At the fourth meeting of the Central Financial and Economic Affairs Commission in 2024, an important decision was put forward —— to promote a new round of large-scale equipment upgrades and stimulate consumer product replacement, thereby significantly reducing the logistics costs of society as a whole. This meeting represents the government’s leadership in economic development, discussing issues that always pertain to the overall situation, strategic in nature and significant in their long-term impact. The introduction of this decision will undoubtedly have a lasting impact on our macroeconomy.
Looking back, the Commission has discussed and promoted a series of historic policy directions including the “Three Tough Battles”, “Dual Circulation” strategy, “Platform Economy”, “Dual Carbon Goals” and “Common Prosperity”. Each policy shift has had a tremendous impact on the capital market, stimulating a new round of wealth accumulation. Although currently the information regarding the new policy is still being collected and market attention is not yet fully heightened, as more policy details and tax incentive measures are implemented, it will become a key factor affecting the economic trend of our economy.
Currently, our country’s economy is facing the challenge of insufficient demand, and the reason for this situation is simple: most people feel “poor” and are tight on funds. The GDP “trinity” that national economic growth relies on – investment, consumption, and export – has inevitably been affected. And when everyone becomes cautious, adhering to the cash is king attitude, the economic situation will only become more serious. Under this backdrop, people’s incomes decrease, wealth shrinks, and market conservatism increases.
Even capable enterprises that have the ability to invest might choose to wait and postpone investment plans due to observing the difficulties around them; ordinary consumers might tighten their wallets further due to concerns about the downtrend in housing and stock markets, and unstable employment. This collective pessimistic attitude will further exacerbate the economic downturn, forming a vicious negative feedback loop. To break this negative economic spiral, macroeconomic regulation is needed to stimulate the revival of the economy.
Although individuals and enterprises have consciously fulfilled their duty in cutting expenditures, we cannot simply expect them to spontaneously break the deadlock. Economist Keynes once said, “In the long run, we are all dead.” The pain that people suffer from economic depression and unemployment should not be ignored by the market’s long-term self-adjustments. History has repeatedly proven that the sufferings and political polarization caused by economic crises are not to be underestimated. Therefore, at a time when the Chinese economy urgently needs intervention, it is crucial to take swift actions to break the negative cycle.
Lastly, it is necessary to point out that logistics isn’t just an issue of courier pricing. The “sinews” of the real economy — logistics, is not only related to production and consumption but is also the bridge for domestic and foreign trade. Effectively reducing the logistics costs of the entire society, enhancing the core competitiveness of the industry and the efficiency of economic operations, is key to stable development.
In the context of deepening global economic integration, the proportion of logistics costs to Gross Domestic Product (GDP) has become an important indicator of a country’s logistics efficiency and economic vitality. In 2020, China’s logistics costs accounted for 14.5% of its GDP, significantly higher than the global average level of 10.8%, and also exceeding the average values of North America and Europe, which are 8.4% and 8.6% respectively, while other Asian countries such as Japan and South Korea are only at 8.5% and 9% respectively.
Entering 2023, the total costs of social logistics in China have changed compared to previous years, reaching 18.2 trillion yuan, maintaining a roughly equal ratio to the GDP as last year at 14.4%. Within these total costs, the respective proportions of transportation, warehousing, and management expenses have reached 53.8%, 33.5%, and 12.6% respectively.
In terms of economic decision-making, taking emergency measures to address economic difficulties is not unprecedented. The 2008 U.S. subprime mortgage crisis, for example, triggered an economic shockwave that compelled China to seek new breakthroughs in domestic demand expansion. Particularly at the beginning of 2009, when China’s exports fell into double-digit negative growth, the first quarter GDP growth rate dropped to 6.4%. The government quickly took action, launching an investment plan worth four trillion yuan involving infrastructure and real estate, and in June of that year introduced a trade-in policy for cars and appliances. The stimulative impact of these measures was significant, and China’s economic response to the crisis attracted international attention.
In the previous round of policy, the subsidies for the car and appliance rural outreach programs were mainly borne by central and provincial finances at ratios of 80% and 20% respectively. Just the car policy alone allocated 5 billion yuan, while appliances were allocated 2 billion yuan. Statistical data shows that in 2010, these two subsidy policies together stimulated over 170 billion yuan in consumption, which, compared to the central government’s subsidy input of 70 billion yuan, achieved a notable leverage effect of 1:24 on consumption.
For the current situation, we cannot simply expect policies to produce effects as quickly as before. Although we anticipate these economic measures to bring positive impacts, their effect might be weaker than in the past. This is largely because the debt leverage ratio of Chinese residents has increased significantly. In the second quarter of 2009, the leverage ratio of residents was only 20.6%, but over time, this ratio has significantly increased, meaning that the potential for consumption is not as robust as it was back then.
Although this round of policy may not yield as aggressive an effect as the last one, as a significant economic measure, it surely contains a substantial wealth effect within it. The “three big projects” in the real estate market may become new investment highlights. Similarly, if policy guidance can trigger a new round of large-scale equipment upgrades, the Juglar cycle, typically thought to be a ten-year cycle, could be on the verge of a new start.
The trade-in policy in the field of new energy vehicles is particularly crucial, but pushing it down to the county and township level markets still requires supporting infrastructure, such as the construction of charging pile facilities. Since 2020, the sales penetration rate of electric vehicles in China has greatly improved. However, as of the end of 2023, the ownership of new energy vehicles still only accounts for 6.07% of the total number of vehicles, indicating that in this field, there is substantial room for growth for both policy and market.
In the current market, the trend of “replacing oil cars with electric cars” has not weakened but still holds vast development space. Especially in regions with relatively low electric car market share, the potential for growth seems particularly prominent. Given this situation, simplistic flooding-style support measures (“flooding the market”) are clearly no longer suitable, because the further forward we go in time, the side effects of implementing broad-reaching and forceful policies (“heavy-handed measures”) are likely to grow incrementally.
Of course, considering the current economic environment, we cannot turn a blind eye to market changes and take no action. On the contrary, we must carefully take appropriate measures in hopes of positively influencing the economic environment. Here, I would like to particularly emphasize that investors may prudently pay attention to the main investment theme of the capital market, which is the opportunity for a “new round of equipment updates.”
