Lu Zhengwei: Multiple factors eroding entrepreneurial confidence as economic structure and asset allocation face major reshuffle

On June 17, 2023, the 45th Tsinghua University Forum on China and the World Economy was held inside the Weilun Building’s main lecture hall on campus at Tsinghua University’s School of Economics and Management. The biannual event was hosted by Tsinghua University’s Academic Center for Chinese Economic Practice and Thinking (ACCEPT) under the theme of 2023 Mid-Year Economic Outlook. During the forum’s proceedings, Lu Zhengwei, Chief Economist of Industrial Bank, participated in a roundtable discussion alongside other distinguished guests where he commented on the current state of China’s economy. 

At this moment, the performance of China’s real economy is tolerable, but it certainly cannot be said to be especially good. Entrepreneurs are unable to see what the future has in store, which has only served to further fuel their anxieties and add to their lack of confidence. As for the main factors defining the present state of China’s economy, the first factor is that the current external and internal environments have undergone significant changes: with the changes to the external environment reflected in a decline in the amount of foreign import demand from Europe and the United States and with the changes to the internal environment reflected in a lack of uniformity in regulations despite continuous improvements to regulatory policies. The second factor is the transformation of the economic structure, which is mainly exemplified in a diminished role for the real estate sector as a driver of China’s economic growth, and with this course correction being irreversible. The third factor is the uncertainty associated with the development of related technologies in the process of achieving the “dual carbon” climate goals, which requires the government to establish the necessary institutional arrangements in a timely manner to provide safeguards.

As for the asset allocation of local households in China, the most important asset allocation in the future will mainly involve fixed income assets and equities, while housing prices on the whole will no longer have the chance to enjoy sharp increases as had previously been the case, and may even be unable to outperform inflation over the longer term. Having said that, if people opt into investing in stocks or equity funds, they will first need to do a good job in preparing themselves by making the necessary psychological readjustments. According to historical data provided by several asset management companies, the surest way to ensure investment returns is to hold onto assets for the long haul. However, only 2% of investors hold onto their assets for more than a duration of 10 years, and with average returns doubling over that period. Normally, all funds will see their net value undergo a dramatic downswing at some point within a 10-year period, so for those unable or unwilling to bear this kind of risk, it may be advisable for them to select an index fund instead. A reasonable expectation for an annualized return on investment in the stock market could be set at 6%, with many of the biggest gains in net asset value typically being made within a 20-day timeframe. Given the challenging economic situation at present, the profitability of companies listed on the Shenzhen Stock Exchange’s ChiNext and the Shanghai Stock Exchange’s STAR Market will be markedly better than the average level for China’s A-share market, with the former therefore proving to be more worthwhile to hold onto moving forward.