The concept of common prosperity was discussed in detail at the recent central meeting. Transfer payments, tax reform and charitable donations all became the focus of discussion at the meeting. In the context of decision-makers' regulation of Internet unicorns in a higher dimension, many companies have chosen to donate generously to expand the scale of donations to help remote and underdeveloped areas achieve the goal of common prosperity.

However, the treacherous market surprises have involved many of China's science and Internet giants in epic fluctuations and caused considerable confusion among investors, causing some foreign investors to leave and stay away. However, we are far from so pessimistic, we firmly believe that the current poor market is being repaired, will eventually usher in the prospect of dark willows and bright flowers.

As early as November 2016 and November 2017, we wrote two in-depth reports focusing on inequality in the distribution of income and wealth, and exploring how this uneven distribution at that time would lead to insufficient demand and deflation. and other social problems that are likely to attract more and more attention in the future. It is worth noting that 2017 is the year when China's "social principal contradiction" was redefined. Since then, the ratio of China's highest income to lowest income has finally stabilized after climbing for more than a decade. In other words, the problem of income inequality has stopped worsening since then.

Another way to look at this issue is to observe changes in confidence in Chinese society, represented here by consumer confidence and compared with the valuations of real estate owners and developers (figure 1).

As the picture shows, Chinese social confidence began to pick up in 2017 after weakening in 2016, and has been going higher ever since. At the same time, a closely related indicator-valuations of property owners and developers-is also rising at the same time. Visually, both indicators are at higher levels that cannot be equated with in the period leading up to 2017.

In other words, as the data show, common prosperity promotes social confidence. Since redefining the principal contradiction of society in 2017, China has begun to work towards this goal, rather than taking action today. This is a process that has been going on for several years and can be seen at a glance from the data. The parallel rise in valuations of owners and developers can also be seen as an indicator that social confidence is rising from efforts to achieve "common prosperity".

If so, why does the market suddenly pay so much attention to "common prosperity"?

We think this concept has been misunderstood by foreign investors. Since there is more than one "Chinese market" represented by Chinese companies listed in the United States, Hong Kong and A shares, we can judge which part of the investors have misunderstandings about "common prosperity" by comparing the index performance of these different groups of companies.

In figure 2, we compare the US-listed Chinese Internet companies (KWEB.US), the MSCI China Technology 100th Index, the MSCI China Index, the growth Enterprise Market (NASDAQ in China) and the NASDAQ 100 Index (NDX). We can see significant differences in their performance-the gem and NASDAQ 100s are high and continuing to hit record highs, while US-listed Chinese Internet companies and the MSCI China index do not perform well.

Since China's gem is mainly traded by domestic investors, while US-listed Chinese technology companies are held by many overseas investors, the divergence in the performance of these indices indicates that China's short-term benefits outweigh its long-term prospects in the future. to some extent, it has been misunderstood by overseas investors. Some people even hastily declare that China is "not allowed to invest". With all due respect, we don't agree.

We were one of the first analysts in the market to point out the bubble in tech stock valuations in February and warned investors of the risk that the bubble was about to burst. Now, according to different indices, the adjustment of Chinese technology stocks ranges from 50% to well over 60%, and their valuations are much more reasonable than before.

Common prosperity is not the involuntary redistribution of people's existing accumulated wealth. It is more about a fairer process to enable more Chinese people who have made great contributions to the great rejuvenation of the Chinese nation to share the fruits of economic development. There are many ways to achieve this goal, such as capital gains tax and some other forms of redistribution / transfer payments in the future.

From the differences in the performance of the indices held by different investor groups, it can be seen that overseas and domestic investors have a very different understanding of the concept of "common prosperity" advocated by China. It is obvious that domestic investors will be the bigger winners of China's great goal of "common prosperity" in the future. No wonder the A-share market index has been largely unaffected at a time of turmoil in China's offshore market.

We believe that after last week's sell-off, the Hang Seng Index has reached an important low, as shown in figure 3. Although it is still possible for the Hang Seng Index to have a second but higher low in the future, long-term investors should start to pay attention to the long-term investment value of the Hang Seng Index and layout accordingly with this overall vision.

Figure 3: after last week's sell-off, the Hang Seng Index has reached an important low