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Who moved my cheese? 2023 China Edition.

Forecast for next 10 years

James Huang | 2023.05.20

We often hear the phrase that a million yuan household thirty years ago, if not properly invested, has basically been washed away by inflation today. So, if you have some money and don't want it to become worthless in thirty years, you HAVE TO invest.

There is also the saying "the poor use time to make money, the rich make money work for them," which makes many people feel that real security comes from working hard to earn money and then investing it in a good financial product, and then spending the rest of their days lying down and enjoying the returns.

It has to be said that this saying is very infectious because it really fits the Chinese people's personal experience. So, many people boldly take their hard-earned money to invest, ready to lie down and earn money for the rest of their lives, and end up losing it all and going back to work.

In fact, it is understandable that you cannot solve calculus without studying any advanced math. You have been doing something else in the first half of your life, and suddenly changing to investment in your later years, what can you invest? Besides, making money is much harder than calculus.

Overall, the "million-yuan household thirty years ago leading to some people now returning to poverty" contains two unusual facts/assumptions:

1. A "non-normal" situation in a special period is treated as normal.
2. Things without entry barriers often have the highest barriers.

The second point is easy to understand and is the most common mistake we make in our lives, such as investing, opening restaurants, selling milk tea, etc. All have very low entry barriers, but it is very, very difficult to get profit, and the competition is too fierce, and no one ends up making money.

And some people can withstand the brutal profit and loss cycle, while others cannot. For example, there was a restaurant that was very popular, and the manager was very satisfied with his experience, saying that his experience was thin profits and high sales, and then he didn't make any money for three years. Luckily, his father was rich and supported him all along, and now he finally doesn't have to rely on his father anymore. On Snowball, someone bought a well-known pitfall fund, which fell by half from a high position, but he bought more at the low point and is now making a profit. But most people don't have these conditions and end up dropping out in the middle.

What is more difficult to deal with is that those low-entry barrier fields often give people a false sense of "I can do it too," but when you do it, you find it too miserable, the profits are thin, and there are many competitors, and it is really a matter of life and death.

And everyone is often prone to two extremes, at first thinking that investment is easy, then doing their own thing, and then losing half of it. So, they think this thing is too complicated, and it's better to leave it to the professionals, and then they get tossed around by them and end up losing their capital.

This is not me talking nonsense; this kind of thing has happened before. There are those new rich people who entrusted their money to financial institutions for management, with an annual return of about 8%, lasting for a few years, feeling that they have adapted to this life of lying down and making money, and then the institution tells them that the money is gone.

It turns out that financial institutions don't have magic; they just lent their clients' money to the most profitable real estate companies at the specific time. These companies used to have very stable debt-paying ability, so they borrowed and repaid every year until a large number of them suddenly went bankrupt a couple of years ago, including Evergrande. Many of the two trillion yuan they owed were these types of private equity and trust funds. These investments were stable in the early stages and lost money in the end.

So, when you invest your hard-earned money in an industry that you don't fully understand, you must think carefully.

Next, let's talk about the first assumption.

Why has China's currency depreciated so rapidly over the past thirty years?

There are mainly two reasons.

One is that economic development has been too fast, and the government has to constantly increase the supply of money. China M2 increased 16 times from 1998 to 2017. It is normal for economic development to require more money; otherwise, there will be deflation, which is a common problem in the era of precious metals.

And we know that the vast majority of money in the market is not printed but borrowed. For example, the well-known phrase that everyone likes to say, "real estate is a reservoir,” it is wrong and actually a real money amplifier.

For example, let's say I'm really poor, and the only thing I have is an old house my parents gave me. Then one day, someone comes along and says they want to buy it; they have a million in their hand and borrow another two million from the bank to buy my house. Now I have an extra three million. That two million is the real estate market "magnifying" it.

If I keep using this money to buy more houses, borrowing another six million, the next buyer will have an extra nine million. You can see the market has added another six million through the house, for a total of seven million. In other words, as house prices rise, the amount of money in the market increases, and the value of your savings decreases.

Secondly, it is also related to China's currency issuance mechanism. For example, everyone is familiar with the exchange settlement system. You're a foreign trade boss; you earn a hundred million dollars selling clothes, and when your customer sends the money, it's all converted to RMB and deposited into your account. The larger the foreign trade scale, the more RMB there is in our market.

In addition, there is more than just foreign trade making money. There is also a lot of foreign investment. For example, everyone knows the saying "China has $3 trillion in foreign exchange reserves," and many people's first reaction is that this $3 trillion is earned by our own enterprises, little by little.

Actually, I checked the latest data from the State Administration of Foreign Exchange, and $2.45 trillion of it is foreign debt, which is a more complex component of foreign debt, much of which is invested by foreign capital in China. Some are US dollar bonds issued by Chinese banks overseas, and many are borrowed by Chinese companies overseas. For example, a while back, a real estate developer had a US dollar debt that came due and defaulted on it, and domestic real estate developers had borrowed a lot of US dollar debt. This money invested or borrowed to China has all been converted to RMB, causing the RMB in the market to soar over the past few decades.

It just so happens that China's lending rates are relatively market-oriented, while deposit rates have always been relatively low. So if you had tens of thousands of yuan back then and didn't choose the right investment targets, you probably don't have much left now.

Multiple factors have come together to create a situation that has rarely if ever been seen in human history. In a short period of time, there has been an explosive increase in the money supply, and the real economy has also increased tenfold.

This dual engine growth situation will never occur again from my point of view

Many countries have had such a period of rapid growth, and once this stage is over, things slowly return to "normal." Inflation does occur, but it won't be like China's first thirty years. Actually, you can't really call it inflation because China's real economic development is truly visible. Next, we will enter a period of stable growth. You can pay attention to the source of the country's money, which has now stopped growing like it used to.

First of all, the probability of lending going down. The most obvious thing is that people's enthusiasm for buying houses has decreased, and lending is the largest part of household loans, and it is also getting smaller and smaller.

Secondly, foreign exchange has not been increasing for a long time. This actually implied that the money supply may be more stable in the future. Of course, the premise here is that the Chinese government will not casually print money like Argentina did.

So how will ordinary people handle their money in the future? It is likely that they will follow the developed countries and enjoy themselves in a timely manner, not invest randomly, deposit money in the bank and earn interest, and prepare for retirement.

You might say that the interest rate is too low to keep up with inflation. But as I said before, with the economic slowdown, inflation is unlikely to happen (look at Japan). In addition, everyone will increasingly form a consensus that low-interest rates are better than losing their capital principal. Japan is actually in this state right now, and they refuse to invest because they've been burned. For many years, they have invested and lost. "Stable returns" are becoming more and more of a myth, and whoever believes in it will be burned badly. The more unlucky people there are, the more people will become wise. Or, to put it another way, after being unlucky a few times, even the most foolish person won't step into that pit. Furthermore, the Chinese people's investment fever has also been driven by real estate over the years, whether it's buying a house or buying financial products related to real estate, they can make money. As a result, many people have formed an inertia of thinking, and these past two years and the next few years will be a period of withdrawal.

So, the interest rates for loans in China have been decreasing over the years, which indicates that the Chinese economy is *maturing*. As a result, it's becoming increasingly difficult for ordinary people to increase their wealth, and even rich people are struggling to find stable investment opportunities with returns of 10%, and there's always the risk of losing their capital. People will eventually give up trying to get stable capital gains and will simply deposit their money in the bank, earning a modest interest rate of 2% to 3%. The interest rates are likely to decrease in the future and may eventually fall to near zero, which means people won't make much money, but at least they won't lose their money.

Regarding buying property and renting it out, the Japanese have had a bad experience with it. After their population started declining, it became very unprofitable to buy property because property prices and rent are both high in expensive areas and very low in cheaper areas. Even if you buy a property in a cheaper area, you'll have problems with tenants who will keep bothering you frequently. This is why some people in China invested in property in Japan a few years ago, but they ended up losing money.

Overall, it's becoming increasingly difficult to increase your wealth in China. People will likely give up on investing their money and will simply deposit it in the bank and prepare for retirement.

That kind of crazy economic boom that happened in the 80s won't happen again. Once the economy slows down, the return on investment for everyone drops dramatically. People who made bad investments in the past when the economy was good will be even more sour now. Most people will start to understand themselves better and give up trying to make their money grow quickly. Instead, they'll just save it and find an easy job.

For those still striving for success:

1. Look at the hard path, follow the real economy or being an entrepreneur
2. Learn something new every year (I have not stopped doing this for a decade)
3. Invest in developed countries with a sustainable population pyramid.

Who moved my cheese? 2023 China Edition.
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