In a sense, why can China’s reform and opening up be successful? There are many reasons, but in a nutshell, the key is that China has successfully built itself into an ideal gathering place for global capital.
Over the past 30 years, global funds have been rallying to China. Foreign investors have called and called for China’s “financial opening” to expand market access. Global talents are also benefiting here. Chinese and even Southeast Asian Chinese have returned. The homeland copied the Internet miracle in Silicon Valley to mainland China.
Why is capital gathering? The reason is not complicated because it can be highly profitable. Now, some capital has begun to withdraw from this land. This is a fact. We must have the confidence and courage to admit it.
From the microscopic analysis, in the enterprise’s income statement, the determinants of investor’s return are mainly three major items: EBIT (similar to operating profit), tax burden cost and financing cost (investor income is mainly from the first one) Subtract the difference between the last two). By decomposing these three factors, we can find the real crux of the Chinese economic downturn.
First, operating profit is the difference between gross profit and marketing cost. The former depends on the “quality premium” of products or services based on corporate technology and business models, while the latter is closely related to the management level of the company. Therefore, if the company’s technology advances, product quality improves, or the business model is unique, coupled with management, then the operating profit is high.
But now the problem with the Chinese economy is that both product quality improvement and business model have encountered challenges. For the first one, we launched a supply-side reform aimed at improving the technological level of the enterprise, but the reform is still in the early stage of promotion, and the effect is not obvious.
For the second, the innovation of the business model of the enterprise has become more and more dead end, and the phenomenon of “homogeneity” of Internet entrepreneurship has become more and more serious. Everyone is burning money in desperation, the goal is to eventually make money, and the trace of profit is gradually drifting away.
Another serious problem is rent. Land rent is an important part of the cost of management. For some special industries, it is even the largest cost item. It has been eroding the profits of enterprises, and the discussion has long been full of enthusiasm.
In short, it is an objective fact that the company’s profit before interest and taxes is declining, or that there is a growing lack of motivation for improvement. In addition, the high cost of taxation and financing costs has always been the hot spot in the economic field. These three, together they eat into the final return of shareholder investment.
Obviously, we don’t have to deny that China’s domestic investment returns are declining, and the attraction of capital is fading. But at the same time, it is also advisable to watch this problem, rather than just swearing.
First, we must recognize the decline in the rate of return on capital investment. This is a phenomenon that must occur in a country or an economy after long-term economic growth. This problem has occurred in all developed countries in the world. On the other hand, we should not be overly optimistic, and we should do “the right medicine” for the decline in the rate of return on investment.
At present, reformers have increasingly recognized “cost reduction”, especially the importance of land rent reduction for the Chinese economy, and various “cost reduction” reforms have steadily advanced. In addition, we should also note that in the simple profit statement model above, the gross profit of the enterprise depends on the industry and the business model, and it depends on the industry in which the company is located. For example, in this world, except for the high gross profit of French and Italian luxury goods, the oil and gas sales and the gross profit of the grid are also very high.
This gives us the inspiration that we must open up some industries with higher gross profit, even some monopoly industries. Appropriate “profit-making” for private capital, even foreign investors who have long-term investments in China, to relax their access restrictions, thereby increasing the overall rate of return on capital. Of course, this must be done without affecting the country’s economic security and financial stability.
Recently, the tax burden on companies has become the focus. The discussion on tax burden will continue to go deeper. But we must also realize that tax and shareholder investment returns are a direct trade-off relationship. It has an immediate impact on the flow of capital. The “directness” of this effect even exceeds the rent and exceeds the cost of financing.