Guan Qingyou: We have fallen into a false prosperity, good luck to everyone
Today, I would like to discuss a few stories with everyone.
01
The Dragon King Making Rain
The first story begins with the 2008 financial crisis.
In 2008, the Jade Emperor suddenly discovered that the mortal world was a barren land for a thousand miles. Although he wasn't quite clear about what had happened, he remembered that between 1929 and 1933, a major upheaval had also occurred in the mortal world, and he didn't intervene back then, which led to very serious consequences (the economic crisis originating in the United States between 1929 and 1933 is also known as the "Great Depression"). Therefore, he decided he should intervene promptly this time.
So the Jade Emperor dispatched the Dragon Kings of the Four Seas to make rain in various places. The Dragon Kings of the Four Seas were somewhat similar to the governors of the central banks of major economies. After receiving the decree, the Dragon Kings of the East, South, West, and North began to make clouds and rain everywhere, which was somewhat similar to the global quantitative easing seen after 2012.
At that time, the Dragon Kings hadn't figured out how to make rain either; some places got a bit more, some places got a bit less, so it worked in some places and didn't work in others. For example, it didn't work much in Japan, it seemed to have worked a little in the United States, Europe didn't see much effect, but China's reaction was extremely intense.
In addition, due to the uneven distribution of rainfall, the amount of rainwater received by different groups in the mortal world also varied. Some people lived higher up, closer to the Dragon King, and received the rain first; others lived in low-lying areas and received the rain later.
Those who received the rain first—banks, non-bank financial institutions, real estate companies, PEs (Private Equity), and VCs (Venture Capital)—began to act as middlemen, reselling the rain to groups farther away from the Dragon King, such as manufacturing industries, enterprises, and startup companies.
Therefore, we saw severe distribution inequality emerge among different social strata and different industries in this process. However, people's morale and vigor surged, especially among the group that received the rainwater first.
Moreover, the Dragon King not only made rain himself, but also called upon the shrimp soldiers and crab generals to make rain together, which was somewhat like the expansion of shadow banking we saw in the past.
What is shadow banking?
Shadow banking refers to the credit intermediation system (including various related institutions and business activities) that operates outside the regular banking regulatory system and may trigger systemic risks and regulatory arbitrage issues.
There are three main forms of "shadow banking": bank wealth management products, loan products from non-bank financial institutions, and private lending.
If commercial banks are the so-called main channel, then the shrimp soldiers and crab generals are equivalent to non-bank financial institutions operating outside the bank regulatory system, which are what we call tributary or branch channels.
The result of the Dragon King bringing the shrimp soldiers and crab generals to make rain together was that some places were full of water, overflowing with wealth; some places were low-lying and fell into waterlogging; and other places were too far from the Dragon King and didn't get many drops at all.
This is what we have seen over the past decade. When rainfall continues for a long time, it causes floods, which is somewhat like several asset bubbles in the past decade. The Jade Emperor felt that it shouldn't rain like this anymore.
Therefore, starting from 2015, central banks represented by the Federal Reserve began the normalization of monetary policy. The United States withdrew first, and Europe, Japan, and China followed suit successively. This is the first story I want to tell: The Dragon King Making Rain; this story is actually still continuing.
02
Human Nature and Monetary Illusion
Why is excessive rainfall harmful? Because many people don't farm the land or improve the soil, but instead run off to resell rainwater, so the Jade Emperor felt that making rain like this was not acceptable.
However, when the Dragon Kings of the Four Seas prepared to withdraw, they found that if it didn't rain, the mortal world wouldn't adapt very well.
Because we had already grown accustomed to the relatively abundant rainfall of the past decade; a slightly bigger rain was fine, a slightly smaller rain was also fine, but it just couldn't not rain. This is the exit dilemma of monetary policy we see today; financial institutions won't agree, entrepreneurs won't agree, PEs (Private Equity) and VCs (Venture Capital) won't agree.
In China—let's call it the rainfall region of the East Sea Dragon King—the Jade Emperor and the East Sea Dragon King discussed that they couldn't rely solely on making rain, but also had to carry out reforms, which meant transforming the soil, improving seeds, and increasing yield per mu/unit area.
Consequently, in 2017 and 2018, China carried out financial rectifications. The resulting chain reaction was that asset bubbles began to burst, overall liquidity began to tighten, and financing costs began to rise.
As always, the places closest to the Dragon King were affected first. In the past, to catch water, they spent a lot of money buying basins and jars, but in the end, the money was spent, the water was gone, and the capital chain was pushed to the verge of collapse.
This is the predicament faced by many shadow banks, non-bank financial institutions, VCs (Venture Capital), and PEs (Private Equity), and it has also manifested itself at the macroeconomic and financial levels. This is the second story I want to tell: Human Nature and Monetary Illusion.
I hope everyone will listen carefully and reflect, because during the process of excess liquidity or even flooded liquidity in asset bubbles, human nature underwent very subtle changes.
No matter what role you play in the mortal world—entrepreneur, senior official, scholar, or retail investor—when the Dragon King makes rain, you will experience a wealth illusion or monetary illusion: abundant capital liquidity, extremely easy financing, very cheap borrowing, and investment opportunities seeming to be everywhere.
Although rationality tells you that there is no free lunch in the sky, the people around you all seem to be running on the path of acquiring wealth—some relying on entrepreneurships, some on financing, some on technology, some on matchmaking, some on connections, etc.—and all have made a lot of money.
Paper wealth is dazzling to the eyes; that is probably the description of this state.
The entire social atmosphere and market mood began to become anxious and restless, not because money couldn't be made, but because money was being made too slowly—why did I only make 1 billion now, look at so-and-so's market value exceeding 20 billion USD.
People began to become unsettled, especially those groups close to the Dragon King. They received a massive amount of water and were also eager to sell or use their water in various ways. You can recall that in previous years, the biggest trouble in the entire investment market was how to invest the large pile of money in their hands.
This change in human nature when the Dragon King makes rain is manifested in all aspects. VCs and PEs are like this, the primary market is like this, and needless to say, the secondary market.
2015 was a typical example; the stock market accelerated its rise in the first half of 2015, and the entire investment market was extremely anxious.
At that time, you would find that whether in Beijing, Shanghai, Guangzhou, Shenzhen, or a border town, everyone had become a stock god. People ate barbecue, talked about stocks, and anyone could buy a limit-up stock, and everyone felt they had a lot of money on their books.
The whole world fell into a false prosperity.
But we know this situation is impossible. If printing banknotes could solve economic and structural problems, then the most developed country in human society would definitely be Zimbabwe.
The largest denomination banknote I have ever received came from Zimbabwe. The friend who returned from a business trip to Zimbabwe brought me two bundles of banknotes and said: "Teacher Guan, I give these to you. Starting today, you are financially free."
I took a look, and I didn't even need two bundles; one single note was enough to achieve financial freedom, because the denomination of that single banknote was 100 trillion.
From macroeconomic indicators, during the financial upcycle or asset bubbles, M2 (M2 is an important indicator reflecting real and potential purchasing power of currency) showed double-digit growth, and total social financing rolled forward rapidly. Under this circumstance, the Jade Emperor told the Dragon King to call off the troops. Although the Dragon King would still make a little rain, his shrimp soldiers and crab generals all went back; in other words, the entire shadow banking system was gone.
This issue itself is worth discussing, but what I am discussing with you today is not this theoretical problem, but a human nature problem, because during this transformation process, human nature and monetary illusion went to another extreme.
When liquidity tightened, everyone felt it was over, and the capital winter had arrived.
At this time, human nature also underwent some changes, shifting from past active entrepreneurship and investment to being conservative, cautious, and fond of learning.
After the financial rectification, the overall market sentiment, liquidity, investment methods, and financing methods underwent tremendous changes.
People suddenly reversed from the financial upcycle or financial asset bubble stage to the financial downcycle or asset shrinkage stage. People became conservative, unwilling to invest, and cash was king.
The situation seemed to reverse overnight, and this turning point was roughly in 2017. The top-tier VCs (Venture Capital) and PEs (Private Equity) all began to lack water. The projects looked quite promising, but sorry, the money hadn't been fully raised yet.
This conservative, cautious, fearful, and frightened sentiment was transmitted step by step and began to spread across the entire industrial chain. So people were all thinking: How did we suddenly reach this plight? What should we do?
03
The Collapse of Two Business Models
What is model business? It is a business model whose model is creating business models. This sentence sounds a bit convoluted.
Let's look at it specifically; there are two types of model businesses.
- High-turnover models represented by finance and real estate
From a financial perspective, the high-turnover model represented by finance and real estate is actually very simple.
For example, a sum of money can normally be turned over twice a year; if it is turned over three or four times, the utilization rate of the capital will be 2 or 3 times higher than normal, which is equivalent to diluting the financing costs in disguise.
Even as a traditional business format in the financial industry, including banks, trusts, insurance, and asset management,
, guarantees, pawnshops, and so on, and the basic model is always like this: high turnover of one's own funds, making full use of original capital, leveraging it, and making it spin faster.
This model was very successful in the financial upward cycle of the past 10 years, and its emergence and success were built on the foundation of the Dragon King continuously making it rain.
Many people will retort, and there are also many financial institutions and real estate companies that have not used this model. I have communicated with such enterprises, and it turns out they had stepped into traps, experienced thunderstorms, and lost money in the past, making them somewhat scared and not bold enough. A famous entrepreneur once said: Tsinghua and Peking University are not as good as being bold.
Setting aside right and wrong, against the backdrop of the Dragon King continuously making it rain, this statement is not wrong either. In this case, the high-turnover model can turn a grenade into a shell, bomb, atomic bomb, or hydrogen bomb; the longer it lasts, the greater the lethality.
However, with the financial contraction in 2017, problems emerged with the high-turnover model.
- Internet High-Valuation Model
The high-valuation model of the internet, or the high-valuation model of many business formats in the internet industry, was also formed in the process of the Dragon King continuously making it rain.
Driven by technology, model innovation, combined with the cooperation of liquidity, a large number of unicorns have emerged in the past decade. Some expanded very rapidly, capable of an IPO within a few years, with market values reaching tens of billions of RMB or US dollars, and investors also had smooth exit channels.
Some unicorns were investment-led mainly by overseas institutions, listing primarily in the United States and Hong Kong, and the money they earned was the valuation difference between the primary market and the secondary market, because the secondary market valuation was high.
There are also some unicorns mainly invested by domestic Chinese investment institutions, most of which are listed on China's A-shares, also earning the valuation difference between the primary and secondary markets.
During the financial upward cycle and asset bubbleization, everyone felt this was just a bubble, and only a tiny minority felt it was a scam. No one is a swindler at the beginning, and no one intends to commit fraud at the start. The grandiose stories cannot be said to be all false, but at least a large portion of them were proven false afterwards.
Under this high-valuation model, human nature, just like the second story I told, underwent subtle changes for investors, entrepreneurs, and listed companies alike. Everyone said this model could be continuously replicated; despite being unprofitable, we believe in it.
For example, we often hear stories like this: the founder is an engineering guy and a top student graduated from a prestigious school, and the partners are either returned from Silicon Valley or Wall Street, making it simply a perfect team.
Mainstream international investment institutions are willing to provide money, domestic investment institutions are willing to provide money, with so many institutions acting as endorsements.
They go to talk business with local governments, and the local governments feel this team is simply too formidable.
We have repeatedly emphasized that under the environment of the Dragon King continuously making it rain, this model has no problem. Even if there is a little bubble, for instance, if some investors invested in the C round and felt uncertain, wanting to withdraw first, they transferred it to the D round. The D round then transferred to the E round, and some even reached the F round preparing for an IPO.
Past IPOs were all very smooth; the US market gave Chinese concept stocks a premium (Chinese concept stocks, a term used by foreign capital for all Chinese stocks listed overseas due to optimism about China's economic growth), and the Chinese capital market also gave the so-called unicorns a premium.
Against the backdrop of the Dragon King continuously making it rain, this chain could have continued to operate, but as we know, later the Dragon King called it a day and withdrew his troops, and the entire chain—whether entrepreneurs, investors, financiers, secondary market institutions, retail investors, or regulators—was suddenly at a loss, watching assets shrink and beginning to panic.
- Fading of the Models
Changes in the situation caused these two models to begin to fade, just like a high-speed machine suddenly crashing into a huge iron block.
Some enterprises could not stop because this change caused a myocardial infarction; some enterprises had foresight, caught the rhythm, and slowly adjusted their balance sheets and lowered leverage before the Dragon King stopped making it rain.
However, most enterprises were barely maintaining or running around blindly. Gradually, debates, arguments, and dialectics regarding business models, investment methods, and financing methods emerged, which leads us to our fourth story: bubble or scam.
04
Bubble or Scam?
In the financial upward cycle, which is when assets are bubbleized, investment institutions' main exit methods and profit methods rely not on the enterprise's endogenous growth, but on the multiple growth of the enterprise's valuation.
Money earned in round A is passed on to round B; round B finds that this enterprise seems to still have room for growth and passes it on to round C; some even scratch each other's backs to push the valuation even higher.
After round C there is round D, after round D there is round E, and after round E there are Chinese retail investors. In this process, some entrepreneurs also began to realize this problem, and some entrepreneurs even mastered this routine thoroughly.
To the extent that some well-known investors and investment institutions said in exchanges that today's entrepreneurs are craftily smart, they are not raising money for the company at all, they are raising money for the VCs, and the purpose is to raise money from here and then pass it on to the next round. Over the past few years, stories like this were everywhere.
Of course, there are still many people who truly believe valuations can still rise, except they only do early stages and leave the later money for others to earn; as the saying goes, out of three thousand weak waters, I take only a single ladle—these are still relatively decent.
Another kind began to frequently enter the so-called Pre-IPO rounds, which is also a model of the linkage between China's primary and secondary markets. The Chinese created the so-called Pre-IPO investment, and later created the listed company + PE (private equity investment) model.
Back then when I led a team on a study tour to Switzerland, it was precisely when China's primary and secondary markets were extremely hot.
Our entrepreneurs got off the bus and immediately began to guide the work of Swiss Fortune 500 enterprises: you took one or two hundred years to reach this scale, you could completely use the listed company + PE (private equity investment) model to scale up and expand the capital end, and you could grow larger than now in just 20 years.
It can be seen how massive the changes were in our behavior and mindset at that time.
Only a tiny minority felt from the beginning that this business model might not hold, and even felt that entrepreneurs were straying further and further off course. From the perspective of the entrepreneur, he finally became the very thing he hated.
Just as Buffett said, only when the tide goes out do you discover who has been swimming naked. Even worse, when the tide goes out, people begin to feel that those so-called targets are not asset bubbles, but scams.
For example, taking America's company W as a representative, this type of traffic-driven, cash-burning, model-driven enterprise only began to reveal its true colors when the tide went out.
Similarly, we see that in the fields of the sharing economy, audio and video, and e-commerce, will all traffic-driven, cash-burning, model-driven enterprises transform from bubble enterprises into scam enterprises?
At least after the Dragon King withdrew his troops, more and more people began to reflect: this model might not be a bubble, and it's hard to call it a scam either; it might just be something that fundamentally does not hold. This is the situation today.
Whether you are an entrepreneur, investor, startup founder, or government official, you are basically an individual moving with the cycle; no one can escape the cycle, just as no one can escape human nature, and there are no geniuses.
Speaking of this, actually we should also reflect on whether we have somewhat overly blindly worshiped the so-called star projects of well-known institutions and well-known investors.
Judging from the realistic market reactions, the capital market's so-called unicorns have indeed entered a period of scraping bone to heal poison, because today the valuation inversion between the primary and secondary markets has become very obvious.
The primary and secondary market inversion first starts in the secondary market. The stock prices and assets in the secondary market begin to shrink, or after high-valuation projects from the primary market are IPOed, it is discovered that whether in the US market, Hong Kong market, or mainland market, capital simply dares not touch them, and retail investors also begin to feel they are not worth that much money, which then forces a valuation inversion in the primary market.
In the past couple of days, seeing many star companies listing on the Hong Kong stock market, they truly are good companies, but their market values and valuations have been halved. For the institutions that invested in rounds B, C, and E, the day they can unwind their investments is remote.
Secondary market valuations are gradually shrinking, and people in the primary market are extremely anxious, perhaps still unable to exit completely. This is the inevitable phenomenon produced by the valuation inversion of primary and secondary markets. Under this circumstance, we have seen very interesting phenomena in some sectors.
Retail investors in the secondary market have enjoyed extremely high treatment for the first time, able to sit on the sidelines and watch the mutual slaughter among harvesting tools—this is a problem produced by the inversion of primary and secondary markets.
This situation cannot end for a moment. So I want to remind everyone that this era has truly changed, and the Dragon King is not coming back anytime soon; even if he does, he will at best give a slight sneeze.
Why say this?
First, Japan's experience and lessons in the late 1980s and early 1990s were that counter-cyclical regulation cannot be too violent, otherwise it will cause the market to get out of control.
Second, China also has its own experiences and lessons; the three major rounds of easing in 2009, 2012, and 2014 solved many problems and also created many problems.
What should we do at this time? Or where should we go from here? Finally, I will share a few immature, minor suggestions.
05
Returning to the Origin
Against this backdrop, many ventures from
, investment, and financing must all return to their original essence, a phrase that everyone has heard very frequently since 2015.
What does it mean to return to the original essence? We still need to honestly earn money from the endogenous growth of enterprises. Some people also say that there is a shift from capital-type investment and wealth accumulation to operational and management-type capital and investment wealth accumulation.
I think the following aspects are worth everyone's attention:
- From the perspective of management, shifting from horizontal traffic expansion to vertical traffic monetization.
In the past few years, traffic-driven companies were the most sought after by everyone, which was related to the development of mobile internet technology as a whole. But we also know that the traffic dividend is truly gone, and the customer acquisition costs for internet companies are increasing. A couple of days ago, Wang Xing had an internal speech which I thought was very good:
The number of mobile phones has reached a ceiling, and everyone is desperately uninstalling apps rather than installing them. Horizontal traffic expansion has indeed reached a bottleneck.
At this time, how traffic-driven companies transform from horizontal traffic expansion to vertical traffic monetization is a perilous leap. If this perilous leap cannot be achieved, there will still be traffic-driven companies dying due to broken capital chains, and this process will be extremely brutal.
Investors and the market have increasingly begun to distrust such expansion—utilizing massive subsidies, exploiting regulatory loopholes, and using so-called privacy.
Therefore, moving from horizontal traffic expansion to vertical traffic monetization is an extremely perilous step. Do not keep telling the market that I will monetize one day; that day may be indefinitely far away.
- From the perspective of company size, shifting from the past concept of too big to fail to small and beautiful.
An increasing number of small and beautiful companies will be accepted by the market. They may not be large in scale, but they are very exquisitely operated, without high growth but with very stable profitability. They might be hidden champions in niche industries, and such companies will be favored by more primary and secondary market investors.
For those companies that are too big to fail, or even companies that cannot stop expanding, I think they are relatively dangerous.
- From the perspective of management strategy, shifting from rapid expansion to steady progress.
Over the past decade or two, many behemoths suddenly rose in China, which is also the contribution of Chinese entrepreneurs to the world.
However, we see that many rapidly expanding enterprises rise abruptly and fall suddenly; each has its day of glory for two or three years, and then disappears.
On the contrary, those enterprises that progress steadily may not expand as fast, but their risk-resistance ability is strong, and their survival rate is higher.
Therefore, from the perspective of enterprise management, there may be a shift from rapid expansion to steady progress.
- From the perspective of investors, learning to shift from making quick money to making slow money.
Now that the Dragon King is no longer making rain, stock investors are beginning to wake up, having stepped into many pitfalls and experienced many thunder explosions, and the business model has also reversed. Everyone will find that making money is no longer so easy, and financing is no longer so cheap.
This process seems very simple when said like this, but in fact, it is not quite fair, because the degree of benefit varies across different age stages.
Seventy years since the founding of New China and forty years of reform and opening up, from an individual perspective, those with the best luck were born between 1965 and 1975. They did not need to work too hard themselves to catch the fast lane of economic growth and financial development. In many industries, there were plenty of opportunities, and as long as they were willing to work, they could seize them.
Those born between 1975 and 1985 barely caught the tail end—the tail end of real estate, financial bubbles, and the internet dividend.
The group facing greater pressure consists of those born after 1985. At this time, China's urbanization is already very high, the demographic dividend has disappeared, the engineer dividend is taking effect, and various industries seem to be full, with all kinds of opportunities already seen. At this time, some people started their own businesses and investments, while others turned to a Buddhist-like lifestyle.
At the same time, I want to give everyone a boost of confidence because China's market is still large enough.
We have a sufficient labor force, a large middle-class scale, and a large sinking market scale. The Chinese people are diligent, brave, and kind, working 5+2, white+black, 996, 007. China's per capita GDP level is less than 10,000 USD, and everyone's drive and desire to pursue a better life are extremely strong.
We still have sufficient market space. The north-south gap, east-west gap, regional gap, and urban-rural gap still exist. Even facing the impact of the trade war and short-term shocks, China remains the best region for entrepreneurship and investment.
We see that in the Beijing-Tianjin-Hebei region, the Yangtze River Delta, the Pearl River Delta, and the Guangdong-Hong Kong-Macao Greater Bay Area, future population size, industrial agglomeration, and investment density will still be the highest, and the gap between these regions and other parts of China will become wider and wider.
Today, I have told you several stories, moving from changes in the sky to changes on the ground. We must adapt to the changes in the sky, and we must also assess the situation in this process and seize the opportunities on the ground.
Finally, I wish you all good luck, thank you!