Vol.153 Macro Musings 74 | The Unexpected Things of 2024, and What to Look Forward to in 2025 (Recorded Jan. 21)

Summary

• Feng Shu’s biggest surprise of 2024 was an exchange-rate fact almost no one noticed: over the past 2 years, the RMB has depreciated about 15% against the dollar, but from January 2024 to January 2025 it was flat to slightly stronger against almost every major currency, including the pound, Canadian dollar, Australian dollar, euro and yen. “In reality, it was the rest of the world depreciating against the dollar.” He reiterated his core view: betting on near- to medium-term RMB depreciation may be wrong, because China’s push for globalization requires preserving the currency’s purchasing power and an appreciation bias—also explaining the “low inflation” in which imported products such as cherries fell nearly 1.5x in price.
• The year’s biggest liquidity call was that “money has nowhere to go.” With manual interest subsidies eliminated and high-yield deposits disappearing, banks sharply reduced exposure to local-government financing vehicles and property, while public mutual fund assets approached RMB33T, including a nearly RMB1T net increase in December alone. Personal pensions and insurance capital may soon enter the market. Feng Shu said this wall of money will ultimately be absorbed by new forms of insurance, insurance-related investments and the capital markets—“just like the bank money that shifted into infrastructure and property 20 years ago”—and suggested using personal pension insurance to buy index funds (“this is absolutely not investment advice”).
• Making money was difficult in 2024: there was no reliable alpha, only rotation among small betas. Even as auto sales grew at scale and BYD beat export expectations, the market merely rotated among intelligent driving, Huawei-related themes and export exposure. The secondary market worked through the entire silicon-photonics, optical-over-copper and humanoid-robot supply chains, prompting the joke that “A-shares are the world’s biggest knowledge-paywall platform,” while buying U.S. stocks was “boring money.”
• The GDP discussion was the episode’s technical core: 2024 GDP approached RMB140T and grew 5%, but nominal growth was only 4.2%, with the gap coming from the GDP deflator and the five-yearly moving constant-price base year. Of the more than RMB3T added to 2023 GDP, more than RMB1T came from changing housing accounting from the cost method to the internationally standard rental method, and more than RMB2T from small and micro service businesses added through the economic census. The “widening” gap between Chinese and U.S. GDP is mainly a statistical result of nominal values and exchange rates.
• Feng Shu’s “X-X combination” framework is worth remembering: domestic recovery and external, or U.S., influence can each be good, middling or bad, creating 9 combinations, yet most people choose the worst one-ninth—“because nobody thinks the other 8 possibilities will materialize.” Even conservatively, there is a 50% probability things turn out better than you expect. The example of human cognition: the index rises from 2600 to 3300, and people in the secondary market are still complaining.
• The key sequence for 2025 is: property stabilizes first, repairing household and bank balance sheets; services absorb employment and digitize; then recovery becomes healthy once balance sheets and cash-flow statements improve. China’s total services consumption is still 1.5x below America’s, while goods consumption is already roughly comparable. In theory, the National People’s Congress should pass the Private Economy Promotion Law at the Two Sessions. Feng Shu’s bold analogy: looking back in 5, 10 or 15 years, it may prove as historically significant as the Law on Chinese-Foreign Equity Joint Ventures 40 years ago.
• Trump withdrew from the Paris Agreement on day 1 and proposed putting energy under a state of emergency while loosening oil and gas production. The U.S. is already the world’s largest traditional-energy power and wants both to produce and export: if the world runs on petrochemicals, the U.S. benefits most; if it runs on new energy, China appears to benefit most for now, leaving Musk in “a pretty delicate position.” TikTok’s solution is to bring in new shareholders and dilute ByteDance rather than sell the company—Trump wants foreign ownership to reach 50%. The pit Biden left behind was “a deep one.” The historical frame is that “although gunpowder was invented in China, after circling the world it became ships and guns”—TikTok is the first time China has used the technology America is best at to enter the circle of global media influence.

Deep dive

1. Opening: 2 Years Without an Outline, From 1,000 Subscribers to the Hundreds of Thousands

• Feng Shu revealed how the show is recorded: there is an 80% chance they have no outline; at most, people briefly discuss in the group chat a few words that might be related to the topic. They record for 2 hours and cut it down to more than 1 hour, while Li Xiang has a 50% chance of not knowing what those words are beforehand and relies entirely on improvisation. The show began in November or December 2022 and grew from 1,000-2,000 subscribers to the hundreds of thousands—far beyond Feng Shu’s original estimate that it would top out at 80,000-90,000.
• A clear-eyed observation about platform algorithms: platforms use traffic to train content creators—“you make something, and suddenly the traffic is extremely high.” Creators then have to choose between being driven by traffic and making their own work. They chose the latter: “We can talk about topics we’re interested in, and keep talking about them.”

2. The First Surprise of 2024: An “Overcorrected” Call at the Start of the Year, With Returns Far Above Expectations

• Feng Shu recalled the anxiety at the start of 2024: sentiment and the capital markets were both depressed, yet they made an unusually categorical call—the capital markets had “definitely already overcorrected.” He subsequently put money in, expecting that “a positive return of 3%, 4% or 5% would already be very good.”
• The result far exceeded expectations. In hindsight, he attributed it to financial reform. Conversations with peers—“when they came to talk, I was a little sun”—revealed a consensus: the ability of multiple financial authorities to coordinate around the same objective really was different from before. That came on top of the market’s earlier steep decline, a sharp increase in passive index funds and a major rise in the cost of punishing illegal and noncompliant behavior. “That statement is completely irresponsible and cannot be used as a trading reference.”

3. The Hidden Truth About the Exchange Rate: The RMB Appreciated Across the Board Against Non-Dollar Currencies

• When his family booked a trip to New Zealand, they found the exchange rate was completely different from last year. Feng Shu initially assumed the RMB had depreciated—after all, it had fallen about 15% against the dollar over 2 years. But after checking the pound, Canadian dollar, Australian dollar, New Zealand dollar, euro and yen, he found it “slightly surprising”: from January 2024 to January 2025, the RMB was flat to slightly stronger against almost all of these major currencies. “In reality, it was the rest of the world depreciating against the dollar.”
• The broader lesson emerged from Xiaohongshu users comparing notes: most Chinese people care only about the U.S., “because you’re number 2, so you watch number 1.” “What the world as a whole has become, and what the place where I live has become, is still a topic that’s very easy to overlook.”

4. The Mechanics of Low Inflation: Beyond the Negative Drag From Housing, Imported Goods Are Getting Cheaper

• One of Li Xiang’s surprises was that inflation data were weaker than he expected. Feng Shu’s chain of reasoning: housing is one source of negative momentum, but the other half is price declines in products with high import dependence. Cherries were nearly 1.5x cheaper than around last year’s Spring Festival, due to the RMB’s relative appreciation against non-dollar currencies and the opening of South America’s trade network—after Trump sought to reclaim the Panama Canal, Peruvian ports became more important.
• Further evidence came from China’s launch of an anti-dumping investigation into imported beef: imports were so cheap that they were hitting domestic ranchers. Feng Shu reiterated a view he has made repeatedly: “Betting that the RMB will depreciate in the medium and short term may be wrong,” because China’s globalization strategy requires maintaining the currency’s purchasing power, an appreciation expectation and a two-currency trade-settlement system.

5. How Did GDP Grow 5%? Deflators, Constant Prices and a Fourth-Quarter Export Rush

• Nominal GDP grew 4.2%, while reported GDP grew 5%. The 0.8-point difference came from the deflator—which strips out all price effects and covers a broader range than CPI—and constant prices. The U.S. shifted its base year from 2012 prices to 2017 prices in 2022; China changes its base every 5 years and uses 2020 prices for 2021-2025. Feng Shu noted that statistical fraud was written into both Party disciplinary sanctions at the end of 2023 and the legal liabilities in the Statistics Law in mid-2024.
• The fourth-quarter upside broke down into several pieces: overseas buyers rushed to secure Chinese exports, driving exceptionally strong export growth, with the full-year net trade surplus approaching $1T; trade-in subsidies clawed back part of the drag from consumption; and manufacturing investment provided a stronger-than-expected positive contribution because “bank money had nowhere to go.” With local-government financing vehicles and property no longer available for investment, funds moved toward small businesses and manufacturing.

6. Breaking Down the RMB3T+ Upward Revision to 2023 GDP: Rental Accounting and the Missing Small-Service Economy

• Of the more than RMB3T upward revision, roughly RMB1T+ came from changing the accounting method for housing: from the cost method—land prices, construction materials, depreciation, property management and repairs—to calculating housing consumption using market rents. “Almost all developed countries in the world use rents; almost nobody uses cost.”
• The remaining RMB2T+ came from the economic census: large numbers of small and micro service workers had previously not been counted. “Take a private-hire driver, for example—that’s an individual worker in the service sector.” The service sector’s share was therefore revised up by a few percentage points to 56-point-something. Feng Shu also pushed back on conspiracy theories: if the goal were to inflate the number, “they might as well have shifted this into 2024,” because the 2023 base was low and 2024 growth would have looked better.

7. The Mystery of the “Widening” China-U.S. Gap: A Statistical Result of Nominal Values and Exchange Rates

• The widely cited drop in China’s GDP from more than 70% of America’s to the 60%-plus range uses nominal GDP converted into dollars. America’s 2% real growth must be combined with 3% inflation, while China’s nominal growth was only 4.2%. “If both were real GDP, it would mainly be exchange rates,” with the rest coming from each country’s statistical revisions. The U.S. raised the anchor for constant prices in 2022, correspondingly expanding the economy by a few tenths of a percentage point.
• This also clarified the “two and a half” contributors to U.S. inflation: transportation, mainly fuel; housing, where higher home prices pushed up rents and rents enter both inflation and GDP; and half a contributor from the wage-price spiral.

8. Lunar New Year Pre-Sales Break Records: An Unexpected Leading Indicator for Consumption

• Another of Li Xiang’s 2024 surprises was that box-office revenue fell short of expectations—“if lipstick is too expensive, it isn’t lipstick anymore.” He leaned toward a supply-side explanation: films scheduled for release now were produced 2-3 years ago, precisely when pandemic controls were strictest in 2021-22. The reversal signal is that Lunar New Year pre-sales broke records repeatedly within 1.5 days, the fastest ever to pass RMB100M and visibly approaching RMB200M. Xu Ke’s The Legend of the Condor Heroes was leading pre-sales, alongside blockbusters such as Ne Zha.
• Feng Shu admitted this was outside his economic frame of reference: “I had never treated Lunar New Year box office as a leading indicator for consumption. Maybe this offers an interesting way of thinking.” They will revisit the thesis after the 15th day of the first lunar month.

9. National Smartphone Subsidies Begin, and Apple’s Historic Decline

• Nationwide smartphone subsidies began on January 20. “They timed it very well around the New Year”—the purchases have both a gift function and the meaning of replacing the old for the new. Scattered reports suggested sales were better than expected. This was an expansion of the trade-in program beyond the auto and home-appliance categories subsidized in September.
• The control case was Apple: in 2024, it suffered its biggest-ever decline in its largest global smartphone market, China, with unit sales down by the low-to-mid teens year on year. The stock fell about 4% on the day the news was disclosed, and Apple reportedly cut prices for the first time in its history. Over the same period, vivo and Huawei grew relatively quickly; as Feng Shu recalled, both were probably up by high double digits.

10. The “X-X Combination”: Why Pessimists Are Usually More Pessimistic Than Reality

• Feng Shu used simple arithmetic to reassure the LPs of pessimistic venture-capital colleagues: domestic economic recovery and overseas, or U.S., influence can each be good, middling or bad. That creates 9 combinations, and “today, among the 9 combinations, almost everyone has chosen the X-X combination”—the worst one-ninth. Even conservatively, there is a 50% probability things turn out better than you expect, and a 50% probability they are just as bad as you expect.
• The footnote on human cognition: “As someone who doesn’t trade stocks, I can’t understand you people in the secondary market constantly complaining. It rose from 2600 to 3200-3300, and you’re still complaining.” Li Xiang’s 2025 base case follows the same logic: everyone is very pessimistic, but everyone knows internally that “it can’t stay this way forever.” Regulators keep working on various fronts, and at least the data will definitely look somewhat better.

11. Why Making Money Was Difficult in 2024: No Alpha, Only Rotation Among Small Betas

• Feng Shu’s characterization of last year’s market: it rose, but making money was difficult because “there was no particularly long-lasting alpha.” There was no reliable, sustained, cumulative growth factor. The clearest counterexample was autos: Chinese cars are already the best in the world on a comparable basis and exports grew at scale, but competition was brutal. Even with BYD beating export expectations, “you still can’t call it a huge alpha.” The year rotated among intelligent driving, Huawei-related themes and export exposure; the only single-name surprise was Seres, which went from obscure to minor star.
• Compare that with electric vehicles in 2019-21: “The ceiling and the floor were both continuously rising. That is when you can call it alpha.” Last year, “people threw countless things into this box—one moment a cabbage, the next a radish”—showing how badly investors wanted a reason to believe or feel optimistic. “I guess 2025 may be slightly different.”
• That produced a running joke: the secondary market studied the entire silicon-photonics, optical-over-copper, copper-cable data-center and humanoid-robot supply chains, down to integrated cooling, in greater detail than the primary market. “A-shares are the world’s biggest knowledge-paywall platform.” “You may not make money, but you learn things.” U.S. stocks were the opposite: “You make money buying U.S. stocks but learn nothing”—just 5 or 7 names, “boring money.”

12. Money Has Nowhere to Go: A Medium-Term View of Capital Migration Across Asset Classes

• Feng Shu’s underlying logic for urging Li Xiang to participate in the market: China’s accumulated wealth is enormous, but high deposit rates are gone—manual interest subsidies and nonbank interbank deposits were eliminated early in the year. Banks sharply reduced exposure to local-government financing vehicles and property, while small businesses remain cyclical. “All this money in China has to go somewhere.”
• The conclusion is that new forms of insurance, insurance-related investments and the capital markets “will ultimately play the role of absorbing it, just like the bank money that shifted into infrastructure and property 20 years ago.” The actionable version: “You can buy personal pension insurance, then use that money to buy an index fund”—and see whether this becomes China’s biggest change in 3-5 years. He also predicted that the M1/M2 scissors gap could narrow sharply from January or February as statistical definitions are adjusted to count funds resembling Alipay and Yu’e Bao as transaction cash already withdrawn by households.

13. The 2025 Three-Part Sequence: Property Stabilization, Service-Sector Jobs and Cash-Flow Repair

• Feng Shu’s rational outlook comes down to 3 things, in order. First, property has to stabilize, no matter what—that is what stabilizes the household and bank balance sheets. Second is employment, with the service sector at the center: as manufacturing automation deepens, labor’s share of income must fall, and the workers displaced can only be absorbed by the most labor-intensive part of the tertiary sector. “Even if you’re a food-delivery platform, your delivery workers’ income is still a large share.”
• The room for growth is clear: China’s goods consumption is already roughly comparable with America’s, but total services consumption is still 1.5x lower—a repeat of China’s 2003-23 catch-up in goods consumption. Recent policy has also moved beyond physical-goods vouchers to promote services, including culture, tourism, food and beverage, winter sports, and coordinated cultural-tourism and archaeological development along the Yellow River.
• The central question for China’s model is how services can digitize while improving efficiency. The U.S. precedent includes McDonald’s automating burger-patty cooking and Starbucks replacing manual baristas with industrial coffee machines. China’s equivalents are Luckin, Chagee and the rest: “Wasn’t one of last year’s hottest companies one of these?” Put the 3 pieces together—balance-sheet repair and better cash flows—and “only then can you say that the stabilization, recovery and growth of the economy have a relatively healthy foundation.”

14. The Private Economy Promotion Law: A Landmark Event That May Only Be Clear 40 Years From Now

• Feng Shu’s procedural read: this is a new law that theoretically requires approval by the National People’s Congress. The draft for public comment is already out, so in theory it should pass at this year’s Two Sessions, at the same time as the annual budget, deficit and growth targets are finalized. His bold analogy: “Looking back in 5, 10 or 15 years, it may be just like the Law on Chinese-Foreign Equity Joint Ventures 40 years ago.” The name itself is unusual: “They generally wouldn’t call something a Promotion Law… This law is fundamentally positive.”
• The expected follow-through is a publicity push after passage. Li Xiang recalled the staged interviews with prominent businesspeople when private entrepreneurs were first allowed to join the Party. Feng Shu wondered whether there might be a less routine attention event: “The boss comes out to meet some important and controversial entrepreneurs.” The first-quarter signal sequence is Trump’s inauguration, the behavioral patterns around the Spring Festival and the Two Sessions. “As long as they don’t form a large-scale offsetting effect, in theory this could be a good start.”

15. Where Wealth Settles: Entrepreneurial Confidence Is an Unavoidable Link

• Feng Shu’s historical frame is that the fruits of socioeconomic development ultimately settle in 4 layers: the state and its administrative system; officials, with their historical corruption problems; business owners; and ordinary people. Assume that most of the wealth accumulated between 1995 and 2015 was concentrated among business owners. This group benefited relatively strongly—the Gini coefficient was lower than America’s, though not by much—which is why common prosperity became an issue. Today, however, this layer has a confidence problem: people are emigrating or considering emigration, affecting how wealth is deployed and invested.
• Why this is fatal for the primary market: long-term global investment capital comes from pensions and endowments, followed by family offices—the patient capital of business owners. “Domestically, over the past 2-3 years, this part has actually been hit quite hard.” The signals are subtle: Singapore’s appeal to Chinese high-net-worth individuals has cooled, some people are returning to Hong Kong, and Hong Kong itself still faces a challenge in restoring confidence in growth.

16. Trump on Day 1: Leaving the Paris Agreement and the Great Energy Contest

• The only certain action on the first day was withdrawal from the Paris Agreement. Trump also proposed placing energy under a state of emergency and loosening oil and gas production. Feng Shu’s backdrop: China overtook the U.S. as the world’s largest carbon emitter in 2007, mainly because of industrial electricity use—China’s power generation rose 6.8% in 2024, while more than two-thirds of U.S. electricity is for civilian use. Obama signed the Paris Agreement in the last year of his presidency; the U.S. exited 8 years later. The strategic read: “If the world uses traditional petrochemical energy, the U.S. has now become the biggest beneficiary; if the world uses new energy, China currently appears to be one of the biggest beneficiaries.”
• Li Xiang pointed out that Musk’s position is “pretty delicate”: Trump clearly wants to increase fuel-vehicle production, while Musk runs the world’s largest new-energy automaker. Their expectation is that Trump will not ban new-energy vehicles, but neither will he stimulate them positively as the Democrats did—he may believe new energy has received unjustifiably excessive subsidies. Other variables include oil-producing countries’ relations with China, Russia, and the possibility that Trump will demand China buy more U.S. oil and gas, although China’s energy self-sufficiency rate is already above 80%. Every country other than the U.S. is adopting a posture of “one heart, two preparations.”

17. TikTok: Equity Restructuring Is the Only Solution—and a Historical Event

• The two speakers agreed on the basic answer: it can be solved by bringing in new shareholders to dilute ByteDance’s stake, rather than selling the company. Walmart and Oracle are already in the picture, while Trump wants foreign ownership to reach 50%, which in some sense transfers control. China placed algorithms under export controls, but Feng Shu guessed that Beijing would probably allow the restructuring. The question is whom to bring in: U.S. media groups would certainly want a stake, but ByteDance would certainly not want them involved. Musk’s X “has again become a bargaining chip in a multi-party balance”; Oracle could expand its stake through cloud servers, and Apple is also possible. Unlike 2018, “the U.S. is facing a completely different China now,” giving the company somewhat more agency in its choice.
• At the political level, the Supreme Court’s theoretical ruling is final and cannot be changed, while Biden left behind a trap whose enforcement date fell exactly on Trump’s first day in office. “That hole was dug deep.” Trump knows that enforcing it on a large scale would run sharply against public opinion, and he also knows the previous administration dug it. The interests involved are clear: global international media are largely controlled by a dozen-odd European, American and Japanese giants. “You took the jobs of America’s biggest media companies.” A crisis was inevitable.
• Feng Shu’s historical framework is worth preserving: TikTok’s rise followed China’s becoming the world’s largest smartphone manufacturer, then its largest consumer market, then the country with the highest smartphone penetration, creating the world’s biggest demand for smart applications. Cameras fueled the internal competition between Douyin and Kuaishou, which then turned outward to the world. “Although gunpowder was invented in China, after circling the world it became ships and guns.” This is the first time China has used the technology America is best at to gain an opportunity in global media. “It may go through a great many changes and twists,” but it will not disappear from the U.S. entirely.
• The closing New Year wishes: the 2025 Spring Festival is the first after the Chinese Spring Festival was recognized as an intangible cultural heritage of humanity. Li Xiang wished for “a normal state of mind while maintaining high energy.” Feng Shu, who calls himself “fairly patriotic,” wished for a strong country and safe people: “Being a major country and being a strong country still matters. Even under pressure from the U.S., you can still hold your ground.”