Source: Xinchao meditation (ID: Xinchao chensi)
Author: Kafka of xinhuamen
In the second quarter, with the unexpected explosion of the epidemic in Shanghai, in fact, it had disastrous consequences for China’s national economy, that is, the economic growth in the second quarter was 0.4%, and then whether it was the “flood release” at the financial level, or the unprecedented “five level government teleconference” in the financial policy and even the general policy, They are all response measures to deal with the “black swan” of the epidemic (i.e. the State Council’s teleconference on stabilizing the economic market, the national provincial city county four level venues, the townships and towns at the county level, and all members of the State Council’s leading group attended the meeting as nonvoting delegates).
A few months later, the tide has receded. At present, the economic and financial data in May and June have stabilized and rebounded, but the social finance has dropped significantly in July. These twists and turns have made the public opinion in the economic field extremely confused this year. The author gives his views on what he knows, what he has learned and understood about economics and finance, and what he has learned about the national strategy.
Of course, first of all, we need to say a premise. At a time when knowledge is becoming more and more complicated and even social media is becoming fragmented, it has become increasingly difficult to explore the facts against the background that topics such as the conflict between Russia and Ukraine and the epidemic prevention policy have become stance screening. The author himself also has a position, and many views are based on the choice of position, which is a guide.
This year’s economic predicament and its causes
In the quotation part, the author has already mentioned that there are great differences in the research and judgment of the economic situation this year due to the basic position orientation. Before analyzing, we should first clarify the facts, that is, what the economic situation is this year. The author starts from two dimensions, namely, the macro perspective of data and mechanism and the micro perspective of employment.
In the previous article, the author has already mentioned that the central economic work conference at the end of last year has already studied and judged the three pressures that will be faced this year: demand contraction, supply shock and expectation weakening.
Demand contraction itself is an objective existence of the economic cycle cycle, that is, the recession of the real estate cycle, and it superimposes the fundamental change of the logic of the real estate industry, resulting in the near extinction of the real estate multiplier effect. There are three reasons behind this:
First, the instrument of monetary multiplier has been banned. Since 2016 when the central government began to carry out financial deleveraging, all kinds of hidden debts and leverage tools other than the normal financial credit relationship, such as “shadow bank”, which used to provide leverage for the economic activities of real estate, have been eliminated. The three red lines of financial supervision restrict not only real estate enterprises but also financial institutions. Therefore, even though the restrictions and restrictions on real estate have been relaxed since November last year, the multiplier effect similar to that in the past can not be created.
Second, the interest mechanism of adding leverage is also disappearing. In fact, the anti-corruption in the financial sector has been lagging behind. However, last year, the central inspection team stationed in 25 financial units. Since the beginning of this year, the relevant inspection results have been continuously implemented. Hundreds of cadres at or above the bureau level of administrative institutions in the financial system have been investigated. For example, people at the level of deputy secretary of the Party committee and President of China CITIC Bank openly clamored at the meeting that “all the credit was given to me for housing loans” would no longer exist. Since the beginning of this year, we have heard more that many “hard-working loan officers” and even governors at all levels have been begging for deposits, loans and cards. Therefore, the interest mechanism behind the creation of mortgage leverage in the past is being broken, and there is no incentive to add leverage.
Third, the “six wallets” at the family level are expected to change. After the fifth and sixth middle schools of the 19th CPC National Congress, there have been changes in the future direction of China’s economic and social systems. The goal of this reform is “common prosperity”, which means that China’s future fiscal and tax system is undergoing systematic changes, and the tax subjects will move significantly. Of course, this is a long-term cumulative change.
The tax subject will gradually shift from the enterprise level to the social asset and capital gains level, and the tax will change from the flow tax to the stock tax and the change tax. Whether it is the real estate tax, inheritance tax, gift tax, including the capital gains tax that will be involved in the future, it is possible to incorporate a perfect system in the transformation of such a social system. These changes will greatly affect the family (individual department)’s inter period economic decision-making, that is, the belief in real estate speculation has collapsed.
Supply shock, relatively simple, is the impact of factors (raw materials and labor). For example, in terms of China’s energy input, last year’s coal shortage and power shortage, power cut-off and power restriction, this year’s hot weather led to the failure of normal construction, and drought led to the shutdown of hydropower in the Yangtze River Basin, especially in the upper reaches of Sichuan and Chongqing. All these are very obvious in the economic troubles. Other aspects include the impact on energy prices and raw material costs caused by the speculation of international energy and bulk commodities, as well as the impact on China’s coal price and international oil and natural gas. Recently, the Minister of energy of Saudi Arabia made a statement to the effect that “OPEC + mechanism controls the main international production capacity, but cannot control the price. He does not understand why the international oil futures market understands the future energy price trend better than OPEC + mechanism”.
The most difficult thing to deal with is the weakening of expectations. The impact of unexpected factors since the beginning of this year mainly comes from two aspects: the first aspect is the change of the epidemic situation. Covid-19 mutated to Omicron, and the Western epidemic prevention policy has made a turn. The control has been relaxed to varying degrees, which has adverse effects on us. In the past two years, China was the first country to get out of the epidemic. We have become a “safe island” in the global supply chain. We have also fully enjoyed the surge in exports caused by the external supply shock caused by the epidemic. It is precisely because of the huge dividends obtained in the past two years that the central government has made great determination to comprehensively promote a series of major social and economic reform breakthroughs.
However, in the Omicron stage, because the infectious power is stronger, our prevention and control costs are higher. These facts are further reflected in the hearts of the people. In particular, because of the uncontrolled outbreak in Shanghai in April, the epidemic entered a protracted war, and many people have suffered from group psychological intolerance. These are reflected in the further reduction of economic expectations in the economy, and reflected in the society that they are more serious, demanding and less patient in social response.
The second aspect is that the conflict between Russia and Ukraine has significantly compressed China’s strategic buffer space, and the United States has obviously become a beneficiary. This has directly changed the pattern of “Sino US joint governance” formed since the COVID-19 epidemic. The United States has changed from fear of decoupling to active promotion of decoupling. China’s pressure comes from the pressure of decoupling at the political and economic levels. Decoupling is inevitable, but the nature of the initiative is different. The current pressure of decoupling has directly affected domestic economic expectations.
From the specific employment situation, the domestic economic situation can indeed be called bad. According to the data of the National Bureau of statistics in July, the unemployment rate of China’s population survey aged 16-24 and 25-59 was 19.9% and 4.3% respectively. It should be noted that this unemployment rate actually refers to the rate of people who have no job and stay at home and do nothing. However, those who are studying or doing odd jobs (flexible employment) are not included in this scope. This situation is actually quite shocking. As mentioned in the previous article, due to the chain reaction of the Shanghai epidemic, the PMI of the service industry was 36.2% in April and 41.4% in May. Such a huge contraction has produced “permanent scars”. The damage caused by it is not only some bad debts, but also caused many market entities to be “cleared” directly.
The ability of the service industry to absorb labor is far stronger than that of the manufacturing industry. This is the reason why the youth unemployment rate is abnormally high, that is, the jobs that they could have been engaged in are “lost”.
The other part is that the COVID-19 epidemic has been superimposed since the country adjusted its economic structure. This situation is inevitable. This can be seen from the fact that the score line of this year’s postgraduate entrance examination is “rolled to the sky”. The score line has increased by 30 points compared with last year. On the other side of the ocean, what happened was the “Sino US cycle turn”. The hot job market in the United States caused inflation in the service industry.
How to break the game? Policy orientation of internal and external forces
Now, the COVID-19 epidemic is impacted by the short-term black swan, and it seems to be transformed into a long-term negative factor, debuff. The cost of prevention and control is much higher than that of previous strains. However, we can see from decomposing the economic data of the United States that thanks to the difficult maintenance of China’s supply chain, the inflation of American commodities is controllable. Since the beginning of this year, in the face of soaring inflation and prices in the United States, many people easily intuitively believe that this is caused by the Biden administration’s continuous large-scale water release. As a matter of fact, the United States, as the global financial hegemon, at least so far, has not had much impact on the mainland, and it is still passing the burden on the global countries. It will take some time for the large-scale release of water from the United States to be transmitted back to the mainland.
In fact, the inflation base of the United States is the service industry. The core problem is that the labor markets of the United States and the United Kingdom are seriously affected by the COVID-19 epidemic. The serious shortage of labor supply is the core reason for this round of salary growth. It is the salary growth that drives the service industry inflation in the United States, and its efforts to rebuild the manufacturing industry in the United States are even more distant.
It is not only long covid that destroys the production order of the manufacturing industry, but also frequent short-term damage. When we make a horizontal comparison with Japan, which is also an East Asian culture and has always advocated superior governance, we ignore covid-19 and pretend that it does not exist. The result is that Japanese society has paid a much higher cost than covid-19.
In the long run, optimizing epidemic prevention strategies and procedures is the only strategy that can ensure the stability of the secondary industry. Because of the precision and stability of the modern manufacturing industry, once it is destroyed, it is extremely difficult to rebuild. This will eventually prove to be the advantage of China’s stable economic operation.
What we need to do is to adhere to the main tone of prevention and control while optimizing the strategy, and do not let the noise interfere with the operation of the prevention and control mechanism. It should be noted that the noise also affects the prevention and control effect. Moreover, the emergence of these noises has undermined social consensus and affected economic expectations. This year’s fluctuations in the capital market are exemplified by the frequent use of the issue of epidemic prevention. In fact, if they lie flat, the black swan will still appear.
At the same time, prevention and control does not mean one size fits all. Normal economic development and social operation still need to be adhered to, and it is particularly difficult to grasp the balance under the high infectious power of Omicron. However, since the beginning of this year, prevention and control in Zhejiang, Shenzhen, Wuhan, Chengdu and Xi’an are still striving to achieve such goals. Such “both needs and needs” have indeed posed a severe challenge to grass-roots governance.
We can see from our observation of the top level’s external statements this year, especially since July, that the top level is unshakable in its determination to deleverage the real estate industry, and in its determination not to speculate on real estate. It is also unshakable in its determination not to engage in flood irrigation and not to invest too much financial resources for short-term economic data (such as the financial policy of the United States of America to reduce the interest rate to zero in one breath in 20 years). This of course means that the economic growth this year will be difficult to see, But this is also for the sake of reaping better returns in the future.
We have seen the recent inspection and investigation of leaders in the Pearl River Delta and Liaoning, urging the mobilization of major economic provinces to complete their tasks (that is, to pay the central profits and taxes in full and on time). The inspection focuses on new industries, import and export, and employment. All these show that the upper levels have indeed expressed their views on this year’s economic activities, as stated at the Political Bureau meeting in July, “do their utmost to strive for the best results”. On the premise of stabilizing the macro-economic situation, they will not excessively pursue the economic growth rate this year, but pay more attention to social issues such as employment. However, these measures also show that the top level has a reasonable and clear understanding and planning of China’s economic operation.
If we use the dynamic AD-AS model of neoclassical economics to understand the current fundamentals, we will face the huge pressure of long-term economic downturn. That is, the current technology level, labor and capital markets, and commodity and raw material markets are all facing enormous pressure that is unsustainable, for the reasons mentioned above. If we use the second law of thermodynamics to look at the whole economic and financial system, it is at a “high level” and there is a large “falling potential energy”, which is also the source of some people’s empty talk.
Such a situation requires that the demand side of the national economy, driven by real estate and urbanization, be transformed into a more sustainable driving force. In addition to sorting out the urban and rural system and stabilizing the current national economic demand, more increment needs to come from further economic opening and the construction of a new energy system.
It is the wave of joining (capitalist) globalization represented by China’s accession to the WTO that dominates the take-off of China’s economy. However, with the change of time, the developed countries, especially the United States, have been in a state of German mismatch with regard to globalization. The proportion of the United States and the G7 in the world economy has dropped by half, which is bound to lead to the decline of the momentum of globalization. The ebb tide of globalization since 2016 is actually a manifestation of the willpower of the United States and Western Europe. They no longer have the infrastructure construction costs (software and hardware) to pay for further globalization, and they can no longer dominate globalization.
Therefore, the author wrote an article last year, believing that the future trend must be the regional integration of the three major supply chains in Asia, North America and Europe. However, such integration is in fact the embodiment of regional economic integration and deepening, and the embodiment of “making up Basic Courses” after globalization has reached a certain degree. If the “domestic circulation” is understood as “closed door”, and the reliability of the supply chain is understood as relying on itself, it will lose the significance of vigorously promoting the the Belt and Road.
After all, the process of globalization must be accompanied by ups and downs if viewed from a graph. The reason for the ups and downs is the rise and fall of the core driving force. As the core strategy of China’s economy, the Belt and Road, the coordinated development of Beijing, Tianjin and Hebei, and the Yangtze River Economic Belt reflect the elimination of regional disparities, the promotion of equitable growth, and the acceleration of regional integration and opening up. Since this year, RECP countries have not disappointed us. In the visit of the old witch, except Japan, they have more or less stood by us.
Since the beginning of this year, the number of China EU trains has reached 10000, breaking 10000 10 days earlier than last year; This year, a total of 972000 TEUs of goods were sent, an increase of 5% over the same period of last year. Considering the impact of the Ukraine Russia war on the issuance of trains between China and central and Eastern European countries, this data has reflected the strong resilience of China Europe trains. The current data still cannot be compared with maritime transportation, but its own resilience and broad prospects for continuous growth are no longer paper ppt.
Considering the need to complete the “fourteenth five year plan” and the “2035 long-term goal” proposed in the past 20 years, it means that in the future we can not sit idly by and watch all of us suffer from “multi-objective imbalance” like this year, and it is inevitable to take the initiative. As the pride of China’s development since the reform and opening up, the “China infrastructure” will not end with the rational development of the real estate industry. The prospect of China’s infrastructure along the the Belt and Road in the future is broad.
Besides, it is a market with great potential to upgrade the freight transport infrastructure along the railway according to the development requirements of China Europe Express. In view of the sustained and stable development of China’s manufacturing industry and the severe contraction of the labor market in the United States and Britain caused by the coronavirus, I think there is no need to have any doubt about the prospects of China Europe Express and the development prospects of the the Belt and Road strategy.
The above-mentioned attitude of the Saudi energy minister to the outside world and the OPEC + mechanism’s resolute refusal to kick Russia out show that the oil countries are extremely resolute in the last moment of mastering old energy. No matter whether the measures to deal with climate change can be realized or not, there is no doubt that new energy will replace old energy, which has become the consensus of mankind. Well, the energy countries that used to lie on the golden mountain of petrodollars and eat nothing have all become crisis conscious.
We know that whether it is wind or light, especially photovoltaic, its production and manufacturing is a huge energy consumption project, which is also the only window of opportunity for these energy countries to protect their own survival opportunities. Therefore, even with the increase of US dollar interest rate and the recession of Europe, the demand of the world economy will decrease, and then the production capacity will decrease, and the demand for energy will also decrease. Such a logical chain does not mean that the oil price can return to the low level before and after the COVID-19 epidemic. The existence of OPEC + mechanism will certainly maintain the oil price as its core interest. Through cooperation with Russia and Middle East countries, it is our interest to ensure the stability of China’s oil supply and further expand the the Belt and Road.
Historically, Saudi Arabia adjusted the oil price and catered to the interests of the United States by obtaining the benefits of the US dollar financial system from the economy and obtaining the security commitment and legitimacy certification from the politics. However, these two points are disintegrating under the current situation. Whether it is political attacks and threats against Saudi Arabia or the constant crisis of the financial dollar system, Saudi Arabia’s interests have been damaged, which is also a common situation in the Gulf countries. This is the main reason why the OPEC + mechanism is united, that is, to control its own destiny with its own natural endowment. This, on the other hand, gives China a broad blueprint for the next step of opening up and the promotion of the the Belt and Road strategy.
Recently, the futures and financial markets are trading another rumor, that is, Chinese leaders may visit Saudi Arabia before or after the conference and invite Chinese enterprises as the main body to build their planned future science and technology city. In this way, this matter, whether it is a rumor or or a rumor, is indeed reasonable.
In China’s domestic governance, the consensus is to reduce costs. This is the reason for “building a unified domestic market”. In my opinion, this cost can be divided into three aspects. I will discuss one or two separately:
First, the prevention and control related policies and how to ensure the strength of “blocking” should ensure both economic flow and epidemic prevention effect. It is a delicate balance. On the other hand, the pressure of local fiscal cliff under the time window of real estate downward cycle pressure release. Because the anti epidemic control on the society is consuming huge financial expenditure, it is almost unbearable for the local government in the “financial cliff” state. In addition, the future tax loss caused by the control is lost twice.
Second, it is necessary to ensure the stability of China’s energy, and the primary objective of reducing energy operation costs is to stabilize coal power. Drawing lessons from last year, both coal producing and energy consuming provinces are making efforts to make good reserves. However, the drought in the whole Yangtze River Basin, especially the almost complete extinction of hydropower in Sichuan, unexpectedly pushed up the promotion resistance of roof photovoltaic. To ensure the stability of energy is to effectively reduce the operating cost.
Third, the cost of credit. When the real estate is an effective monetary multiplier tool, the central bank’s monetary policy is often described as “tight money and wide credit”, that is, the creation of the base money is tight, but the credit mechanism derived from the base money is loose.
At present, there has been a situation of “wide money and tight credit”, that is, in order to promote economic stability and growth and ensure that there is no tension in the capital chain, the banking system is desperately injecting basic currency. However, due to the explosion of the real estate multiplier mechanism and the development of other mechanisms, the credit derivative system “cannot be born”. It is similar to the “liquidity trap”, that is, the interest rate drops to a very low level, but no credit relationship is generated. People store cash assets, neither invest nor spend them. This actually shows people’s pessimistic expectations for the future.
This also shows that with the decline of China’s potential growth rate, there is room for further downward adjustment of the interest rate center. However, the situation of “loose money and tight credit” is likely to result in the continuous decline of interest rates and the increase of stock market valuation. It is necessary to control the implementation of policies to ensure the normal prosperity of the stock market, but do not go to the real estate market and then the stock market.
Horizontally, the economic rise of East Asia has its own characteristics, but there are still similarities in the overall strategic framework and practice of industrialization and financial liberalization. Both China and Japan are financial systems dominated by commercial banks. This financing mode dominated by bank credit is especially suitable for developing economies, because it facilitates the country to fully implement the industrial strategy with low capital cost. The problem is that the industrial level is prone to overcapacity, and the financial level is prone to accumulate systemic risks, which are easily covered up.
Japan’s real estate foam and stock market foam burst in 1990. However, the problems of its financial system were not fully exposed until the Asian financial crisis in 1997. The reason is that the banks delayed the recognition of toxic assets and the repair of balance sheets by continuously granting credit to zombie enterprises and banks with bad loans, which made the problems more and more serious. At present, we are also facing the problems of mandatory credit and zombie enterprises. These problems need to be cautious when releasing water to reduce the cost of capital operation.
Some people say that this year may be the best year in the next three years, and a recent internal speech by Ren Zhengfei of Huawei may also indicate the same view. The author does not hold a position on this, and agrees that this statement is reasonable to a certain extent. Because we are at the bottom of the new energy economy.
When the growth of the economic model is at the bottom, it is difficult to recognize the growth from the chart. This is because the stable growth model needs time to form a multi-party joint force and coordination, so it must be painful at the initial stage of abandoning the real estate economy and moving towards new energy. However, we should not give up the long-term optimism because of such short-term pain. How to firmly take the road of Chinese style modernization has just begun.