Source: New Economist

What does the reconstruction of wealth in high-speed economic growth mean?

Analysis of major cyclical variables usually doesn't occur for decades, but when it does, it lasts for decades. According to the current trend, these assets will be worthless in the future.

Pu Peng analyzes for you: how to adjust investment direction, which assets will appreciate, and how your career and consumption should go along with the trend.

The full text is as follows:

I am very honored to share with everyone at Taixue today. What I really want to talk about is an important core variable—population. It affects all aspects: real estate, government financial status, future infrastructure investments, and even influences everyone's preferences in investment areas.

Important core variable: population

I shared with everyone the important turning point of population back in 2018, because for China, there is a data point from 2015, at which point China's birth rate again fell off a cliff. To date, our population birth growth rate is about 0; this number has changed very rapidly over the past decade, and people are now aware of it, but in reality, this issue occurred about ten years ago, and this data has begun to impact the economy and investment.

I enjoy discussing population with everyone. Many people say you're an investor; you used to be in Hedge Funds, why not talk about the market? Why always share about aging populations, the distribution of young people's savings, risk preferences, etc.? I say I won’t cater to your tastes; I will share with you the underlying logic that I'm contemplating.

In the past few years, I've observed that I would invest in what my daughter likes, and these two things are essentially one and the same; under the significant turn of the population, our investments have guided and changed.

For example, there are now very famous new consumption concepts in the Hong Kong market, such as the Labubu doll that everyone is hanging on their bags, and the extremely popular trendy toys, anime, etc. Recently, when I spoke with some veterans in the automotive industry, we discussed how young people are now buying cars, which is very different. I said yes; not long ago, I bought a car for my daughter and found that our needs are completely different from her thoughts and needs. Do you think she would like a V8 or a V12? Does she care about mechanical performance? Would she analyze how the suspension works or how the brake pads are, or would she rather analyze if the car is cute? This car looks nice and the interior has six screens that connect comfortably. From our perspective, we feel this isn’t a car, but from her perspective, this is a car.

Why does this change occur? It is indeed due to significant demographic changes. In recent years, the primary consumer group in the market has been young people, so when analyzing the entire consumer market, you must pay attention to changes in population structure, whether in the primary or secondary market.

Those born after '85 will only usher in the silver economy when they age

Many people have told me about the silver economy for the elderly, but I have some reservations about this term because our understanding of the silver economy can vary greatly. I don't believe the silver economy emerges in the first phase of the population.

To put it bluntly, have you lived with your parents? If you have experience living with your parents, you probably know that no matter how wealthy or poor your family is, the elderly have a habit—when you leave saying, "Mom, I'll be back in half an hour," your parents will surely enter the house and turn off the lights and air conditioning. Do you think your family lacks money? They might not; consumer habits are sometimes not entirely related to wealth but also consciousness. Just like today’s young people, many say they order takeout and drink milk tea instead of buying ingredients and cooking.

This reflects the economic and social ideology; the older generation is frugal, conservative, and hardworking.

Therefore, it is indeed difficult to release the consumer power of my parents’ generation. This will turn into savings. Although they are not financially constrained, think about it: if we grow old, such as those born in '85 or '90, that is when the real silver economy will arrive.

Because their mindset is likely, "I’ve lived a difficult life; I must ensure the next generation lives well," while the subsequent '00 generation may think, "I’ve lived a challenging life; I want to live better."

This is the combination of consumption consciousness and age structure of the population. You will discover that the peaks of population, total quantity, and degree of aging—all these demographic issues must not be ignored. Especially since this major cyclical variable is not a quick variable; it doesn’t change from today to tomorrow—it’s a long cycle variable. You could say that from the reform and opening up until 2015, we might not need to analyze this issue. However, once the data from 2015 emerged, you had to analyze this issue. This is why in the nearly past ten years, I have always kept it at a very important nexus.

Population peak and the three-stage evolution of real estate

What else will demographics affect? It will also affect real estate. Real estate definitely goes through three stages: housing demand, housing and investment demand, and speculation demand.

Before 2004 and 2005, China's real estate was primarily about housing demand. Through market reforms in housing, economic growth, and population growth, we began to meet our housing needs. The second stage is housing and investment demand, which is also highly related to the population—urbanization.

The reason we say that World War II is an important node in terms of demographics is that after the war, the population structure would be reconstructed. Furthermore, there is a characteristic that I estimate many might overlook.

Take marriage and childbearing, whether to have more or fewer children—is it related to money? My answer is it's not completely related. For instance, many voices online say people are reluctant to marry, date, and have children due to overwhelming pressure, whether from buying a house or the mother-in-law’s pressure. People attribute the low birth rate to excessive debt leverage and living pressures, which is not entirely correct—it only fits within one stage's manifestation.

In fact, after the war, in poverty-stricken days, theoretically, it should be a time of fewer births, yet you often find that the worse the environment, the more births occur, and the earlier marriages happen. Therefore, population peaks exist; we place under 20 years in one peak, from 20 to 30 years in another peak, from 30 to 40 years in another peak, and from 40 to 50 years in another peak.

Once we extract population data from various countries post-World War II, we see an interesting phenomenon: the first and second post-war generations generally experienced early marriages and many childbirths. This means that your parents’ generation generally had siblings and large families; during the Spring Festival, it was common to gather for large family reunions with thirty or forty people. Now, gathering three people during the Spring Festival is difficult. These large families often resulted from early marriage and multiple births, which is evident in generations where population peaks are close together, meaning everyone could become parents around the age of 20.

Now, a 20-year-old is still a kid, 30 years old is still young, and 40 years old means considering dating and marriage. This is roughly how my child thinks now. However, this situation has its pros and cons; everything has its ups and downs, and I must emphasize that everything has both advantages and disadvantages—nothing is perfect.

So what are the benefits of the demographic dividend? After a war, all production factors related to the economy are redistributed, and the most important element many people say is technology. Not quite; humans are the most important link among all production factors. Don’t become overly reliant on technology to solve problems; if technology could solve all problems, we wouldn’t have normal cycles.

At this stage, humans are, for any country, the most important factor of production. In that phase, as long as you can sustain them, more people are better. Think about why families in Minnan must have plenty of descendants—because within all our previous economic structures, technology is weaker than people. So people become the most important variable in families and nations.

If there are sufficient numbers of people in the early post-war period, you get a demographic dividend. But all the development in countries post-World War II has basically been like this; they all experienced such a stage.

What are the downsides? First, after rapid population growth, can you sustain it? Therefore, during this phase, among the primary concerns of daily necessities, the most crucial is food: can food production match the population growth? This is what we mean when asking whether we can ensure production factors become a positive aspect rather than a burden.

Secondly, what are the downsides? The answer is that the population peaks are too close together, and the effects of this will become apparent in ten or twenty years. When wealth is reconstructed amid rapid economic growth, closely packed population peaks would mean a shift in real estate from housing to investment, and from investment to speculation, forming a standard three-stage peak. In these three stages, between the second and third segments, the beneficiaries of investments and those who take on debt are very close.

Reform and opening resulted in a fortune, and then early out of the need for housing improvements, we obtained homes. At that time, the post-'80s generation hadn’t been born yet. When the '80s generation began to arrive in cities, starting families and careers, housing prices definitely rose. They needed to acquire these houses from the '60s and '70s generation, which meant that there was no generational effect in this process—no intergenerational transfer.

Wealth is similar; the act of sharing the cake hasn’t been passed on to you yet, so you end up with a smaller piece of the cake. In fact, all countries are like this, not just China, because after the war, all countries have population peaks that are too close together; thus, it leads to similar problems.

Next door in Japan, next door in South Korea, even Southeast Asia faces the same problems. So I have previously mentioned something called intergenerational distribution; wealth and population indeed experience a redistribution process. But this process is simple: if it’s too fast, part of the population receives it, and part doesn’t; if it’s too slow, labor shortages will arise.

I've told many people that you'll see the Bank of Japan will raise interest rates, and you’ll see inflation in Japan. Many people are puzzled, saying that 0 to 1 growth in its economy is already impressive, so how can it face inflation? This is a huge misunderstanding.

For most workers, what determines your labor income? Market economics tells you it’s supply and demand. In simple terms, if supply increases and demand remains small, the value of human labor diminishes; this is the root of deflation. If the supply of people decreases while demand can be guaranteed to remain unchanged—even if demand doesn’t need to grow—it will lead to a situation of supply shortages, causing prices to rise.

Japan is thirty years ahead of us; this cycle adjustment of demographics is crucial. So now, the big question is, does Japan need rapid economic growth to achieve inflation? Many people make a conceptual error: economic growth is a total amount, but when it comes to income growth for residents, there’s a critical link missing called distribution. Therefore, I have never said that total growth is needed to pull up resident income; instead, it means keeping the total stable and not letting it drop.

So I previously mentioned that you might try to understand Japan's intergenerational distribution, and many users would say otherwise, implying it’s simple: if you grow old, your money will be spent by your children.

In other words, if the proportion of people over 65 reaches its current level, the latest data should be 200 million. When you reach this number, does it mean I will just give all my money to my children? What I want to convey is that many times, people tend to understand things too unilaterally. Think about it again—if you are 65 years old, what would you do regarding your children? Would you give them all your savings, all your money, your pension? If those in their sixties are still vigorous and you did this, I jokingly say your miserable retirement life is about to begin.

Why does Japan show such a situation? An elderly person has children, yet after they pass away, you can open up their drawers and discover they left behind millions of yen. Some online jokes, although funny and entertaining, sometimes reflect a deep truth. For example, if I gave all my money to my children, and I end up in the hospital where I could still be treated, is it possible that my tubes would be pulled because of that? Or, if my child faces difficulties in life, I can aid him, but I won’t give him all my wealth, so within the whole East Asian cultural framework, there is a certain characteristic: the transfer and inheritance of wealth often occur en masse only after the elderly have passed away. There can be small-scale transfers beforehand, like supporting you to buy a car, giving you a little, but entirely giving all the money for your discretion—it’s not going to happen until I’m gone. Thus, I clearly told my children that before I pass, I will spend. I feel I can assist you to some extent, but after I’m gone, this money becomes yours; in principle, until I’m gone, it’s still mine.

Decreased risk appetite for investment, increased savings

Let me ask you another question: do you know that when a society creates wealth, the initial creation and accumulation of wealth often concentrate on that generation? So what happens when this generation grows old?

At this point, it relates to our investments: risk appetite decreases, and savings increase. Many attribute this phenomenon to a lack of confidence. I don’t quite agree because the term lacking confidence assumes we all are the same, have the same age, and risk preferences. In such cases, why do people prefer savings? It might be due to a lack of confidence in the current external environment, economic conditions, or investment climate. However, for me, people are different, and the distribution of wealth is different.

Therefore, what is an important factor affecting current risk appetite? In 2018 and 2019, I shared with many institutional persons that it would be very difficult to find a 3% fixed deposit interest rate in China moving forward; our rates could continuously decline. Back in 2018 and 2019, I discussed with them the issues of population, rapid wealth creation, and the economic miracle accumulating in one generation which, once solidified, would produce a preference for savings and aversion to risks.

So, do you know what elderly people prefer? They prefer thriftiness and low-risk investments; for individuals in their fifties and sixties nearing retirement, if asked for investment advice, I typically advise on fixed income, dividend stocks, coal, oil, water, gas, electricity—monopolized industries—with a decent 4% dividend being favorable.

If I transferred this plan to a 20-year-old, that young person would say, after a year of hard work, I saved up 50,000 yuan; you want me to compound that? Is there a way to All in and gamble, turning 50,000 into 100,000, 100,000 into 200,000, or 200,000 into 400,000? I understand this; I would never say you are reckless or overly speculative. This reflects that different individuals, with differing age structures, possess vastly different risk appetites.

So I often tell young people: take a gamble; a bicycle could become a motorcycle. But if you lose, you are still young, so don’t jump off a bridge; you have time and opportunities aplenty. Could I advise a 50-something who is about to retire to gamble? After telling him, if he loses, do you think he will still have the chance? For him, that means he needs stability; even if the interest rates are low, he seeks stability. Hence, you will naturally observe a decline in the overall wealth investment risk appetite of society. Of course, within this declining landscape, there are still exciting worlds for young people; it's just that the exciting aspects are completely different.

In recent years, let's be honest; do you have additional items? For instance, do you have wrist beads or walnuts? Do you have stamps? Do you have redwood at home? Do you have jade, agate, or vintage calligraphy and paintings? Of course, everyone knows that those items I just described have declined significantly over the last decade, right?

I can tell you I long ago sold everything. Some say these are all bubbles, while I view them as heirlooms. I can tell you I strongly disagree. Why? Once this generation has passed, I assert that our items will also hold no value. Value is ascribed by people; you must learn to understand what gives something value.

That is to say, you don’t need to define or evaluate what is valuable, because people are the core of what ascribes value. When people change, when wealth changes, the game also alters accordingly; this is the same principle.

So in recent years, what have I invested in? I only invest in things that young people like; I never use my value system to evaluate. For instance, when my daughter queues for milk tea, do you understand this marketing method? Waiting four hours for a cup; my value system tells me that if I had to wait even ten minutes for this, I would find it unreasonable.

But that doesn’t matter; since young people like it, we go along with this marketing approach; thus, in recent years, the popular marketing modes have been like this. Don’t promote how safe, high-quality the cars are or how big their engines or how great the brakes are. You need to market that I have six screens, and you can play games inside. You should promote these aspects. Why cater to consumers? Of course, there are issues with this, but young people's perceptions vary.

In the future, these assets will have no value

It also relates to other matters. Since real estate has already concluded, after 2018, I believe the phase of real estate speculation has ended; the stages of living and investment are also finished. The next stage leaves only one, which is living, as living addresses a person's essential needs.

So do you know, historically, for example, the real estate bubbles in neighboring Japan, South Korea, or even the United States? What was the peak in these processes? It was speculation—frenzied speculation. Speculation is when I pay exorbitant prices for items I do not need. Vacation homes, tourist properties, and retirement lands in real estate represent the peak of that bubble.

Recently, due to my recovery, I returned to Chengdu. Do you know what’s happening in Chengdu right now? During an expansion, people move outwards; during a contraction, they return to the second and third rings. Why? Because we have four elderly folks in our home. I’ll be honest: for future retirement, it won't be in tourist destinations or vacation hot spots, due to inadequate public facilities.

Thus, you will find many folks originally moved from the second and third rings to Lushan and Luhua, only for them to return to the second and third rings as they age. This is due to the need for community, living facilities, medical resources, and so on. If urbanization continues to expand, you might still have opportunities; however, should urbanization stagnate, it implies that previously existing public resources will also concentrate in core areas.

Finally, you will find, for instance, that the height of Japan’s frenzy was those ski resorts, vacation apartments, and seaside condominiums. On the surface, Japan's housing price index has now returned to before the 1990 real estate bubble collapse, but inside, differentiation is significant: around the concept of “living”—those with housing and occupation are coming back, while those without will never return. We can envision the future; based on our current population trends, assets over the next ten to fifteen years will certainly hold no value. Some might argue they can rent them out, generating cash flow of 100 to 150 yuan a month, which is insufficient to counter the depreciation of the property. This is the underlying issue.

At the same time, it involves another aspect—construction infrastructure. One number that many might not know: the primary labor force, aged 24 to 45, forms the main tax-paying group in society. They occupy a critical share of the total population; this ratio cannot drop below 25%. In other words, if the primary tax-paying demographic falls below 25%, meaning only one out of every four people is a taxpayer, I can assure you that problems will arise.

Once this ratio reaches a corresponding historical data point, fixed asset investment peaks will appear, and the peak of urbanization will emerge.

Of course, some might use Japanese data to indicate that the peak of urbanization seemed to climb when that statistic was released, but pay attention to what that final wave of urbanization represents: it is not the cities expanding that boosts urbanization rates, but the disappearance of villages. Japan's Heisei era mergers, where towns became extinct, led to urbanization. This, in China, could mean many villages will no longer exist; with villages vanishing, the urbanization rate will naturally rise.

The final result is that the road and rail public spending leading to villages won’t need to be maintained anymore. It’s improbable for a bus to continue running because five households reside in a village, nor will six new subway lines be constructed simply because a major urban area's population shrinks from one million to 800,000 or from 600,000.

If we rewind to 2008, there was both demand for workforce and economic growth. That means all elements were in place, and all investments could be made without concerns about future returns, which is why we have the classic line: to get rich, first build roads. This statement is correct, but the precondition is that several factors remain unchanged—people remain unchanged, economic growth remains unchanged.

Thus, our neighboring countries, Japan and South Korea, experienced a peak period; fixed asset investments would drop to about half of their original levels. What corresponds to the population during this time? It's that moment when the primary labor force and main taxpayer group dips below 25% of the total population, and then how can public finance, subways, and infrastructure be sustained? Looking ahead over the next ten years, it is highly likely that we have also reached our peak in fixed asset investments.

So to put it bluntly, for instance, if real estate investment reverts to "living," the answer is: where are the people? Wherever there are people, there is "living," and once we return to "living," what will occur? The disparities will be vast; the differences between old and new houses will be enormous, just like aging people; those dilapidated old houses can no longer be demolished. Redevelopment fundamentally arises from a peak population era and the urbanization rate's increase process. Once this process is completed, many old and dilapidated houses will be extremely difficult to undergo large-scale demolition, which will have consequences. The maintenance costs for these run-down houses when lived in will be incredibly high, leading to a phenomenon where the price gap between new and old houses will be extraordinarily vast—even within the same neighborhood. Of course, I believe other social factors will gradually begin to lose importance; hospitals will become crucial, while schools will no longer hold as much significance.

So at this time, it’s very simple—for you, is it about buying school district homes or buying medical district homes? You should contemplate. Hospitals, in this context, represent public investments for China, and are unlikely to expand or construct new hospitals within a city.

At this moment, you will see limited resources concentrating within cities. Thus, the final development will inevitably cluster around major cities; this is beyond any doubt and is reflective of the population changes we are currently witnessing.

Earlier, we discussed population issues, real estate demographics, our personal investment issues, and even the connections between population and infrastructure investment, as well as government spending. What I aimed to share with you today is the significant importance of analyzing these major cyclical variables. Such variables typically occur over decades but, once they do, they too will last for decades. Thank you all.