The most surreal event of this year might be the official announcement that M2 is continuously climbing, yet the overall environment is not as satisfactory as one would hope, and everyone feels that the money hasn't reached their pockets, which inevitably leads to some confusion. Where did all that money go?

Or, to put it another way, there are three questions that need to be answered:

1. Why does the government release so much liquidity?

2. Where did the released liquidity go?

3. What should be done next?

1

First and foremost, it is necessary to reiterate the common knowledge that China does not actually print money and distribute it directly; that was something Chairman Chiang Kai-shek did. China's "money printing" is all in the form of loans.

Advertisement

The main reason why China has a path dependency on releasing liquidity to protect the economy is also due to the fact that for a long time, there were two unchanging assumptions in the market:

1. The foreign market is large enough, as long as you produce something, it can be sold. If not, you can lower the price, or provide tax rebates and subsidies, or at worst, earn less profit, such as many coastal enterprises whose profit margins have now fallen to 0.5%;

2. House prices will always rise. If you have idle money, then buy a house and make a profit on the price difference in a few years.It is precisely because these two assumptions have always been valid that the policy of monetary easing has been effective. No matter how much money is released, there are always people to take it, either investing it in foreign trade or in real estate.

Why can products be sold as soon as they are produced? It's not complicated. In the past, our labor was too cheap, and electricity was also cheap, which made Chinese industrial products very competitive internationally, especially low-end industrial products. These products are very popular, and basically, the world outside can absorb as much as you can produce.

Under this background, before about 2018, the main thing China did was to make money. Once they got the money, they would buy equipment, hire people, expand production capacity, and then sell to the whole world.

During that period, there was almost no such thing as a loan that could not be issued in our country. Even the interest rate offered by banks was 5%, but when the private sector wanted to borrow money, it often had to be more than 10%, and they were still scrambling to borrow. The usual practice was for banks to lend to state-owned enterprises first, and then state-owned enterprises would lend to private enterprises at twice the interest rate.

Private enterprises have many projects, and as long as they can get money, they can make money from foreign trade. Therefore, for a long time, as long as the economy was not good, a little bit of water would be released, and the released water would enter the manufacturing industry, driving employment and the economy.

However, the growth space for exports is getting smaller and smaller overall. Not to mention that the United States wants to have a trade war with us and transfer capacity, even if there are no such things, it is impossible to keep rising indefinitely. After all, the overseas purchasing power is also limited, and our own labor and land costs are also rising.

After 2018, banks released less and less money into the manufacturing industry, mainly because the profits were too thin. The first assumption mentioned earlier began to shake.

The term "industrial upgrading" is very politically correct, but the reality is much more bony. In the past two years, I have communicated with many small bosses. They say that everyone knows that upgrading is necessary, but upgrading is actually a second entrepreneurship. Most of those who dare to upgrade, in the end, not only fail to upgrade successfully but also lose their old capital.

Now the whole society is teaching young people that "the biggest waste is entrepreneurship, followed by investment." Those old people understand even more.

So, the first generation of people in China who were engaged in manufacturing exports would generally stick to the end, that is, until their factories were really without any profit, and then they would close the factory and resolutely not upgrade. They would sell the heavy assets in the factory for cash and enjoy their old age with the money they had earned before. They also think that only extreme irrationality would bet on their accumulation in the first half of their lives to fight for a small probability event.During the years when foreign trade was on the rise, more and more people moved to cities through foreign trade, and moving to the city meant buying a house. As a result, "real estate driven by urbanization" also began. Foreign trade has always been an important booster for real estate, until real estate itself grew legs and started to run on its own.

Real estate has made an indelible contribution to China's development. The only problem is that its prosperity is based on loans.

Banks lend money to the public to buy houses, and house prices continue to rise. The remaining public feels that buying a house is a profitable investment, and they buy houses with even more passion. More and more people start to invest all their family's savings into it. With so many people doing this, house prices do indeed continue to rise.

As house prices rise, developers also borrow money from banks to buy land for development, and the scale becomes larger and larger, with more and more money being borrowed. However, it does promote the upstream enterprises of real estate. Those upstream practitioners continue to borrow money to buy houses after they have money, and this cycle just floats up.

Later, everyone understood that borrowing money, using credit cards, and borrowing credit loans, as long as they can get money out of the bank and then buy a house, after a few years, when the house price rises, the buyer will pay back all the money they borrowed and still make a profit. At this time, as long as the bank is willing to release water, there is no such thing as "no one to take over."

The final result is that residents borrow money to buy houses, developers borrow money to build houses, and the government borrows money for infrastructure (mainly through urban investment), everyone is crazy about borrowing, and the economy is booming.

The public can borrow money to buy houses, anyway, the house is always rising, buying is making money, why not borrow?

Developers are even more daring to borrow, anyway, the house is always rising, borrowing money to buy more land and build more buildings, why not borrow?

Behind the developers, there are countless suppliers of all sizes who are not afraid. The credit of real estate merchants is excellent, supplying them is just like joining the "fruit chain" to supply Apple now, making a steady profit. Even if they advance money for production, the repayment cycle may be as long as two or three years, but everyone is not afraid. They borrow money from various places for production, with an interest rate as high as more than 10%, and everyone is in full swing.Some friends may not know that if you are a cement seller, when you sell cement to a real estate company like Evergrande, they do not give you money directly, but give you a "commercial bill", similar to an IOU, which can only be exchanged for money after a long time. Before that, you have to use your own money or bank money for production. However, in the past, Evergrande had sufficient credit, and this commercial bill could also be spent like money, and could even be directly exchanged for money from others, just like a JD.com shopping card can also be exchanged for money.

At this stage, wealthy people could easily take advantage of this, as they have assets and can borrow more money, which can be invested in foreign trade and buying houses, and then waiting for others to take over.

So as long as the government is willing to print money and release it, how much it prints, the people below dare to take how much to buy houses. The money for buying houses has become houses and cement, has become government expenditure, and has become the wages of more people.

In the most extreme case, at the beginning of 2021, the epidemic was still raging, but the domestic control was very good, and many people almost forgot about the epidemic. At that time, the economy was still a bit sluggish, and the government wanted to stimulate the economy and released a wave of water.

This wave of water was mainly intended to be lent to enterprises with operating difficulties, especially small enterprises, so it was also called operating loans.

However, it was quickly interpreted as "house prices will rise". Shenzhen was the first to jump out, and many people, with the help of intermediaries, transferred a shell company to themselves, and then put some collateral in, and after getting loans from the bank, they hurriedly bought houses.

What's more, some people who didn't have a penny in their hands, only had a house for self-occupation, also put this house into a small company, and after getting the operating loan, used the operating loan as a down payment to buy another set.

Later, this "operating loan price increase tide" spread from Shenzhen to Shanghai and Beijing, and the school district housing in Beijing also began to rise, and then the government decisively intervened to suppress it. Since then, Shenzhen has been falling continuously.

In the blink of an eye, 2022 has passed, and there was also the Russia-Ukraine war. Objectively speaking, the impact of the Russia-Ukraine war on China's manufacturing industry is very, very large.

In the past, when we discussed the transfer of manufacturing, we were always saying that "it's not cost-effective to transfer to India or other countries", after all, capitalists think about problems almost the only starting point is profit, and naturally no one will do business that doesn't make money.After 2022, the way multinational companies think about problems has shifted from a "profit-oriented" approach to a "safety-oriented" approach. After witnessing what happened in Russia, they began to worry about being too dependent on China, eventually facing a situation similar to Germany's dependence on Russian energy, where suddenly there are problems and they have to search the world at high prices for energy.

The core of safety is diversification, and countries like India naturally get a share of the pie. Just a few days ago, India's chief economist was still saying that the Russia-Ukraine war has brought unprecedented opportunities to India, with the whole world rushing to set up factories in the south of India. He suggested that India start a "subsidy for migrant workers to move to cities," bringing migrant workers from the north to the south to work in factories.

What's even more outrageous is Mexico. With safety considerations and the United States' decoupling, a large number of multinational companies have gone there, and even a large number of Chinese-funded enterprises have gone to Mexico. There's no way around it, the United States is the biggest buyer for many domestic foreign trade companies, if they don't go, they may have to go bankrupt, so they have to go.

In addition, there is a bad rhinoceros wandering around, which is the low marriage rate. The low fertility rate is mainly due to the low marriage rate. If you don't get married, what house will you buy?

In this sense, this time Country Garden actually lost the bet with young people. It has accumulated countless land in the second and third-tier cities. If the young people in the small towns are eager to buy, its assets can also bear the debt. A few days ago, it owed 160 million US dollars and couldn't pay it back. This amount of money should be nothing, it's just a matter of selling a building. But now it's really not possible, it's really unsellable.

The current problem is that young people are not playing anymore, houses can't be sold, cash flow can't be turned, and the chips in Country Garden's hands have become garbage.

So there is no such thing as "house prices can't fall." If young people really give up and don't buy, don't get married or have children, it doesn't make sense to set a high price for unsold houses. If houses can't be sold, house prices can't rise, and once house prices stop rising, the demand for housing will immediately disappear.

Without demand, houses are stranded, real estate companies and a large number of related enterprises behind them can't start work, and even the truck drivers who transport goods and materials for them have no work to do.

Combining all these factors, everyone can see that in the past, every time the bank released water, it was absorbed by the manufacturing industry, and later by the real estate industry, which could drive an economic wave.

Now it's just the opposite.These two engines are now somewhat underperforming. The contraction of foreign trade has led everyone to be reluctant to borrow heavily to invest in manufacturing. The downturn in the real estate market has made people hesitant to take out loans to buy houses, for fear that if housing prices do not rise, they will become the last unlucky ones to hold the bag. More critically, the debt may be too high, and everyone is reluctant to borrow more, worried about not being able to repay it.

The central bank does want to stimulate the economy by loosening monetary policy, but no one is borrowing the released funds, and they are not being lent out at all.

In the past, we said that the rich used loans to increase the value of their assets to achieve the goal of "the rich getting richer." Now, asset prices are also declining, and even the rich are not borrowing anymore, let alone ordinary people.

What's even more absurd is that not only are they not borrowing, but they are also repaying their debts. Companies usually use the cash they earn to hire more people, but now they are repaying banks. Ordinary people used to take out loans to buy houses even when they had no money, but now they save money in banks even when they have it. The funds released by banks are clearly not entering enterprises or individuals' pockets. The intuitive feeling of everyone is that it is getting harder and harder to find work, and income may still be declining.

The biggest characteristic of debt is that "it must be repaid sooner or later."

When borrowing to develop, everything is fine. Borrowing to speculate in real estate, housing prices rise, and the next buyer can get more money through high-priced mortgages. When there is more money in the market, everyone spends it to buy, buy, buy, and other things also follow suit and rise.

When everyone suddenly realizes that the good times are over and cannot continue to borrow like this, they start to cut back on spending, stop borrowing, and then housing prices fall. When the prices fall, people do not buy houses anymore, and the companies behind them also cut back on expenses.

What's more troublesome is that once consumption shrinks, many products cannot be sold, and companies have to lay off workers to survive the winter.

So many people are worried that inflation will not rise at all. Ordinary people have money in their hands and rush to buy goods, and the prices of goods can only rise, and there will be inflation. Now, there is no money and no buying, where is the inflation?What should we do next?

In fact, it's a topic that's been talked to death, and there's no good solution. We can only wait for the Federal Reserve to end its interest rate hikes, and for the global economic environment to improve, and perhaps our foreign trade will also show signs of recovery. The current interest rate hikes by the US dollar have made life difficult for the whole world, which is why I said before that replacing the US dollar is still a long way off, as the US dollar is still at its zenith.

Now, too many people are trapped in confusion about the future, feeling anxious and full of uncertainty, only wanting to repay loans, save money, and prepare for the winter.

When people find out after a period of time that nothing major has happened and life goes on as usual, they will gradually regain confidence, and consumption will also improve. Your consumption is someone else's income, and we can all live a little better. As for real estate, it's not that it's completely over in the future, but the era of real estate is likely to be completely over.

However, the most critical point, and perhaps a fundamental shift is coming. Our country has always positioned itself as a manufacturing country in the past, because no matter how much it produces, it can be sold, so it doesn't care too much about production and doesn't care about the income of the people. Now that overseas purchases of our products have decreased, it has immediately become empty. In the future, we should focus on improving the income of the people in the country and reducing dependence on overseas.

But on the other hand, a pure domestic cycle of 100% is not feasible, and poor countries like Russia and Iran can't be relied upon. Foreign trade and manufacturing still have to rely on those wealthy developed countries. We like to say, "The world is not just those developed countries," but from the perspective of exports, those are the "two" in the "80/20 rule," and there is no way to solve it in a short period of time.

So, in the next step, we still need to endure, maintain a good international image, not be arrogant or impatient, maintain stable foreign trade while improving the income of the people, maintain a good business environment, and ensure the stability and predictability of society through the rule of law, and things will gradually get better.

In short, there is no wave that only rises and does not fall, and there is no wave that only falls and does not rise. It's time for us to adapt to this cyclical state. And looking back at history, every time we fall into a trough, we will usher in a wave of change, whether it is economic, technological, or policy level. Change will bring new vitality, and the economy will move forward in this cyclical wave.