Having an "asset shortage" is not a new concept in China. During the years of 2015 and 2016, the Chinese investment market was hit by an "asset shortage". At that time, China's economic growth continued to decline, corporate economic benefits too fell as a result and the Chinese government was attempting to push for structural adjustments, including deleveraging and de-capacity. This had resulted in a reduction in the supply of advantageous assets, which led to an "asset shortage" in the market.
In 2019, talks about "asset shortage" once again emerged in the Chinese market and the economy. Take the bond market as an example. At the beginning of 2019, the domestic bond market in China had high subscription multiples, and coupon rates were repeatedly lowered, which led to the bond market to be wary in preparations of possible impacts brought about an "asset shortage", and this occurrence was considered to be "the recurrence of the asset shortage in 2016."
The so-called "asset shortage", in layman's terms, means that the investment is only marginal or even unprofitable, resulting in the absence of suitable areas to place the investment funds. In such a scenario, the funds would be either idling in the banking system or flowing to the virtual economy like real estate. As a result, the asset bubble continues to be blown up, yet the real economy was stuck in a dilemma where neither investments nor loans could be located.
Regarding the cause of the "asset shortage", the research team of ANBOUND believes that the underlying factors are that the economy is experiencing problems, while economic growth is slowing down, and market confidence continues to be insufficient. This leads to lower expectations for asset appreciation to take place. From time to time, the "asset shortage" that appears in China today can be divided into two situations:
The first is the relative "asset shortage" caused by the expected difference in investment returns. Because investors expect returns to be high yet when the actual returns are much lower than expected, investors would feel they have no asset targets to invest in. For example, China's economy grew at a relatively high rate for a long period of time in the past, and capital could easily obtain high returns. However, now that economic growth has suddenly slowed down, and it is now not easy for capital to find high-return investments, so a wait-and-see situation has occurred, hence the appearance of relative "asset shortage".
The second situation is that the economy is in a rather poor state, either wallowing in a slowdown or even having negative growth. When the real economy is in a slump, the relative risks of capital markets would rise. At this time, obtaining high investment returns would be more improbable, and it would be difficult to even locate investments with stable returns. This kind of situation where there are no real targets to invest in because of scarce investment targets, is in fact the scenario of real "asset shortage". This is the real problem encountered in economic development. Since this year, the downward pressure on the Chinese economy has increased, and the dilemma faced by enterprises have also intensified. The "asset shortage" that appears in this scenario is caused by this second situation.
It should be pointed out that no matter which of the above two situations occur, it does not necessarily mean that the market has collapsed, as capital and investors have not completely left the market. Rather, it is just that the investors have a more negative attitude towards the market and they adopt a wait-and-see position. If a major depression occurs and the capital market collapses, only then would capital and wealth be wiped out in that crisis.
In reality, the market's differences over the cause of the latest "asset shortage" in China are not significant. The question that really diverges is how to alleviate the current "asset shortage. There are different views on solutions and responses. Some market analysts have concluded that there are currently two types of views. The first is that monetary policy is required to solve problems. That means on the one hand, China must properly control the total amount of money, because there is already a lot of money in the market and the liquidity is becoming saturated. On the other hand, China must also be precise in its policies so that the money released by the easing policy can flow to the real economic sectors that really have a need for the funds.
Another view is that the economy has its own laws of development, and that any "asset shortage" should be viewed from the long-term perspective. As the Chinese economy can no longer grow at a high rate like it did in the past, assets with large investments and high returns will become rarer to find. Therefore, when the surplus capital encounters a stagnant or even contracted asset market, an "asset shortage" will be inevitable. In this case, the short-term solution can be to liberalize market access and allow valuable assets to be traded in the market. The medium- and long-term approach is to focus on the economic fundamentals in order to form a stable, balanced, and sustainable economic development. Under such circumstances, only a relatively stable investable asset will have a relatively stable investment return.
Final analysis conclusion:
The essential reason behind "asset shortages" is economic development. Without major reforms, "asset shortage" will become the "new normal" of the Chinese economy, especially in the field of investments.
