Source: New Economist

What does the restructuring of wealth during rapid economic growth mean?

Analyzing long-term cyclical variables is a rare occurrence, happening only once every few decades, but when it does happen, it can last for decades. Based on current trends, these assets will have no value in the future.

Fu Peng explains: How to adjust your investment direction, which assets will appreciate in value, and how to align your career and consumption with market trends.

The full text is as follows:

It is a great honor to share with you all at Taixue today. What I really want to talk about is a crucial variable – population. It affects many aspects, including real estate, government finances, future infrastructure investment, and even your investment preferences.

Key core variable: Population

Back in 2018, I shared with everyone a significant turning point in population, because in 2015, there was data showing that China's birth rate had once again plummeted. Now, our birth rate is roughly zero. This figure has changed very rapidly over the past decade, and everyone has noticed it now, but this actually happened 10 years ago, and this data has already begun to impact the economy and investment.

I enjoy talking to people about population. Many people ask why I don't talk about the market, since I'm an investor, and I used to work in a hedge fund. They say I always share things like population aging, the distribution of young people's savings, and risk appetite. I tell them I won't cater to their tastes; I'll share more directly the underlying logic I'm thinking about.

Over the past few years, I've observed my daughter and I've invested in whatever she likes. In fact, these two things are essentially the same thing: under the major shift in population demographics, our investments have undergone guidance and changes.

For example, there's a well-known new consumer concept in the Hong Kong market right now: Labubu dolls hanging on people's bags, and the trendy toys, anime, merchandise, badges, and standees that have been incredibly popular in the last two years. Even when I recently talked with some veterans in the automotive industry, we all agreed that young people's car-buying habits are completely different now. I agree. A while ago, I bought a car for my daughter, and I discovered that our needs and her ideas and desires were completely different. Do you think she'd prefer a V8 or a V12? Would she like mechanical performance? Would she analyze the suspension, the brake pads, or would she analyze how cute the car is? This pink car looks great, the interior has six screens connected together, it's very comfortable. From our perspective, we wouldn't think it's a car, but from their perspective, it is.

Why did this change occur? It's actually due to significant demographic shifts. In recent years, the primary consumer group has been young people. Therefore, when analyzing the overall consumer market, you must pay attention to changes in population structure, whether in primary or secondary markets.

The silver economy will only arrive when those born in the 1980s get old.

Many people have talked to me about the silver economy for the elderly, but I have some doubts about this term because our understanding of the silver economy can be very different. I don't think the silver economy exists in the first stage of population development.

To put it simply, have any of you lived with your parents? If you have experience living with your parents, I believe you know that regardless of whether your family is rich or poor, the elderly always have one habit—when you go out and say, "Mom, I'll be back in half an hour," your elderly relative will definitely come in and turn off the lights and the air conditioner. Do you think your family is short of money? Probably not. Consumption habits are sometimes not entirely related to wealth; they are also related to mindset. Take young people today, for example. Many people say that young people nowadays order takeout and drink milk tea, and don't buy groceries or cook anymore.

In fact, this is the ideology of economics and society. The older generation is frugal, thrifty, and hardworking.

Therefore, it is actually very difficult to unleash the consumption power of my parents' generation at this stage. It will turn into savings. Although they are not short of money, we can think about it. When we get old, for example, when the post-85s and post-90s generations get old, that is when we will truly usher in the silver economy.

Because their thinking is probably, "I've had a hard life, I want the next generation to live well," and then the next generation after them, the 00s, might think, "I've had a hard life, I want to live even better."

This is because when consumption awareness and population age structure are combined, you will find that population peaks, total numbers, and the degree of aging are all factors that cannot be ignored when it comes to population issues. In particular, this long-term cyclical variable is not a fast-moving variable that changes today or tomorrow; it is a long-term cyclical variable. It can be said that from the reform and opening up until 2015, we may not have needed to analyze this issue. However, once the data for 2015 came out, you had to analyze this issue. This is why, for me, for the past ten years or so, I have always placed this matter in a very important position.

Population Peaks and the Three-Stage Evolution of the Real Estate Market

What else will population affect? ​​It will also affect the real estate market. The real estate market inevitably goes through three stages: demand for housing, demand for housing and investment, and speculative demand.

Before 2004 and 2005, China's real estate market was driven by housing demand. We began to meet our housing needs through housing market reforms, economic growth, and population growth. The second stage is driven by housing and investment demand, which is also highly correlated with population growth—urbanization.

Why do we say that World War II is a very important turning point in the topic of population? Because the population structure will be restructured after the war, and it has another characteristic that I suspect many people will overlook.

For example, does getting married and having children, or having many or few children, have anything to do with money? My answer is that it's not entirely related. For instance, many voices online say that people are unwilling to get married, date, or have children because the biggest problem is the immense pressure, whether it's the pressure of buying a house, the pressure from the mother-in-law, etc. People attribute this low birth rate to excessive debt leverage and excessive life pressure, but this is not entirely accurate; it only reflects the situation at a certain stage.

In fact, after the war, in those impoverished and difficult times, theoretically there should have been fewer births. But you often find that the worse the environment, the more births there are and the earlier people get married. So there is a population peak. We put those under 20 years old in one peak, those between 20 and 30 years old in another, those between 30 and 40 years old in another, and those between 40 and 50 years old in yet another.

After analyzing the post-World War II populations of various countries, we see a very interesting phenomenon: the first and second generations after the war generally married, had children, and had many children at an early age. In other words, your parents' generation usually had siblings and large families. During the Spring Festival, these families would gather together, with a large family of thirty or forty people. Nowadays, it's not easy for even three people to get together for the Spring Festival. These large families are often the result of early marriage, early pregnancy, and many children. The population peaks of each generation are very close, meaning that people can become parents around the age of 20.

At 20, you're still a baby; at 30, you're still young; and at 40, you can start thinking about dating and marriage. That's pretty much how my kids are thinking right now. But things have their pros and cons. Everything has its advantages and disadvantages. I must emphasize that everything has its pros and cons; nothing is perfect.

So what are the benefits of the demographic dividend? After the war, all factors of production related to the economy are redistributed, and many people say that the most important factor is technology. But that's not entirely true. People are the most important link among all factors of production. Don't be superstitious about technology. Solving all problems requires technology. If technology could solve all problems, we wouldn't have normal cycles.

Therefore, at that early stage, people were the most important factor of production for any country. As long as you could afford to support them, the more the better. You can think about why families in southern Fujian must have a large population. In all our previous economic systems, technology was weaker than manpower, so people became the most important variable in all families, households, and countries.

If there is a sufficient population in the early post-war period, there is a demographic dividend. In fact, this has been the case for almost all countries after World War II; they all went through such a phase.

What are the drawbacks? First, can we afford to support the population after such rapid growth? So, regarding the basic necessities of food, clothing, housing, and transportation, especially food, can we ensure that the growth rate of production factors is in line with the population growth rate? This is what we mean by whether we can ensure that production factors become a positive force rather than a drag.

Secondly, what are its drawbacks? The answer is that the population peak is too close, and its impact will only become apparent 10 or 20 years later. After wealth is restructured during periods of rapid economic growth, a population peak that is too close means that housing will form a standard three-stage peak, transitioning from housing to investment, and from investment to speculation. In the second and third stages, housing will be very close to both the beneficiaries of investment and those burdened with debt.

We gained a fortune through reform and opening up, and in the early days, we acquired housing to improve our housing needs. At that time, the post-80s generation had not yet been born. When the post-80s generation started to move to the city and start families, housing prices were bound to rise. They would definitely need to take these houses from the post-60s and post-70s generations. This means that there will be no intergenerational effect in this process, which is the generational gap effect.

The wealth is the same everywhere; the act of dividing the cake hasn't even been passed on to you yet, so you've already been given a slice. Actually, this is the same in every country, not just China, because all countries experience a similar problem after a war, due to a population peak occurring too close together.

Neighboring Japan, neighboring South Korea, and even Southeast Asia face the same problem. So, as I mentioned before, there's a concept called intergenerational distribution. There's actually a redistribution process between wealth and population, but this process is quite simple: if it's too fast, some people will get a share while others won't; if it's too slow, it will lead to labor shortages.

I've told many people that they will see the Bank of Japan raise interest rates and that Japan will experience inflation. Many people don't understand this, saying that its economic growth of 0 to 1 is already quite good, so how can it experience inflation? This is a huge mistake.

For most workers, what determines your income and salary? The market economy tells you it's determined by supply and demand. Simply put, if the supply of labor is large and market demand is small, the value of human labor decreases, which is the root of deflation. If the supply of labor is small, but demand remains constant, even if demand doesn't need high growth, a shortage of labor will still result in a supply shortage, and prices will still rise.

Japan's demographic cycle adjustment is crucial, as it occurred a full 30 years earlier than ours. Therefore, the major question now is: does Japan need rapid economic growth to manage inflation? Many people make a misconception: economic growth is a total quantity, but there's a crucial link between economic growth and household income growth—distribution. So I've never said that Japan needs high overall growth to drive up household income; rather, it needs to ensure that the total quantity doesn't decrease.

So, as I mentioned before, I said you can try to understand Japan's intergenerational distribution. Then many netizens said that's not right. Mr. Fu, the idea is very simple: if you get old, your money will be spent on your children.

In other words, if people get old, say, if the proportion of our population over 65 reaches its current level, the latest data is about 200 million. So, once you reach that number, does that mean I'll just give all my money to my children when I'm old? Actually, what I want to say is that people often have a very one-sided understanding of many things. Think about it again: if you were 65, what would you do with your children? For example, would you give them all your savings, all your money, your pension, your retirement income? If you, at 60, are still full of energy and do this, I jokingly say that your miserable retirement life is about to begin.

Why does this situation occur in Japan? An elderly person may have children and grandchildren, but after they pass away, you can always open a drawer in their wardrobe and find that they left behind tens of millions of yen. Some jokes online are funny, but sometimes they reflect very aptly. For example, if I give all my money to my children, and I end up in the hospital, even though I can still receive treatment, I might have my lifeline pulled. Or, if my children face financial difficulties, I can help them financially, but I won't give them all my wealth. So, within the framework of East Asian civilization, there are certain characteristics where the transfer and inheritance of wealth often occurs on a large scale only after the elderly person has passed away. Small-scale transfers are possible beforehand, like helping you buy a car or giving you some money, but giving you all the money to spend freely is impossible before I'm gone. So, I've made it very clear to my children: I'll spend it before I'm gone, and I can help you if I feel I can, but the money is only yours after I'm gone. In principle, the money is still mine as long as I'm alive.

Investment risk appetite declines, savings rise

Let me ask you another question. Do you know that when a society creates wealth, the early wealth creation and accumulation is often concentrated in that generation? So what happens when that generation gets old?

This is actually related to our investments: risk appetite decreases while savings increase. Many people say this phenomenon is due to a lack of confidence, but I don't quite agree. The statement about a lack of confidence assumes that everyone is the same—the same age, the same risk appetite. In that case, people might prefer to save because they lack confidence in the current external environment, the current economic situation, and the investment environment. But in my case, people are different, and wealth distribution is different.

So what is a key factor influencing current risk appetite? Back in 2018 and 2019, I shared this with many people in various institutions, saying, "Have you considered that in China, finding a fixed deposit with a 3% interest rate will be extremely difficult in the future? Our interest rates may continue to decline." In 2018 and 2019, I discussed issues like population, rapid wealth creation, and the accumulation of economic miracles within a single generation. This solidification leads to a problem: a preference for savings and a dislike of risk.

So do you know what older people like? They like to save money. Older people prefer low-risk investments. For example, in the investment circle, I often say that when people in their 50s or 60s, or retirees, ask me for investment advice, I basically recommend fixed income, dividends, and monopolistic industries like coal, oil, water, gas, and electricity. A 4% dividend yield is considered good.

I applied this scenario to a 20-year-old, who said, "I worked hard for a year and saved 50,000 yuan. Now you want me to compound my money? Is there such a thing as going all in and turning 50,000 into 100,000, 100,000 into 200,000, and 200,000 into 400,000?" I expressed my understanding. I would never say that you are reckless or overly speculative. This is simply because different people and different age groups have completely different risk preferences.

So I often tell young people, "Take a gamble, and you might turn a bicycle into a motorcycle." But if you lose, you're still young; don't jump off a bridge. You have plenty of time and opportunities. Would I tell a person in their fifties, about to retire, to gamble on turning a bicycle into a motorcycle? If I told them that, and they lost, do you think they'd still have a chance? So, for them, what they want is stability, even with low interest rates. Therefore, you naturally see a decline in the risk appetite for wealth investment across society. Of course, even amidst this decline, there's still a vibrant world for young people, just with entirely different kinds of excitement.

Let's be honest, in recent years, do you still have any other things on hand? For example, do you still have beaded bracelets or walnuts? Do you still have stamps? Do you still have redwood furniture? Do you still have jade, agate, antiques, or calligraphy and paintings? Of course, everyone knows that the things I just described have probably all gone downhill in the last 10 years, right?

I can tell you I sold everything a long time ago. Some people say these are all bubbles, and that what I have is a family heirloom. I can tell you I strongly disagree with that. Why? Because once this generation is gone, I can tell you that what we have will still have no value. Value is what people assign. You have to learn to understand whether something has value or not.

In my words, you don't need to define or evaluate what is valuable, because people are the core element that gives value. When people change, when wealth changes, the game changes too; it's the same principle.

So what have I invested in these past few years? I've invested entirely in things that young people like. I never use my own values ​​to judge. For example, when my daughter and kids queue up for milk tea, do you understand this kind of marketing? Queuing for 4 hours to drink a cup of milk tea? My value is that if I have to wait for even 10 minutes for this stuff, I don't think it's worth it.

But that's not important. Since young people like it, we'll follow this marketing approach. That's why all the popular marketing methods in recent years are like this: don't advertise how safe the car is, how good the quality is, how big the engine is, or how good the brake pads are. You should advertise that you have six screens and you can play games on them. You should advertise those things. Why cater to consumers? Of course, it has some problems, but young people's perceptions are different.

These assets will be worthless in the future.

What else is involved? Since the real estate market is essentially over—we believe the speculative phase of real estate investment ended after 2018, and the phase focused on housing and investment has also ended—the next stage is simply housing. Housing is a basic human need for food, drink, and shelter; without people, where would housing come from?

So, you know about historical real estate bubbles in countries like Japan, South Korea, and even the United States. Do you know what the peak of this process was? It was speculation—crazy speculation. Speculation meant paying a high price for things you didn't need. Vacation homes, tourist properties, and retirement homes were all at the peak of the bubble.

Recently, I returned to Chengdu to recuperate. Do you know what's happening in Chengdu right now? During expansion, people move outwards; when it contracts, you'll find yourself returning to the second and third ring roads. Why? Because all four of my elderly relatives are still alive, and I'm being honest. Regarding future retirement, people won't actually retire in tourist destinations or resorts because of the lack of public facilities. So you'll find that many people who moved from the second and third ring roads to places like Lushan and Luhu, and then when they get older, say around 70, they eventually return to the second and third ring roads for retirement, because of the vibrant atmosphere, amenities, and medical resources. If urbanization continues to expand, you might still have opportunities; but if urbanization stagnates, it means that the existing public resources will remain concentrated in the core areas.

So, in the end, you'll find that, for example, during Japan's most frenzied period, the focus was on ski resorts, vacation apartments, and beachfront apartments. On the surface, Japan's housing price index seems to have returned to pre-1990s real estate bubble levels, but the underlying situation is extremely polarized. It all boils down to the word "housing." Those with existing housing and residents have returned, while those without housing and residents will never return. Let's imagine the future: given our current population trends, these assets will be worthless in the next 10 to 15 years. Some might say, "I can rent them out, and the cash flow will be 100 to 150 yuan a month, which won't even cover the wear and tear of the aging building." That's the problem.

At the same time, it involves another thing, namely infrastructure. There's a figure that many people may not know: the main working-age population, that is, people aged 24 to 45, are also the main taxpayers in society. Their proportion of the total population is crucial; this proportion cannot be lower than 25%. In other words, if the main taxpayers fall below 25%, that is, if only one out of four people pays taxes, I can tell you that problems are brewing.

When this ratio reaches a certain historical level, the peak of fixed asset investment and the peak of urbanization will appear.

Of course, some might cite Japanese data to suggest the peak of urbanization, and the figure did seem to surge when it was first released. But consider the urbanization rate itself: what marked the final wave? It wasn't the expansion of cities driving the urbanization rate, but rather the disappearance of rural areas. Japan's Heisei-era mergers, where cities and towns disappeared, led to urbanization. In China, this could mean many villages would become deserted, and the urbanization rate would naturally increase accordingly.

The end result is that public expenditures such as roads and railways leading to rural areas will no longer be necessary. It's impossible to continue providing bus service to a village with only 5 households, or to insist on building 6 subway lines just because the population of the main urban area of ​​a city has shrunk from 1 million to 800,000 to 600,000.

If we turn back the clock to 2008, there was plenty of manpower and economic growth. In other words, all the necessary factors were in place, and there was no need to worry about future returns on investments. That's why there was the classic saying, "To get rich, build roads first." This statement is correct, but it's based on the premise that several factors remain unchanged: the population and economic growth.

So, the same applies to our neighbors Japan and South Korea. After the peak, fixed asset investment will probably drop to about half of what it was before. And what will the corresponding population be? That is, when the proportion of the main workforce and the main taxpayers in the total population falls below 25%, how will our public finances, subways, and infrastructure be sustained? Looking ahead 10 years, it is highly likely that we have already reached the peak of fixed asset investment.

So, to put it bluntly, if we consider real estate investment in terms of "housing," the answer is: where are the people? Wherever there are people, there is "housing." And what happens once we focus on "housing"? The differences are enormous. The difference between old and new houses is huge, just like as people age. Those old, dilapidated houses can no longer be demolished. Demolition is essentially a product of peak population growth and the process of increasing urbanization. Once this process is complete, it will be very difficult to carry out large-scale demolition of old, dilapidated houses in many places. What will that mean? The maintenance costs of these old, dilapidated houses will be incredibly high. A phenomenon will emerge where the price difference between new and old houses will be enormous, even within the same area. Of course, I think other social factors will gradually become less important; hospitals will become crucial, while schools will become less important.

So now it's very simple: do you want to buy a house in a good school district or a house in a good medical district? You need to think about it. In China, hospitals are also public investments, so it's highly unlikely that a city will expand and build more hospitals.

At this point, you'll find that limited resources are concentrated in the city, so development ultimately revolves around large cities as clusters and cores, without a doubt. This is also the population change we are seeing now.

We've just touched on population issues, including population and real estate, personal investment, and even the relationship between population and infrastructure investment and government spending. What I mainly want to share today is the importance of analyzing these large-scale cyclical variables, which typically occur only once every few decades, but when they do, they last for decades. Thank you.