Morgan Stanley's Xing Ziqiang: "The "924" new policy is just the prelude, not the final chapter."

On December 20th, Xing Ziqiang, Chief Economist of Morgan Stanley China, participated in the "Alpha Summit" jointly hosted by Wall Street News and the China Europe International Business School. During the summit, he analyzed and forecasted the global economic outlook for 2025-2026, the impact of Trump 2.0's three major policy agendas, the package of economic policies since September 24th, the upcoming second round of policies, and the potential opportunities for structural adjustments. Key points from the speech include: ** The impact of this round of Trump 2.0 tariffs on the Chinese economy, Chinese enterprises, and industrial chains will be much smaller than the first round of tariffs in 2018-2019. Over the past six years, Chinese enterprises have diversified and upgraded, reducing their dependency on the United States. ** China's diversification is evident in the decrease in direct dependence on the U.S., with the U.S. market accounting for only about 14% of China's total exports. The upgrade is seen in the expansion of export categories beyond just the Apple industry chain to include automotive, high-end capital goods, industrial robotics, lithium batteries, and more. ** China needs to focus on improving its own domestic affairs to counter external pressures. Despite external challenges during Trump 1.0, China transformed this pressure into motivation, leading to strong economic and market performance. ** Development and security must be balanced, with development serving as the foundation of security. ** The shift since September 24th aims to improve overall societal well-being and local government operations to create a positive economic cycle. ** The first round of policies following September 24th was just the beginning of a broader restructuring effort, focusing on resolving existing debts and reorganizing financial policies. ** Even during periods of adjustment, there are numerous opportunities for structural changes. New productive forces in China, such as AI, industrial robotics, and green energy, present significant growth potential. ** China's unique advantage in AI application includes a strong emphasis on consumer integration, driving innovation and widespread adoption of AI technologies. In his address, Xing Ziqiang discussed upcoming economic and market forecasts for China in 2025-2026 within the context of global changes, including the potential impact of Trump 2.0 policies. He also emphasized the importance of ongoing policy initiatives to stimulate economic growth and address structural challenges in China's economy.The attitude towards controlling immigration and these social issues has changed, but the United States has changed more.Which areas of the United States have changed? According to the summary of our macro research team in the United States, the current American economy is very different from the Trump 1.0 era, which is when he first took office as president in 2017. The current American economy exhibits the characteristics of "two highs and one late": high fiscal deficits, high inflation, and being in the late stage of the economic cycle, meaning it is nearing the end of this economic and market cycle. This is very different from when Trump first took office in 2017, when the American economy was just recovering from deflation and in need of stimulation. At that time, Trump's policies of tax cuts, fiscal stimulus, and deregulation reignited market confidence, which was crucial for the American economy at the time. Currently, inflation in the United States is much higher than in 2017, and has been ongoing for several years. Although there has been some recent easing from high levels, inflation remains sticky. Similarly, the United States has had persistently high fiscal deficits for several years, especially after the pandemic, as the Biden administration implemented many stimulus measures, pushing the fiscal deficit to historic highs. Even in 2023 and 2024, when the economy has recovered and inflation becomes a problem, the fiscal deficit will still be at around 6-7% of GDP, higher than in 2017. At the same time, it is known that the current American economic and market cycle has been prolonged, and every cycle has its limits. This current cycle may be nearing its end. Implementing the policies of the Trump 1.0 era at this stage may have significant impacts. For example, the three main policies of raising tariffs on foreign goods, cutting taxes domestically, and strict immigration control could lead to further inflation. Tariffs on foreign goods would increase costs for American businesses, leading to higher prices and inflation. Additionally, strict immigration control would reduce the labor supply, increasing inflation further. Cutting taxes domestically to maintain high fiscal deficits would create a paradoxical situation. Due to these factors, the Federal Reserve may not lower interest rates as aggressively as previously thought because of high inflation. This could lead to economic challenges, as the burden of paying interest on federal debt increases. In this process, the market will begin to question the sustainability of the U.S. economy. The new U.S. government is highly focused on market feedback. The appointed Treasury Secretary comes from Wall Street and is concerned about the credibility of the dollar and the sustainability of U.S. finances. However, achieving this sustainability may require compromises and trade-offs. Therefore, implementing the three main policies of Trump 2.0 simultaneously may not be practical, and a balance must be struck. Under Trump 2.0, China's economy should focus on its own affairs. Therefore, the impact on the Chinese economy, Chinese companies, and supply chains may be less severe than the first round of tariffs in 2018 and 2019. Chinese enterprises and supply chains have diversified and upgraded to cope with tariffs. China's reliance on the U.S. market has decreased, and new markets have been explored, making the market structure more diversified. For example, in 2018, emerging markets with friendly geopolitical relations with China, such as Southeast Asia, the Middle East, Eastern Europe, Latin America, and Africa, combined for a sizable portion of China's export market. Additionally, Chinese companies have expanded globally, establishing factories and marketing channels in third-party countries, diversifying market options. Despite challenges, China's economy and supply chains have adapted and gained experience in responding to tariff adjustments.At that time, it accounted for less than one-third of China's total exports. Today, these emerging markets together account for about 43% of China's total exports. In other words, China has managed to use the Belt and Road Initiative and strengthen economic and trade exchanges with countries that have relatively friendly relations with China, partly offsetting the decrease in exports to the United States. This is the first step towards diversification.The second point is upgrading. In the past six years, we have heard a lot of news about trade frictions between China and the US, tariffs, and geopolitical issues. Many companies have moved some of their supply chains away from China and stopped production in China. The most common example we hear is that companies like Apple have shifted their production to Vietnam or India. Is this noise true or false? We have carefully verified and found that it is partly true and partly false. Indeed, in some product categories, such as phones and communication products, China's market share in global exports has slightly declined, and some factories have moved to so-called India and Southeast Asia. However, we have analyzed the 12 main categories of Chinese exports. Among these 12 categories, the Apple supply chain is just one of them. There are now more and larger categories, such as the automotive industry chain, high-end capital goods, Siasun Robot & Automation, lithium batteries, and other items. In the other 11 categories besides phones and communication products, China's export market share has increased over the past six years. This is because companies are no longer satisfied with just assembling phones, but are moving towards producing higher value-added products, even competing with Europe and developed countries. In other words, by upgrading, companies have partially offset the impact of tariffs on exports of low-end products. Therefore, when we consider these two points, even if there are still tariffs in the Trump 2.0 phase, Chinese companies and supply chains are more experienced in dealing with them, and the economic impact will likely be smaller than in 2018-2019. Of course, there are concerns that if Trump not only targets China but also imposes tariffs on other countries worldwide, the efforts made by Chinese companies and other foreign companies to diversify their supply chains over the past six years could be in vain. This is a risk, but as we mentioned earlier, conditions are stronger than people. For the new US government, if it comes out aggressively, not just targeting China with tariffs but launching a comprehensive attack, it will eventually have to consider the impact on US inflation, economic growth, business confidence, and even the stock market. Chinese companies have experience in dealing with tariffs. But if other countries around the world have to deal with the confidence shock caused by the US tariff war, the impact on foreign direct investment will be much greater than in 2018. We have also calculated through a team of economists that if these policies are implemented and tariffs are imposed on all countries at a rate of 10-20%, US inflation may rise by 1 percentage point in the future, and economic growth may decline by 1.4 percentage points after two years. This combination of economic downturn and rising inflation is something that the Trump administration would not want to see. So while there is this risk, we believe it is not the baseline scenario, just something to watch out for. In summary, the impact of tariffs on China will be milder than in 2018-2019, and Chinese companies are better equipped to handle them. However, if there are other geopolitical frictions, such as the new US government appointing many aggressive officials, who not only have a deep understanding of tariffs but also restrict investments in capital markets, limit competition in the technology sector, and adopt a hawkish and aggressive approach to exports control. Considering these factors, I believe that China needs to overcome the external pressure of the Trump 2.0 phase by focusing on its own affairs. This was also the case during the Trump 1.0 phase from 2017 to 2020 when despite facing external trade friction and geopolitical pressure, China turned this pressure into motivation. In 2017-2020, whether in terms of domestic economy or capital markets, the overall performance was quite impressive, resisting external pressure. The 924 policy is just a prologue, not the end With this experience in mind, we can see that since September 24, there has been a shift in policies, including the Central Economic Work Conference and the second round of policy changes. How effective will these policies be and what effects are they expected to achieve? To understand this, we need to go back to why there was a policy shift in September. In discussions at other events on Wall Street Witness, I have talked with editors and invited experts about the fact that in early September, we were one of the first research institutions to predict a clear shift in policies. The basis for this prediction was the various changes since 2018, which led to a somewhat pessimistic tone among foreign investors and some entrepreneurs, suggesting that despite China's emphasis on development and security, many were concerned that security had taken precedence over development, resulting in delayed policy adjustments in response to economic data changes. Because security was more important, policies might not be adjusted promptly.Businesses and investors want to share the dividends of development. However, if development tends to become secondary, it is obvious that their mindset becomes pessimistic and cautious.But we do not quite agree with this tone, because even as we enter a new era, development and security should be both coordinated and emphasized. However, one understanding that will not change is that development is the foundation of security. Because there must be economic improvement, people finding good jobs, LBX Pharmacy Chain Joint Stock's employment prospects improving, income rising, progress towards a better life, in order to more easily form the foundation of social stability. It is because of this framework that over the past year and a half, my team and I have been internally researching and compiling an index that reflects the public's perception of economic issues such as inflation or deflation, asset price fluctuations, called the Morgan Stanley Social Perception Index. The benefit of this index is that, in answering whether development is still the foundation of security within this new framework, as long as this point is taken into consideration, decision-makers will definitely respond more sensitively to feedback from the people to make significant adjustments to economic and reform policies. This index is based on familiar employment situations, income confidence expectations, conditions of basic welfare guarantees, and labor disputes. Historically, whenever this index has entered a relatively lower range, it has triggered significant adjustments in economic policy, whether it was in the second half of 2015, the end of 2022, or now in September and beyond this year, where the index is in a relatively weak range, just a step away from the levels of the second half of 2015 and the end of 2022. It is because of this that I believe decision-makers have received enough feedback from the people to make a comprehensive set of policy arrangements after September. In other words, the starting point and purpose of these policies are to comprehensively improve social livelihoods, restore the normal operation of local governments, and guide LBX Pharmacy Chain Joint Stock towards a positive cycle regarding prices and asset prices. Each of these three major objectives is not easy, each is much more difficult than simply maintaining a GDP growth rate above 5% in the short term. But precisely because of this, we deeply understand that the policy since September is just a prologue, not an ending, because this first round of policies mainly focused on monetary policy and some aspects of financial measures relating to resolving existing debt issues, restructuring debt, taking only the first step. Breaking away from conventional thinking, the victory is in sight Since July last year, my team and I have released a series of reports on how China can emerge from deflation and break free from the "3D" issues of debt, deflation, and population constraints. To break free from deflation requires overcoming these structural constraints, and since July last year, the focus of our framework has mainly been on achieving this through a three-step process. This three-step process includes debt restructuring, solving existing local hidden debts and real estate debt issues. Stimulating the economy, especially consumer spending, to shift the economic structure towards consumption, and reform to stabilize confidence amongst entrepreneurs and regional governments to restore a normal business environment. Between July last year and September this year, progress on these fronts was initially slow, but following a series of policy shifts since September, at least in the first step of debt restructuring, significant progress has been made. Looking at the overall progress, about 40% has been achieved in terms of realizing these three steps to break free from deflation. This progress is faster than before, but still not enough, as the remaining two steps - stimulating the economy, especially consumer spending and reforming to stabilize corporate confidence - are still being observed and anticipated. The recent Central Economic Work Conference has sounded the horn for the second round of policies, and the announcement regarding the orientation of fiscal policy, monetary policy, and unconventional policies is considered the most positive in more than a decade. What does this mean? Part of it implies that decision-makers are attempting to break free from the three major constraints of conventional thinking to try new policies to overcome deflation. These three conventional ways of thinking, many of you may have seen in some interviews on Wall Street News, so I won't go into details. Since the end of last year, we have discussed them in various settings. Firstly, there is the conventional thinking about fiscal strength, where we used to approach central fiscal power cautiously, always balancing income and expenditure, keeping the deficit rate around 3%, and avoiding strong central stimuli. However, most countries around the world have abandoned this past golden rule and have adopted stronger central fiscal stimuli. Secondly, the direction of policy efforts. Over the past 20 years, we have been more focused on supply-side efforts, investing in infrastructure, and capacity upgrades, while sometimes neglecting the consumer side. Now, with China's infrastructure and capacity somewhat surplus in certain areas, and the return on investment decreasing, is it time to shift towards stimulating consumption? Thirdly, in the process of stimulating consumption, there are two main challenges. One is the high savings rate in China, leading to concerns about LBX Pharmacy Chain Joint Stock and hesitancy to spend. The second is the ongoing downturn in the real estate market, which constraints consumer tendencies due to negative wealth effects. Overcoming these two points requires overcoming moral risks, such as providing better social security welfare for low to middle-income groups and strategizing towards laborers, as well as considering whether intervening with central government finances and balance sheets in the real estate market downturn to shorten this painful adjustment period, balancing the need to save projects and save entities. These are debates still detaining our thoughts. Overcoming these three conventional ways of thinking, we see some light at the end of the tunnel. The Economic Work Conference appears to have taken a half step forward in various expressions, such as with fiscal deficits. I believe that the orientation towards fiscal deficits in 2025 indicates a willingness to break free from these conventional constraints and try new policies to overcome deflation.Compared to the previous year of 24 years, especially in terms of the official budget deficit rate, breaking the constraints of around 3% and giving the market confidence.The second point is that in the direction of exertion, although there is still a considerable part of the overall financial plan for next year that is about equipment updates, production capacity upgrades, and infrastructure investments, there will also be an increase in consumer stimulus, including expanding the trade-in of old products for new ones and subsidies for some middle- and low-income groups and fertility groups. I believe that by 2025, it will show that we are gradually transitioning from a focus on construction to a focus on consumption. Finally, there is the breaking of moral risks. We have also noticed that since the Third Plenum, the central government has been advocating for providing social security benefits, household registration, kindergarten enrollment for children, healthcare, and affordable housing in the places where the 250 million migrant workers reside. If these household registration benefits can be funded through central finances to fill the gaps in social security, allowing migrant workers to settle down, I think this is a major positive development, signaling that we have completely broken away from the constraints of the three major mindsets. With these glimmers of hope, I am optimistic about the direction in which we are heading after 2024. It is not just to secure GDP data for a quarter but to achieve a comprehensive improvement in social welfare, ensure the proper functioning of local governments, and move towards a positive cycle of prices and asset prices for LBX Pharmacy Chain Joint Stock. Achieving this will not be easy. So, with the first step of debt restructuring, there will be a second step of real financial stimulus for consumption, and even a third step in the future, which is how to reform and stabilize the confidence of entrepreneurs. In summary, from 2025 to 2026, China may gradually explore these policies and form a cohesive effort to ultimately break free from deflation. In this process, perhaps at the beginning, economic expectations and corporate profits have not fully recovered to a positive cycle, so what should we do? This brings us to the last topic I will address today, which is that during this difficult adjustment process, there is a glimmer of hope for breaking free from deflation, and the cognitive awareness among decision-makers is continuously deepening. However, there is still a long way to go to form the optimal combination of short-term stimulus and long-term reform, as advocated by some experts and scholars. In these one or two years of the adjustment process, what should entrepreneurs, investors, and individuals do? I don't think we need to be too pessimistic because of China's large scale. The opportunity for structural adjustment, even if its incremental growth rate is not as good as before, is still abundant. We compared China with Japan, and although many are worried about China falling into a deflation trap like Japan, there are differences. When Japan officially fell into deflation in 1995, firstly, its urbanization had already peaked. Secondly, its per capita income was higher than that of the United States at the time, with no catching-up effect, meaning its potential growth rate was lower. Thirdly, the extent of the real estate bubble in Japan was enormous, and the impact of the decline in real estate on its economy was unprecedented globally. China excels in all three aspects compared to Japan. Firstly, our urbanization is still ongoing, with two-thirds of the population living in cities. With the progress of rural and agricultural productivity in China, there is no need for one-third of the population to remain tied to rural areas, so our urbanization rate will further increase to around 75% of developed countries, or even close to 80%. In this process, the influx of population into medium and large cities, provincial capitals, and the Pearl River Delta and Yangtze River Delta will continue to promote productivity. Secondly, China's current per capita income is 1/7 of the United States', far less than when Japan's per capita GDP exceeded that of the United States in the 1990s, making China relatively poorer. However, this has its advantages, as expectations for LBX Pharmacy Chain Joint Stock for a better life, and entrepreneurs' efforts to move up the industrial chain and export more valuable goods, are much higher than in Japan. We are still in the catching-up phase, so China's potential growth rate is stronger than Japan's was at that time. Finally, the harm caused by the decline in real estate. In 1990 and 1991, Japan's real estate bubble was at an unprecedented level worldwide. At that time, the value of its real estate accounted for five to six times its GDP, so once it collapsed, many companies involved in the real estate bubble, whether in manufacturing or services, suffered greatly. Over the next decade or so, there was a recession due to asset-liability mismatches and debt repayment. Even at the peak of the real estate market in 2020, China's national real estate value accounted for only 230% of our GDP total, much lower than Japan's at the time, so the extent of the bubble is not as severe as in Japan. In the process of decline, although local government financing platforms may suffer, the vast majority of manufacturing and service sector companies have not been heavily involved in the real estate bubble and therefore are less affected and still have potential to explore. AI, Siasun Robot & Automation, green energy... the Chinese market is full of structural opportunities Based on these experiences, China has unique advantages that can allow new quality productivity to take root in China. To find some structural investment opportunities, I have summarized three opportunities. First is the landing stage of artificial intelligence (AI), followed by the rise and widespread use of industrial Siasun Robot & Automation and humanoid Siasun Robot & Automation, and thirdly, the transformation to green energy. The first opportunity may sound like what is happening in the USA with AI flourishing, but we predict that by 2025 to 2026, AI will enter a stage of practical application, where China's unique advantages will come into play, enabling a counterattack. Although the US is ahead in the field of chips, once it reaches the application stage, people are more concerned with massive data and application scenarios, and the integration with consumers and businesses. Investors who have experienced the mobile internet era are well aware that China has unique advantages in this respect. For example, in Hong Kong, we often compare AI tools from China and abroad, each with its strengths from a productivity perspective. But.Whether it's OpenAI's ChatGPT or Google's tools, they all place too much emphasis on the enterprise end and form a deep tie with the productivity of enterprises.And these AI tools in China, whether it's Douba or Kimi, everyone will find that they emphasize more on integration with consumers, and even have a lively, interesting, and entertaining aspect. This is often seen in the application phase, where China has some unique means to quickly promote it as a killer app for consumers. The data is massive, the application scenarios are diverse, this is a phenomenon of catching up with others. Similarly, apart from the application phase of AI, another advantage of China's unique overtaking in the curve is Siasun Robot&Automation. Siasun Robot&Automation has been around for a long time, but now, with AI, there is hope for the rise of industrial Siasun Robot&Automation and humanoid Siasun Robot&Automation. This is because through the application of large language models, Siasun Robot&Automation can make real-time responses to external environments, for the first time having the potential to replace human labor in some industries, especially in industries with high repetition, strong danger, and high labor intensity. Let's summarize 5 industries, such as agriculture, mining, construction maintenance, road cleaning, and catering, which are more suitable for the application of humanoid Siasun Robot&Automation. However, as we all know, during the US election period, Elon Musk, who has been in the limelight, emphasizes that his company will transition to producing more humanoid Siasun Robot&Automation. However, the Optimusgen2 they launched now has material costs as high as $50,000 to $60,000, which makes it too expensive in the US and globally, despite potential demand. However, according to our calculations, China has huge unique industrial advantages in the upstream and downstream sectors of humanoid Siasun Robot&Automation, especially in parts and assembly. Once the potential global demand for humanoid Siasun Robot&Automation is combined with China's industrial chain, the cost of each humanoid Siasun Robot&Automation can be quickly reduced from $50,000 to around $20,000, making it more cost-effective and feasible. Perhaps in the next 5-8 years, there could be a potential demand for up to 8 million humanoid Siasun Robot&Automation, with a market of around $400 billion, providing a broad space for Chinese companies to continue. Finally, it is the transformation of green energy. In fact, everyone is already very confident in this area. But now there is a new phenomenon, which is Trump 2.0, which has a policy against these green energy transitions and may even modify the inflation reduction bill introduced by the Biden administration, which includes many policies supporting new energy. This is not a bad thing for China because the rest of the world is still striving for green energy transition. In the process, whether from the technological advantage already accumulated or due to the potential withdrawal of the Trump administration from the Paris emissions reduction agreement, China can try to repair its cooperation with Europe and other regions in the field of new energy, reduce the risk of trade friction, and achieve win-win cooperation. I believe that in the field of new energy transformation, we will continue to see Chinese companies expanding globally. These three aspects are new productive forces that are currently rooted and grounded in some industries in China, which are some of our superficial understandings. Today we have discussed the impact of "Trump 2.0's policy on China and the world, expanded to a series of policies since September 24, after the Central Economic Work Conference, the next step of its purpose, the possible expected policy efforts, and the direction of some new productive forces that can be invested in in the coming years. I have shared with you briefly here, thank you.