Author: Qinghe President WeChat official account: Zhiben News Agency (ID: zhibenshe0-1)
Recently, the Chinese economist community has been discussing this issue and there have been many controversies.
Not long ago, the expert group of the China Financial Forty Forum visited the headquarters of the International Monetary Fund (IMF) in Washington, and economist Yu Yongding gave a speech. His view is that the current expansionary macroeconomic policies still need to be strengthened.
What is the reason?
He believes that the most prominent issue in China’s current macroeconomic situation is insufficient overall demand, poor economic recovery in the first quarter, low CPI growth rate, and sustained negative PPI growth. Therefore, expansionary fiscal and monetary policies need to be intensified.
How to do it specifically?
Mr. Yu Yongding believes that the fiscal port should increase the deficit rate, issue more treasury bond, and the monetary port should cut interest rates; I believe that the important way to start this year’s economy is still government investment, mainly in infrastructure investment, technological transformation investment, and industrial chain reshaping investment.
I believe everyone is familiar with this viewpoint and logic. Whenever the economy weakens, Teacher Yu Yongding will come out and shout, hoping to increase the stimulus policy.
Last May, the policy was increased to rescue the market. Should we continue to increase this year?
Do you still remember last May. At that time, due to the impact of the epidemic, the economic growth rate rapidly decreased, and many people were very worried and anxious. At that time, a meeting was held and a series of policies were introduced, called a “package of policy measures”.
What does it include?
For example, the total amount required for tax refunds and reductions is 1.64 trillion yuan. Intensify the issuance of special bonds, requiring them to be completed before June and used up before August. Increase policy bank loans by 800 billion yuan to support infrastructure investment. There are also consumer incentives, mainly through the reduction of car purchase tax. Another option is to lower interest rates.
On May 31st last year, which was today last year, the State Council issued a notice on a package of policy measures to solidly stabilize the economy. Today, it happens to be one year anniversary.
After the first anniversary, the economy seemed to be struggling again, and discussions began on whether to stimulate the economy and whether to increase stimulus measures.
Today, it has been 5 months since the beginning of this year. How is the economic recovery going?
It should have failed to meet expectations. Perhaps everyone’s expectations for economic recovery are relatively high, and the recovery in the first quarter is still good, especially in terms of consumption and real estate sales. However, in April and May, the economic recovery cooled down relatively quickly, with both investment and consumption cooling down. Some people feel that this year is even worse than last year, feeling even weaker.
May PMI: Comprehensive contraction in demand for manufacturing and service industries
Today, the Bureau of Statistics released the manufacturing PMI for May.
In the first quarter, the manufacturing PMI recovered relatively quickly, but it immediately fell in April and fell below the critical point. In May, the manufacturing PMI continued to decline, reaching 48.8, a decrease of 0.4 percentage points compared to April. Especially for small and medium-sized enterprises, it has dropped to over 47.
Production and new orders continue to decline, falling below the critical point, indicating a decline in production activities and market demand.
There are two indicators to note, one is that the new export order index has dropped to 47.2, indicating that export demand is still declining.
Another is the factory price index, which is currently 41.6. The purchasing price index of raw materials for large enterprises has dropped to a historic low, which means that PPI will continue to decline.
The non manufacturing industry is slightly better, with a May reading of 54.5, a decrease from April, but still expanding the range. However, it should be noted that new orders from non manufacturing industries have decreased rapidly, by 6.5 percentage points compared to April, and both the construction and service industries have fallen below the critical point. What does this mean? It indicates that the demand for the service industry has almost been released, and sales were rapidly declining in May. In addition, investment in real estate and infrastructure projects has significantly decreased.
PMI is a leading indicator. From the PMI in May, at least a few issues can be identified:
Firstly, there has been a significant decline in demand, with the demand in the manufacturing, service, and construction industries all shrinking. It is important to note that the service industry is an important driving force for this round of economic recovery, but now that demand has been released, sales in the service industry are also decreasing.
Secondly, the demand for real estate has fallen, and the sales area of residential properties in April was actually smaller than that of last year. In the first 30 days of May, the sales area of commercial housing in the top 30 cities in China decreased by 2.66% month on month.
Thirdly, the demand for exports is declining, and the export recovery in March is difficult to continue.
Fourthly, PPI will continue to decline, and CPI may continue to remain sluggish.
In the first live broadcast, I mentioned that May is an important period to observe the direction of the economy. In the first quarter, the economy has recovered, but in the second quarter, the recovery has significantly cooled down. What should we do next?
Last May, in order to stabilize the economy, the government introduced a package of measures, including consumer stimulus and increased investment. This year, we are facing economic weakness again. Do we still need to continue stimulating?
Whether to stimulate or not, economics is causing a lot of controversy
This kind of problem is often a topic of heated debate in the circle of economists. In 1929, Hayek argued with Keynes. This is a very famous debate in history. In fact, this debate has never stopped, and there are significant differences between demand economics and supply economics, especially during economic crises, where the debate becomes even more intense.
Keynesians believe that the market will fail. When market demand is insufficient, the government needs to expand fiscal and monetary policies, increase government investment, stimulate demand growth and promote economic recovery.
However, neoliberal economists believe that the market will not malfunction, and falling prices, deflation, and even economic crises all indicate that the market is showing signs and clearing. Instead, government intervention has hindered market clearing and market recovery.
More importantly, the side effects of stimulus policies are too significant, such as the central bank issuing excess currency and the government’s large-scale investment to rescue the market, which can lead to inflation and debt crises.
I believe that most people can understand and agree with the views of neoliberalism. The government cannot continue to stimulate the economy on a large scale, repeatedly borrowing heavily to invest in infrastructure and real estate, resulting in a high level of debt. Last May, a wave of stimulus was completed, and a year later, the economic recovery cooled down and another stimulus was needed. This is the problem in itself. Just like a person’s body, their own immune system is weak and they rely on medication to maintain it. Repeatedly taking medication leads to poorer results and weaker physical health.
This principle is very easy to understand, and the lesson is also at hand. However, have you noticed that an interesting phenomenon is that everyone understands the truth, but once an economic crisis occurs and the economy fails, many people hope that the government will come out to rescue the market.
So Keynesianism has never left, it has always been in people’s hearts, and as long as there is an economic crisis, Keynesianism will soon return.
However, large-scale stimulus policies can trigger economic crises, such as inflation and currency collapse. So, whenever inflation breaks out, Keynesianism is hit again, and neoliberalism returns.
I can summarize it into one sentence: economic crisis ends neoliberalism, inflation ends Keynesianism.
For example, in the 1970s, the stagflation crisis in the United States ended more than 20 years of Keynesian rule, and after Reagan took office, neoliberalism emerged and developed for more than 20 years.
By the 2008 financial crisis, neoliberalism had come to an end and Keynesianism had reigned. The economics department of the Massachusetts Institute of Technology, the American headquarters of Keynesianism, sent a large number of central bank governors to the world, and they implemented expansionary monetary policies globally. Last year, with the outbreak of major inflation in the European and American world, Keynesianism was hit, but they still managed to grasp the power sector. US Treasury Secretary Yellen is promoting her “modern supply side economics”. Many people are curious why she says the supply side instead of the demand side. The reason is very simple, because of this great inflation, demand economics has a bad reputation, and supply side economics can only be said. However, when it comes to supply side economics, people will think of the supply side reforms during the Reagan administration, which contradicted Yellen’s proposition. No way, just add the word “modern” before supply side economics. In fact, it is promoting demand stimulus economics under the banner of supply side economics.
Okay, let’s return to the topic just now. Everyone knows that excessive investment and borrowing are not allowed, but when the economic crisis comes, everyone’s rationality cannot be controlled and they hope that the government can rescue the market. Why?
Hayek was also puzzled when he argued with Keynes about why everyone supported him. At that time, Hayek’s assistant Caldo, as well as his student Hicks, changed their ways and followed Keynes. This dealt a significant blow to Hayek. After the debate with Keynes, Hayek rarely studied pure economics and shifted more towards the field of political philosophy.
At that time, the Great Depression broke out, and everyone was in danger. People’s fear would overcome rationality and they hoped to receive government assistance. Every time an economic crisis comes, many people hope to be protected, which is why human fear is at work.
Hayek later explained this, saying that freedom comes with a price. There is no market that only makes money without losing money. Opening a factory may lead to bankruptcy, investing may lead to bankruptcy, and working may lead to unemployment. This is the price of freedom. Many people hope to receive the benefits of freedom, but they do not want to pay the price of freedom. During economic crises, this is a common mentality.
So, everyone understands the truth, but you can never wake up a group of people pretending to sleep.
Let’s return to the current issue, should we continue to rescue the market? Should stimulus policies continue to increase?
In fact, for a long time, we have been using stimulus policies. Since 2008, broad money has increased by 240 trillion yuan, and the growth rate of money is far higher than that of GDP.
At the same time, the fiscal sector is also continuously expanding, with local governments borrowing on a large scale. Currently, the debt has reached 36 trillion yuan, and there is also 45 trillion yuan in urban investment bonds. The investment intensity is very high, especially the investment in infrastructure. fixed assets investment accounts for nearly 50% of GDP.
So, what we are considering now is not whether or not to implement stimulus policies. We have been using stimulus policies, but whether or not to increase such stimulus policies.
How to add code?
For example, whether to continue to cut interest rates, whether to issue more treasury bond, whether to increase the deficit rate, whether to restart the supplement of mortgage loans to the real estate. These additional measures are to continue expanding monetary and fiscal sectors.
In fact, as long as it can still stimulate, the policy will definitely increase, but now the stimulus policy is subject to some constraints. This year, social financing has made a good start and investment has made a weak start. The intensity of fixed assets investment has declined significantly, and a large amount of funds have been idle in banks. It seems difficult to implement stimulus policies. Why?
The RMB exchange rate has fallen, and stimulus policies are constrained by four factors
What are the constraints on stimulating policies?
I have previously talked about the logic of consumption, investment, and export, and here I mainly focus on four constraints:
The first point is the constraint of local debt, especially urban investment bonds.
On the one hand, it is controlling the expansion of local urban investment bonds, and on the other hand, local finances are tight, busy paying debts, and busy paying wages. As I said before, in China’s debt economy system, treasury bond and local special debt are the aorta, and local urban investment debt is the capillary. A large number of projects rely on the urban investment debt of a large number of county and city units. Now with the shrinkage of capillaries, the intensity of investment has significantly decreased, but it cannot be relaxed. Some places borrow new debt to repay old debt. On the surface, debt Financing is large, but the money does not go to the project, but to repay old debt. This is the leverage ratio constraint.
The second point is the constraint of weak demand in both domestic and foreign markets.
Foreign demand has decreased rapidly this year, with exports mainly supported by automobiles in the first four months, while other exports have been relatively weak. In this way, investment in export manufacturing will be weak. Domestic demand has been relatively weak for a long time, with a wave of demand released in the first quarter, mainly driving the service industry, while the manufacturing industry has cooled down relatively quickly. The purchasing power of households is insufficient. Last year, car consumption stimulated overdraft demand. This year, sales of major categories of consumption, such as cars, mobile phones, home appliances, furniture, cosmetics, luxury jewelry, etc., are very sluggish. Then, the inventory in the manufacturing industry is relatively high. Investment ultimately relies on consumption to resolve production capacity, and consumption is sluggish, making it difficult to invest.
The third point is the balance sheet constraints of businesses and households.
Simply put, the debt of businesses and households is relatively high now, with households mainly relying on mortgage loans and lacking strong investment and consumption capabilities. At present, there is a phenomenon of balance sheet recession, where companies are not busy expanding their investments, but rather selling non-performing assets and unprofitable businesses; Families are not busy borrowing money to invest, but also repaying loans. This year, the real estate recovery feels like a flash in the pan. Ordinary families cannot afford a house, wealthy families lack investment confidence, and middle-class families are burdened with high mortgage payments. This is also the leverage ratio constraint.
Fourthly, the RMB exchange rate has declined.
The RMB exchange rate has rapidly declined this year, exceeding market expectations. Last year, when it fell below 7 o’clock, the US dollar index reached 110;
This year, the US dollar index is 104, and the Chinese yuan has fallen below 7.1. From this comparison, the RMB this year is weaker than last year.
What is the reason?
The main reason is the widening interest rate difference between the two countries. On the Chinese side, the economic recovery is less than expected, investment is weak, monetary easing is loose, and market interest rates are falling; In the United States, the Federal Reserve has raised the federal funds rate to its highest level, resulting in a significant increase in interest rates. At present, the short-term deposit interest margin on both sides has reached about 2 points, and the yield of 10-year treasury bond has reached about 1 point, which has promoted the increase of arbitrage motivation, capital export and the decline of exchange rate.
Have you noticed that these four constraints are actually the sequelae of past stimulus policies. The more stimulated it is, the higher the debt, the weaker the consumption, the more depreciated the RMB, and the tighter the constraints.
However, some people may think the other way around. At this point, if stimulus is given up and stopped, it will worsen even more. Local government finances will be tight, debt is prone to thunderstorms, corporate and household incomes will be worse, and unemployment rates may rebound. Therefore, it is necessary to continue stimulating.
So, now we have reached a crossroads of policy. This year, the government has set a GDP target of 5%, which is lower than market expectations. This may be to lower the expectations of society and the bureaucratic system. Relatively speaking, the economic speed has slowed down, debt control and control have placed more emphasis on safety and stability.
My feeling is that in the future, the government will maintain a normalized stimulus policy, issue as many special bonds as needed, and maintain a relatively strong investment in infrastructure and technology projects. At the same time, additional stimulus policies may also be added, including a possible interest rate cut.
However, there will be no additional large-scale stimulus. On the one hand, large-scale stimulus is not effective, and on the other hand, continuing large-scale stimulus will result in a greater depreciation of the renminbi and greater debt risk.
Better reform by 4% than stimulate by 5%
Here, let me share my viewpoint.
Do you want to save the economy? Should the stimulus policy be increased?
I have four opinions:
The first point is that rescuing the economy is definitely necessary. The government has a considerable amount of resources and power. If not rescued, market resources will become more scarce, and the economy will be worse. The key lies in how to rescue it, whether to continue to stimulate demand, invest in infrastructure, or find other ways.
Secondly, we do not agree with large-scale stimulus policies on the demand side.
The demand side stimulus cannot continue on this path. The more we go, the more debt we have, the more dangerous we become. Don’t try to use a bigger foam to cover the previous foam. As I mentioned earlier, inflation and exchange rate crises will bring an end to loose policies. Currently, there is no inflation on the surface in China, but the RMB exchange rate has declined. The decline in exchange rate is itself an external manifestation of inflation. We also need to consider that China controls cross-border capital and the renminbi is still falling so rapidly. This is enough to point out that this path cannot continue down.
The third point is to implement a series of policies to improve people’s income.
There are several main points:
First, a sum of 2 trillion treasury bond will be issued to ordinary families. The central government still has the ability to borrow money. It will directly use the credit of the central government to borrow money, and then send money to ordinary families to pay unemployment benefits. This will directly improve the income of ordinary families and boost their consumption ability. The current CPI is relatively low and can withstand this funding.
The second is to reduce the interest rate on existing housing loans, which increases the debt burden of homebuyers, equivalent to increasing the income of ordinary households.
The third is to increase the proportion of profits paid by state-owned enterprises on a large scale, and then reduce and refund taxes on small and medium-sized enterprises, implement a negative personal income tax system, and provide tax subsidies to low-income families.
The fourth is to allocate state-owned assets on a large scale to enrich social security funds, and significantly increase the pension amount for rural households.
The fourth and most important thing is to launch a new round of reform and opening up.
At the end of 2019, economists were discussing whether to use stimulus economic policies to ensure the economic target of 6%. I wrote an article at that time called ‘Reform 5% ? Stimulation 6%’, which preferred the 5% brought by the reform to the 6% brought by the stimulation.
Now three years have passed, and the views remain unchanged, but the data has changed. We would rather reform the 4% we bring than stimulate the 5% we bring.
This itself can explain the problem, what problem? The more stimulus, the worse the effect, the lower the economic growth, the higher the debt growth, and then the harder it is to initiate the reform, and the worse the reform effect.
Next, it is necessary to launch a new round of reform and opening up, reform the economic system domestically, and improve international relations externally. How to reform?
In terms of finance, it is necessary to shift the direction of expenditure from infrastructure investment to family welfare, while streamlining personnel and strengthening legal supervision. In terms of currency, we will promote market-oriented reform of banks, as well as market-oriented reform of interest rates and exchange rates. In state-owned enterprises, breaking the monopoly of state-owned enterprises, allowing private enterprises to enter, improving investment confidence of private enterprises and the income of ordinary households. In terms of land system, the reform of rural land property rights aims to achieve free circulation of rural land.
There are many contents and difficulties in the reform, but the most crucial one. Only by deepening reform and expanding opening up can we change the vicious cycle of economic stimulus and overcome difficulties.