Morgan Stanley(US:MS)2025-07-22 01:59Summary of Key Points from the Conference Call Industry Overview - The report focuses on the Chinese economy, particularly addressing the deflation challenge and the anti-involution program aimed at tackling excess capacity and stimulating demand [3][7][12]. Core Insights and Arguments 1. Policy Intent and Action: Policymakers are reaffirming support for the anti-involution effort, indicating that new policy actions are likely to emerge in response to the deflation challenge [7][10]. 2. Historical Context: The current situation is being compared to the 2015-16 supply-side reforms, which helped the economy exit deflation in September 2016. However, the current cycle is expected to be more prolonged due to structural issues in the property market and trade tensions [7][11]. 3. Deflation Metrics: The GDP deflator has been negative for the past nine quarters, and producer prices have been in deflation for 33 months, indicating a significant deflationary environment [8][11]. 4. Excess Capacity: A substantial portion of excess capacity (50-90%) is located in the private sector, complicating efforts to boost demand [7][11]. 5. Demand Challenges: The structural downturn in the property market and trade tensions are significant barriers to boosting demand, making it more challenging to combat deflation [11][12]. 6. Consumption Focus: A sustainable solution to the deflation problem requires a shift towards supporting consumption, particularly through increased social welfare spending aimed at urban migrant workers and the rural poor [12][47]. 7. Investment Dynamics: Non-real estate fixed asset investment (FAI) has grown by 26% since 2Q21, with gross investment to GDP remaining elevated at 41%, contrasting with Japan's experience post-bubble [20][27]. 8. Diminishing Returns: The current investment push has led to diminishing returns, with the incremental capital output ratio (ICOR) rising to 7.9 in 2025 from 7.3 in 2023 [27][30]. 9. Demographic Challenges: Declining population and weaker demographics are expected to hinder property sales and overall economic growth, complicating the deflation battle [27][31]. Important but Overlooked Content 1. Private Sector Dominance: Unlike previous cycles where state-owned enterprises (SOEs) dominated, the current overcapacity issues are primarily in private sectors such as solar, EVs, and batteries, complicating coordination for supply-side consolidation [49][50]. 2. Excess Supply in Key Sectors: In solar, China's supply is over twice the global demand, and in EV batteries, it is 1.3 times the global demand, indicating severe overcapacity [51][54]. 3. Historical Lessons: The report draws parallels with past deflation cycles, emphasizing that both demand recovery and supply-side reforms are necessary to exit deflation sustainably [33][34]. 4. Global Economic Context: The report notes that global growth is expected to slow below trend due to trade tensions, which will further impact China's economic recovery [44]. This summary encapsulates the critical insights and arguments presented in the conference call, highlighting the complexities of China's current economic challenges and the multifaceted approach required to address them.