Last year, I read “How the West Will Dominate for a While,” a book by American scholar Ian Morris. In it, he argues: Human history is, in essence, a history of mutual competition and advancement between Eastern and Western civilizations. Underlying these civilizations are the systems and capacities of national governance. Eastern civilization, epitomized by Chinese civilization, first surpassed the West in terms of governance systems and governance capabilities starting from the Qin Dynasty. Since the Renaissance, Western civilization has been catching up with and eventually surpassing Chinese civilization, achieving comprehensive dominance over the East by the 19th century. For the past 250 years, the West has essentially been calling the shots on the global stage. Yet today, in the 21st century, the crisis facing the West is not merely an economic one—it’s also a crisis of its governance systems and governance capabilities. The question now arises: Can the East surpass the West in the 21st century? Judging by GDP, China has already overtaken Japan; and according to purchasing-power parity, last year China even surpassed the United States. So then— Can the East fully surpass the West in the 21st century?

The overarching goal of comprehensively deepening reform, as mentioned at the Third Plenary Session of the 18th Central Committee, is to improve and develop the socialist system with Chinese characteristics and to advance the modernization of the national governance system and governance capacity. General Secretary Xi’s “Four Comprehensives” include “building a moderately prosperous society in all respects, comprehensively deepening reform, governing the country according to law in all respects, and exercising full and strict governance over the Party.” My personal insight is that these concepts revolve around “dreams, change, and humanity”—building a moderately prosperous society in all respects represents our dreams; comprehensively deepening reform signifies change, and it is through change that opportunities arise; while governing the country according to law in all respects and exercising full and strict governance over the Party provide the people with a sense of security and make our governance system more humane.

I listened to General Secretary Xi’s speech at the National Memorial Ceremony for the Nanjing Massacre twice, and I was deeply moved. First, he spoke with great confidence; second, his demeanor reflected the grandeur of a major power. One particular passage—“The future of the Chinese nation is incredibly bright”—clearly demonstrated his unwavering confidence in our country’s future. By placing these two key points at the very beginning, I hope to offer everyone a perspective on how we should view China’s future. This is also the underlying assumption for what I’ll be discussing next: In the race between East and West, reform will be the deciding factor. If we truly push forward with bold and far-reaching reforms—if what we actually do matches what we say—we believe the country’s future will be incredibly bright.

The world’s growth engine is still in China.

A "wind vent" is a concept from physics—only a pressure difference can create a wind vent. In economics, it’s imbalance that gives rise to wind vents. Most importantly, from an investment perspective, wind vents created by imbalance carry high certainty. With a balanced system, it’s often impossible to predict whether it will shift left or right; however, if the system is imbalanced, it will inevitably return to equilibrium and mean reversion—this is certain.

Why are we confident in saying that China will be the world’s growth engine over the next decade?

As of today, the vast majority of people still harbor significant doubts about China’s economic growth over the next decade—and that’s hardly surprising. Can China’s economy continue to lead the global economy over the next ten years? In my view, the most critical factor to watch is the global competitiveness of Chinese enterprises. Over the past few years, it has become strikingly clear that the global competitiveness of Chinese companies has been steadily declining. If this trend isn’t reversed, China’s economy simply won’t be able to lead the world economy. The most significant impact of declining competitiveness is on foreign trade. In the global economic growth landscape, one figure stands out as particularly important: global trade. Historically, the top ten players in global trade have always served as the engines driving the world economy. Especially during periods when developing countries were moving toward developed nations, their trade volumes consistently ranked among the highest globally. Back in their day, Japan and Germany each accounted for more than 10% of total global trade—but once they exceeded that threshold and failed to maintain their global competitiveness, their share of global trade began to decline. And that means external demand would dry up.

If we can't maintain a trade surplus, relying solely on domestic consumption and investment, achieving 5% growth over the long term would already be quite impressive.

The three major pain points are closely related to the competitiveness of Chinese enterprises.

After experiencing 10 years of 10% growth in the 1970s, Japan suddenly plummeted directly to 4%. Will we end up like that?

I believe there are three key factors that directly influence the global competitiveness of Chinese enterprises—and these three factors happen to correspond precisely to the three major imbalances, or “three critical pain points,” between China’s economy and those of the world’s advanced economies. In fact, while these three pain points are currently sources of pain, they will all become opportunities in the future. Their transformation will directly boost the global competitiveness of Chinese enterprises.

The first pain point—and also the biggest one—is efficiency. Right at the start of reform and opening-up, our efficiency was low—but our costs were incredibly low too: land, labor, environmental protection—all were inexpensive. That’s why even with low efficiency, we could still outperform foreign competitors. But today, if you lack efficiency, you’re simply out of the game. Corporate efficiency is a critically important factor in global competitiveness. Efficiency has two key dimensions: first, the efficiency of the company itself—this is closely tied to China’s management standards, technological capabilities, and business models; and second, the external operating environment of the enterprise—the actions of the government. Here are two pieces of data: First, the share of logistics costs in GDP—a figure that stands at 18% in China, which is exceptionally high, and this reflects poor corporate efficiency. BCG once reported that Chinese companies could on average cut their logistics costs by as much as 28%. The second point concerns PM2.5. Why does this also have to do with efficiency? Actually, it stems from our inefficiency in the utilization of resources and energy. Right now, there’s enormous room for improvement in our efficiency. Some might ask: “If these problems existed before, why didn’t we address them then?” The answer is simple: Back then, we were doing just fine. We enjoyed strong global competitiveness, and our goods flowed seamlessly around the world without any obstacles. But that’s no longer the case. Today, this is the biggest pain point in our entire economic system.

The second pain point is the financial system. China’s current financial system, which remains dominated by commercial banks, has already fallen behind the evolving changes in the economic structure. The gap between direct and indirect financing in China is so significant. Even if we don't compare it with the U.S. or Japan, just looking at BRICS countries like Brazil reveals an enormous disparity. In fact, this stark contrast represents an opportunity. Just as Soros did with macro hedge strategies, this imbalance is bound to be corrected—there’s a high degree of certainty about that. Personally, I believe that over the next five years, this ratio will undergo a dramatic shift.

The third pain point is demographic structure. In fact, the most fundamental determinant of economic development is population. I’m particularly focused on three aspects of population structure: living standards, education levels, and the degree of aging. Let’s take a look at how China compares with the global situation—what’s our position?

First, let’s look at income levels: Our per capita income is lower than that of Russia and Brazil but slightly higher than India’s. Our per capita income is roughly one-sixth to one-seventh of the U.S. level and one-fifth of Canada’s and Germany’s—clearly indicating that there’s still considerable room for improvement in per capita income compared to larger economies. Moreover, within China itself, the gap between urban and rural areas is quite significant; if we were to categorize it, we could identify several distinct levels.

Second, consider the level of education: China boasts the world’s largest workforce with higher education attainment. With 110 million people holding higher education degrees, China ranks first globally, surpassing the United States, which has 76 million such individuals. Among the prime-age population aged 25 to 64, about 46% in the U.S. have attained higher education, and 42% have completed higher vocational education; in contrast, in China, only around 9% of this age group have higher education qualifications, and just 14% have completed higher vocational education—a relatively small proportion. Moreover, from 1964 to 2010, China’s human resource structure by educational attainment underwent rapid changes: the proportion of the population with higher education rose from 0.48% to 8.93%, while the illiteracy rate fell from 33% to 4%.

Third, the degree of population aging. China’s average life expectancy is now very high—Shanghai’s average life expectancy even exceeds that of New York—and the national average life expectancy in China is only three years lower than that in the United States. Given China’s massive population base, this is truly remarkable. More importantly, the working-age population aged 14 to 64 accounts for 73.4% of China’s total population—the highest proportion among all developed economies, even higher than Brazil’s. Why do we say there’s hope for the next decade? It all comes down to productivity.

To summarize the three major pain points of China’s economy, the first is efficiency. Low efficiency makes it impossible to compete with others, so global competitiveness declines and trade conditions worsen. The second is finance, Right now, the financial system does not support structural adjustments nor does it support the development of new economies and new industries. The third is demographic structure, The income gap between China and developed countries is significant, and there’s also considerable inequality within China itself. The absolute number and proportion of people with higher education levels starkly contrast with those in advanced economies. In terms of age structure, China’s dependency ratio isn’t as bad as one might expect. So where lie China’s opportunities? Over the next decade, if we can find appropriate solutions to these three major challenges, that will be our golden opportunity.

Leveraging the Internet to Enhance Government and Market Efficiency

How can we address the pain point of low efficiency?

First, the government must undertake its own reforms. After all, the business operating environment is shaped by government actions.

Second, consider the changes in the market. At the Third Plenary Session of the 18th Central Committee, it was proposed that the market should play a decisive role in the allocation of social resources, that administrative intervention should be reduced, and that a negative-list approach to reform should be adopted. Over the past two years, the effects of the government’s own reforms have already become evident. Now that the government has given more room to the market, how will the market itself seize its opportunity to go global? The answer is the internet. At its core, the internet is simply a tool—a tool that is exceptionally powerful in enhancing efficiency. It was precisely at this opportune moment, when China was acutely in need of greater efficiency, that the internet was born.

Today, the level of internet development in China is roughly comparable to that of the United States, and the internet has greatly boosted the efficiency of Chinese enterprises. Take Xiaomi’s smartphone business as an example: the smartphone industry is a very traditional one. Yet, Xiaomi managed to become No. 1 in China and No. 3 worldwide within just four years. The reason for such rapid success boils down to efficiency—pure and simple. The essence of internet thinking is to eliminate intermediaries—removing the unnecessary waste and friction in society. Although some people say that Xiaomi’s phone quality isn’t great either, no matter what, it has managed to achieve today’s goals by relying on a new way of thinking and boosting its operational efficiency to an extremely high level. How far Xiaomi can go—let’s just wait and see. If you happen to spot any industry that’s currently chaotic and suffers from information asymmetry but could be organized and streamlined through the internet, there’ll surely be tremendous opportunities waiting for you.

The financial system urgently needs to be reshaped.

How can we address the second pain point—the outdated financial system? China is the world’s second-largest economy, yet its financial system remains so antiquated. The fact that commercial banks dominate the financial system essentially reflects a culture of collateral. All human economic activities—including production, consumption, and exchange—rely on finance as the most critical component of exchange. If the exchange process can only be conducted through collateral, it clearly demonstrates just how inefficient it is.

Why has the proportion of direct financing, which was already deemed too low and in need of change more than a decade ago, remained unchanged to this day? The core factor is real estate. The real estate industry boasts an enormous supply chain, and as a sector representing hard assets, virtually every company along that chain can offer asset-backed collateral to secure bank loans. As a result, commercial banks have driven the rapid growth of the entire real estate value chain over the past decade. Banks make money, and so does real estate.

But that’s no longer the case today, because the economy is now heading toward real estate-driven growth. The critical juncture was at the end of the second quarter of last year, when society as a whole reached a consensus: the real estate sector needed to adjust. From both the supply and demand perspectives, the financial system must undergo rapid transformation. Let’s start with demand: Who has financial needs? It’s industry—and different industrial structures give rise to different demands. Today, emerging industries lack hard assets, making it extremely difficult for the “new economy” to secure collateral. This fundamentally calls for a fundamental shift in the financial system. As for supply, we’re talking about the supply of social capital—the money held by ordinary people. In the past, most of the public’s savings were invested in real estate and bank deposits, with real estate accounting for roughly 50% to 60% and bank savings around 20%. That situation is bound to change. In the past, buying property was considered safer than keeping money in bank deposits; but now that real estate prices are falling, this perception has become unsustainable. Commercial banks have long dominated the financial system, but they must transition to a capital-market-driven financial system if they are to meet the current demands of the overall economic structure and align with residents’ evolving asset-allocation needs.

Looking at the historical development of the global economy, economies dominated by capital markets tend to be more dynamic than those dominated by commercial banks. The capital market should become the most important and central market in a market economy, playing a leading role in allocating social resources. More importantly, a robust capital market is not only essential for China’s economic transformation, but also crucial for unleashing the entrepreneurial potential of the entire society and enhancing the nation’s innovative capacity!

Five Insights from Demographic Shifts

How can we address the third major challenge—the demographic structure? From the perspectives of income levels, education attainment, and age distribution, our demographic structure is both a pressing challenge and a key driver of future economic growth. I’d like to share some insights into the implications of future demographic shifts.

The first revelation is that the Chinese Dream pursued by the vast majority of people still revolves around creating wealth and improving their lives. This is a key distinction between China and other developed economies—and also the most important driving force behind China’s economic growth. Why? Because for most Chinese people, we’re still too poor. The second insight is that high-income individuals are striving to enhance their quality of life. Correspondingly, there is ample room for growth in areas such as consumption upgrading, entertainment, sports, environmental protection, military industry, and information security. The further aging of the third population suggests that healthcare expenditures will continue to rise. The fourth level of education suggests that the education industry still has enormous potential. Fifth, I think it’s important; the age structure and education level indicate: China’s industrial structure can be diversified. It can both challenge mid- to high-end industries and compete with developed countries, as well as continue focusing on mid- to low-end industries and compete with developing countries—this is an advantage that no other country in the world possesses.

With a population of 1.3 billion, a single language, and a single currency, yet still facing significant disparities in income levels, education attainment, and age structure—this is precisely China’s greatest competitive advantage.

In summary, market-oriented reforms and the internet can significantly enhance enterprise efficiency. A thriving capital market can greatly boost entrepreneurial enthusiasm across society, thereby strengthening the nation’s innovation capacity. For most people, the Chinese Dream still revolves around creating wealth and improving their quality of life. As income levels rise, demand will also increase further—these are all effective ways to rapidly enhance the global competitiveness of Chinese enterprises.

Now it seems that, China has at least two things that may be unmatched by any other country: First, we are undertaking reforms of such massive scale and comprehensiveness; second, we are fostering entrepreneurship and innovation on such a large scale and in such a comprehensive manner. It is precisely for these reasons that I am confident: in the next decade, the world’s growth engine will still be China.

The capital market could exceed 100 trillion yuan in size within five years.

Based on the analysis above, we can identify investment opportunities in China through three key dimensions: the transformation of traditional industries by the internet, demographic shifts, and changes in the financial market. Why is it that the capital market represents the biggest growth opportunity for China over the next five years? The first two factors didn't emerge just recently, nor are they likely to undergo dramatic changes and come to an end in the near future. In contrast, the financial system is precisely the area that will experience profound transformations starting from now and continuing over the next five years. Historically, this has indeed been the case—South Korea and the United States both saw their capital markets flourish after interest rates were liberalized. Most importantly, changes in the capital market will affect each and every one of us, reshape the way society allocates resources, and transform the entire country. This transformation also reflects the humanization of our national governance system.

Speaking of the prosperity of the capital market, I’d like to share three points.

First is the issue of long bulls and short bulls. I believe we’re in a long bull market. As early as the beginning of 2014, I predicted that this bull market would last anywhere from three to five years—perhaps even longer. Why do I think it’s a long bull market? It’s simple: this shift represents a transition from a financial system dominated by commercial banks to one dominated by capital markets. To put it plainly, in the past, capital markets played a supporting role; going forward, they’ll be the main players. And what does it mean for something to be the “main player”? It means it can no longer afford to be ignored for extended periods. From this perspective, this round of the bull market will be distinct from any previous bull market in history.

Second, how high can the market rise? I believe that a market capitalization of 100 trillion yuan represents the first equilibrium point. To explain this phenomenon, I’d like to draw on the relationship between potential energy and kinetic energy in the capital markets. Currently, there are two major sources of potential energy in the capital markets: First, the reallocation of assets held by domestic residents—a scale exceeding 100 trillion yuan; second, the global allocation of assets into China—a scale of 100 trillion US dollars, which, when measured as a share of China’s GDP, still amounts to over 10 trillion US dollars. One of these two sources of potential energy has already begun to transform, while the other has yet to start significantly. How much market capitalization could this transformation generate? Last year, China’s GDP was 63 trillion yuan. If we assume an annual growth rate of 6% over the next five years, China’s GDP will reach 84 trillion yuan in five years. Consequently, the equilibrium market capitalization for the stock market in the coming years should be somewhere between 100 trillion and 150 trillion yuan—this is precisely the magnitude of change we’re talking about. Right now, however, the market capitalization stands at just over 30 trillion yuan. So how can we get from 100 trillion to 150 trillion yuan? There are three main channels: first, IPOs; second, organic growth; and third, mergers and acquisitions coupled with securitization. All three of these avenues currently have ample room for expansion. As a result, over the next five years, we can expect to see an additional 70 to 100 trillion yuan in market capitalization—two to three times the size of our existing market capitalization today. This represents an extraordinarily large market opportunity. The 100 trillion-yuan mark is the first equilibrium point in this growth process. In the early stages, the market moved from imbalance toward equilibrium, and in the process of correcting past imbalances, it’s quite possible that we’ll overshoot the mark. Before reaching 100 trillion yuan, the market was characterized by rapid, even frenzied, growth; after crossing that threshold, the market will shift toward slower, more steady growth—a “plow horse” rather than a “bull.”

Potential energy is converted into kinetic energy—so where exactly is this kinetic energy? We can identify it along three key lines. The first line is the sustained rise in market valuation levels driven by the gradual decline in risk-free rates, which translates into blue-chip stocks characterized by low valuations and high dividends. The second line focuses on innovation and transformation—such as the internet-driven reshaping of traditional industries, opportunities arising from demographic shifts, and emerging industries—all of which fall under this category. The third line is growth through mergers and acquisitions: achieving growth via M&A deals represents the most dazzling feature of a bull market.

Third, where lie the opportunities for a thriving capital market? The prosperity of the capital market first benefits entrepreneurs—the suppliers in the capital market—and secondly, it benefits investors—including private equity funds, asset management firms, and individual investors—the demanders in the capital market. Of course, it also benefits the market’s service providers: stock exchanges, investment banks, and various intermediary agencies. If we can’t become entrepreneurs ourselves, we can at least become well-prepared investors.