accumulate wealth through asset appreciation or speculative activities. In other words, the investment motivation of Chinese residents comes more from the expectation of wealth appreciation rather than the natural investment capacity generated by income growth. This phenomenon also reflects the irrationality of residents' asset allocation.

3.2 Capital Markets Do Not Meet Expectations

Source: TradingView Figure 3.2

Moreover, since the 2008 global financial crisis, although the Shanghai Composite Index has experienced multiple fluctuations and slight increases, it has overall remained in a long-term consolidation state. As of now, the level of the Shanghai Composite Index is almost the same as in 2009, indicating that capital market returns over the past decade have been negligible. The policy goal of low interest rates has not manifested positively in the capital market; instead, it has exposed the inefficiencies in the internal allocation of funds within the market.

The key point is that if the increase in consumption levels is not based on rising labor income but relies on the volatile growth of capital markets, it will create a "false prosperity." This prosperity is not only unsustainable but may also bury risks for the economy. When the driving force for consumption growth comes from the expansion of residents' debt rather than actual income increases, it will ultimately lead the economy into a predicament of weak consumption, debt expansion, and stagnation.

Therefore, the meaning of interest rates needs to return to its essence. An increase in interest rates (rate hikes) due to rising labor income leading to overheated consumption levels is a healthy economic signal, representing robust economic development momentum. However, a decrease in interest rates due to the bubble in capital markets leading to artificially inflated consumption levels is extremely dangerous.

4. Current Economic Growth Status

In recent years, China's GDP annual growth rate chart indicates that, aside from the brief impact of the 2019 pandemic, China's economic growth rate has remained positive. This suggests that our economy is generally continuing to grow. However, although the data shows economic growth, the actual feelings of the public are completely different; many people feel a pressure of sharp economic contraction. The phenomenon of "disconnection between data and perception" deserves our deep reflection.

Source: MacroMicro.com Figure 4.1

Although GDP data continues to grow, the distribution of the benefits of this growth shows a distinct "top-down" characteristic, benefiting more the industries and assets controlled by the wealthy class. Meanwhile, the pressure of economic contraction gradually transmits to the lower strata of society in a "bottom-up" manner. From real estate to capital market returns, most of the benefits brought by growth are concentrated in the upper-income strata. However, when economic growth slows, the lower strata often first feel the impact of reduced income, employment pressure, and declining consumption capacity.

This "top-down" growth logic leads to unequal distribution of social wealth. During economic growth, rising asset prices benefit the wealthy class more, allowing them to gain substantial returns through investments in real estate, stocks, and other capital market assets. In contrast, the income of lower strata relies more on labor remuneration, and during economic contraction, the reduction in labor income directly affects their living standards. For example, the real estate boom in recent years has allowed the wealthy to accumulate vast wealth through property appreciation, but high housing prices have limited the purchasing power of many ordinary residents, forcing them to bear heavy debts.

Compared to the "top-down" growth, the impact of economic contraction spreads more in a "bottom-up" manner. From ordinary workers to small business owners, the lower strata often feel the pressure of declining income and weakened consumption capacity first. As time goes on, this contraction gradually transmits to the middle class and wealthy strata, affecting the vitality of the entire economic system.

5. "Main Issues"

Behind economic growth, the middle class has always borne the brunt of demand. However, with the dual pressures of negative population growth and excess leverage, the effective demand of the middle class is continuously contracting, directly weakening their support for economic growth. On one hand, negative population growth means a decrease in the new generation of consumers, creating a natural demand gap for an economy reliant on consumption-driven growth. On the other hand, the high leverage and debt levels formed over the past years further limit the consumption space of the middle class, forcing them to cut spending and prioritize debt repayment.

In this context, the middle class cannot provide sufficient demand support for a new round of economic growth, and the supply generated by this growth cannot find enough consumption to digest it. This imbalance between supply and demand not only robs economic growth of its momentum but also leads to declining revenues for supply-side enterprises, increasing the risk of bad debts. When enterprise profits are insufficient to cover debts, systemic financial risks may emerge. It can be said that the contraction of middle-class demand is becoming the most critical breakpoint in the economic cycle, and if this issue cannot be effectively resolved, it will lay profound hidden dangers for future economic growth.

6. Reflections: Breaking Free from Inertia

In the context of drastic changes in the current global economic environment, we need to break free from inertia and find new paths to adapt to future development.

1. Shifting from "Making the Cake" to "Dividing the Cake"

In the past, we focused on how to "make the cake" larger, driving overall economic expansion through continuous GDP growth. However, the growth dividends have not been fairly distributed, leading to widening wealth gaps and increasingly insufficient consumer capacity. Therefore, the future focus should shift to "dividing the cake." This requires not only achieving redistribution through government policies such as tax adjustments and welfare transfers but also addressing the imbalances in residents' income, promoting the flow of wealth from capital-intensive fields to labor-intensive fields. At the same time, it is essential to reasonably adjust debt and leverage levels to achieve resource reallocation between individuals and enterprises, as well as across regions.

For the capital market, many may believe it is essentially a form of resource redistribution. However, the characteristics of capital markets mean they cannot fully achieve fair redistribution. There is a risk of manipulation in capital markets, where experienced and well-funded investors are more likely to dominate the market, while young people, retail investors, and those with less experience often find themselves at a disadvantage. In other words, capital markets tend to exhibit a form of wealth "disconnection" rather than "distribution" in the process of resource redistribution. It essentially forms a mechanism of wealth "harvesting," where capital tends to flow back from young and inexperienced individuals to those who already hold advantageous positions.

Therefore, true resource redistribution should be achieved through more systematic and inclusive policy measures, rather than relying solely on the natural operation of capital markets. This not only helps narrow the wealth gap but also enhances the overall consumption capacity and economic vitality of society.

2. Maximizing Stock Supply Transfer into Effective Demand Capacity

In the future, whether for enterprises or individuals, the core capability lies in how to maximize the transformation of stock supply into effective demand. The current issue of excess supply is evident, and activating market demand will be key. Enterprises need to find breakthrough points for demand through innovative methods, such as marketing models like "MCN" or "personal IP," to further explore and attract potential consumers.

The entertainment industry plays an important role in this process, serving as a "painkiller" for ordinary people, providing emotional comfort and leisure activities under economic pressure. Therefore, the market demand in this field will continue to exist, becoming an important direction for enterprises to tap into consumption potential.

3. Engaging in Personal "Carry Trading"

Earning where there is inflation and spending where there is deflation, engaging in personal "carry trading" could be a new approach to respond to changes in the global economic environment. In a globalized economy, inflation and deflation conditions in different regions may be starkly different, and this disparity provides new opportunities for individuals and enterprises.

For example, the capital markets in the United States (such as U.S. stocks and cryptocurrencies) exhibit strong profit potential in an inflationary environment, especially with Trump's potential return to politics, which may usher in a new round of inflationary policies in the U.S. This inflationary policy will further promote the prosperity of capital markets, and cryptocurrencies, as a "reservoir" of the capital market, have already begun to operate in this environment, providing opportunities for investors. Additionally, from the perspective of seeking overseas markets, fields such as cross-border e-commerce can also leverage the opportunities brought by inflationary markets to achieve profits by meeting global demand.

On the other hand, spending in deflationary areas means acquiring more resources or assets at lower costs, such as in the domestic consumer market and the sluggish real estate market. In a deflationary environment, consumers can meet more needs with relatively less expenditure, thereby improving their quality of life. This "cross-market thinking" can help individuals and enterprises find better action paths amid global economic fluctuations.

4. Forward-looking Investment

As mature markets and industries face narrowing profit margins, future wealth growth needs to focus on less mature fields. In the context of a saturated domestic real estate market with potentially declining prices, seeking overseas permanent property assets after meeting basic housing needs will become a choice. For example, properties in Singapore and forest resources in Europe.

Moreover, we must also consider the current turbulent international situation, where the risks of war and geopolitical conflicts are increasing, making asset ownership issues particularly sensitive. In the context of national opposition, traditional assets (such as real estate, bank deposits, and even some gold reserves) find it difficult to ensure ownership stability. In this case, the value of Bitcoin (BTC) becomes increasingly apparent. As a decentralized digital asset, Bitcoin does not rely on any country or institution, and its ownership is entirely in the hands of individuals, not subject to deprivation or freezing due to geography, policy, or war.

Source: TradingView Figure 6.1

The rising status of Bitcoin in the market is also validated by the BTC/GOLD ratio chart. In recent years, this ratio has rapidly increased, indicating that Bitcoin is gradually being endowed with similar safe-haven attributes as gold, and even surpassing gold in certain scenarios. Gold, as a traditional store of value, has its liquidity and security still constrained by geographical and political factors due to its physical properties. In contrast, Bitcoin's digital nature allows it to outperform gold in terms of circulation efficiency and security, leading more and more investors to view it as "digital gold."

This trend not only reflects the market's recognition of Bitcoin but also further strengthens its value identity. In the context of increasing uncertainty in global assets, Bitcoin, as an asset that cannot be seized, permanently exists, and forms a global consensus, is providing people with a new way to hedge and store wealth.

5. Three Elements of Asset Allocation

In asset allocation, valuation, return rate, and volatility are the three key factors for measuring investment choices. However, the ideal state of "high valuation, high return rate, and low volatility" is almost impossible to exist simultaneously. The market typically achieves balance through "killing valuation," "killing volatility," or "killing return rate," and this dynamic adjustment also reveals the essence of risk in asset allocation.

"Dynamic Balance of the Three Elements: Impossible to Have It All"

High valuation conflicts with low volatility: When asset valuations are too high and volatility is low, it easily attracts a large influx of funds, especially in a low-interest-rate environment, where leveraging to amplify returns becomes the market norm. However, this state is often fragile; once market sentiment reverses or external conditions change, it may lead to a rapid "killing of volatility."

High return rate conflicts with low volatility: High-return assets are usually accompanied by high risks, and sharp price fluctuations are their characteristics. For investors seeking stability, such assets are difficult to provide sustained appeal.

Low volatility conflicts with high valuation: Low volatility usually indicates strong market confidence, but excessively high valuations can make assets lose their attractiveness, prompting the market to "kill valuation" to rebalance risk and return.

The U.S. stock market has long attracted global investors with stable return rates and relatively low volatility. However, this low-volatility environment has also encouraged excessive leverage behavior, where investors commonly increase their exposure to low-volatility assets through financing or derivatives to amplify returns. For example, NVIDIA, as a star stock in the AI wave, once attracted a large amount of capital due to its high valuation and low volatility. However, NVIDIA experienced a flash crash, with a 9.53% drop on September 3, marking the largest single-day decline since late April, evaporating $278.9 billion (approximately 1.99 trillion RMB) in market value in a single day, setting a new record for U.S. stocks.

This phenomenon indicates that when an asset possesses high valuation and low volatility characteristics, the market is prone to extreme behavior. Once excessive leverage accumulates, even slight market fluctuations can trigger a chain reaction, leading to significant corrections or flash crashes. This dynamic adjustment mechanism is not an isolated case but rather an inherent logic of modern capital markets. In summary, the dynamic balance of valuation, return rate, and volatility is the core logic of market operations. Investors need to recognize that it is impossible to enjoy the ideal state of high valuation, high return rate, and low volatility simultaneously. Understanding the mechanism by which the market achieves rebalancing through "killing valuation," "killing volatility," or "killing return rate" is an important prerequisite for optimizing asset allocation and avoiding risks.

7. Conclusion

Amid the intertwining waves of de-globalization and complex economic environments, the challenges facing the Chinese economy are becoming increasingly severe. From changes in population structure to declines in consumption capacity, from contradictions in interest rate status to imbalances in economic growth, and from mismatches between supply and demand, various signs indicate that we are in a critical period that requires profound reflection and adjustment.

The dual dilemma of insufficient effective demand and excess supply reveals the deep-seated contradictions in the current economic operation. Population aging and the weakening of middle-class consumption capacity further undermine the vitality of the internal economic cycle; meanwhile, intensified competition among enterprises driven by policy orientation and declining profits have trapped the supply side in a predicament. In this context, relying solely on traditional economic stimulus measures is unlikely to fundamentally solve the problem; we need to re-examine growth logic, wealth distribution mechanisms, and the opportunities and challenges of globalization.

The reflections proposed in this article aim to focus on the deep logic and future direction of the economy. From reasonable redistribution of resources to maximizing the transformation of stock supply into effective demand, from global perspectives on asset allocation to forward-looking investments, we seek to provide broader ideas for the Chinese economy. In this process, the choices of individuals and enterprises, the adjustments and implementations of policies, and changes in the international environment are all key variables.

The trend of de-globalization cannot be ignored, but it also brings us opportunities for repositioning and adjustment. Whether redefining the meaning of growth or seeking new balances for asset allocation, we need to face challenges with a more flexible and pragmatic attitude. Navigating through the fog requires not only a clear understanding of the current situation but also bold imagination and decisive action for the future. This may be the most powerful response we can find in the current complex situation.

Disclaimer: Readers are advised to strictly comply with local laws and regulations; this article does not represent any investment advice.