Li Daokui: Be wary of one black swan and three gray rhinos

Li Daokui, Dean of the Institute of Chinese Economic Thought and Practice at Tsinghua University

"I think the world economy now has one 'black swan' and three 'gray rhinos.'" On November 27, Li Daokui, dean of the Institute of Chinese Economic Thought and Practice of Tsinghua University, said at the 19th Caijing Annual Conference "Caijing Annual Conference 2022: Forecast and Strategy".

Li Daokui pointed out that a black swan is an epidemic, this epidemic is really difficult to predict, very cunning, it is constantly mutating, do not dare to take it lightly. Three grey rhinos, the first of which is a debt recession. In response to the pandemic, the level of the overall national debt around the world has risen by 18% relative to GDP, which is not a high figure, but it is based on the already high level. So whether the epidemic will continue or it will go, so much debt will always be a problem in the future, so the level of interest rates will rise in the future.

The second gray rhino is the rearrangement of the industrial chain. After the epidemic eased, developed countries will try to move some of the industrial chains back, which will lead to rising production costs and inflationary pressures. At the same time, many countries, including China's economy, will certainly be negatively affected.

The third grey rhino is the low-carbon grey rhino. The new technology to replace traditional energy sources is not yet mature, including the immature energy storage technology, which will definitely bring about an increase in costs.

In addition, Li Daokui believes that the economy of the world today is three worlds – poor countries, rich countries and China. China attaches great importance to the epidemic first and attaches great importance to economic work in the coming years. Specifically, he mentioned that while dealing with the problems left over from the old growth model of the past, we must conscientiously find ways to create our new growth points, change the mode of growth, and implement the new development concept of new growth in accordance with the new development concept.

The first growth point is that the 1 billion people in China's economy have not yet entered the middle-income population, 400 million people have entered the middle-income level, if it takes 15 years to turn 400 million of the 1 billion people into the middle-income people, then the middle-income population will double, the economic growth is very dynamic, and the pattern of double circulation will really be formed. The key is to mobilize the enthusiasm of economic entities. The government, especially local governments, does not have enough initiative in participating in economic activities, and it does not understand the development concept of the new era. The second is to cultivate new markets and let them play a role. What market? Low carbon market. It is not enough to let such a low carbon price guide the low-carbon market, and taxes should be levied on the production end of coal and crude oil, so that the market can play a decisive role.

Finally, Li Daokui concluded that the current international situation cannot be taken lightly, we must be vigilant against one black swan and three gray rhinos, and the country must return to the new development concept, conscientiously study the resolutions of the Sixth Plenary Session, conscientiously study Xi Jinping Economic Thought, and find ways to mobilize the enthusiasm of local governments. At the same time, the market approach, the carbon tax approach rather than the carbon trading method, let the market play a decisive role.

The following is a transcript of some of the statements:

Li Daokui: Good morning to all guests, I am very happy to come to the beautiful Beijing sub-center Tongzhou to participate in the 19th Annual Conference of Finance and Economics, it is not easy, it is not easy, at this moment many meetings have been completely changed to online, we are a combination of online and offline, it is not easy, we should also thank Tongzhou!

Just Yiping teacher said very well, I followed his words to talk about my ideas about the international economic situation and domestic economic response next year and the next period of time, I summed it up this way may be convenient for everyone to remember, I think that now the world economy may have a "black swan", "three gray rhinoceros", 1 + 3, a black swan is the epidemic, this epidemic is really difficult to predict, very cunning and cunning, it is constantly mutating, Last night's news came from South Africa that has not yet been named after the new pandemic and what impact it will have on our world economy, I really don't know. I'll reveal a little bit about my family, my wife studies biology, but I don't know much about biology. The general rule is that it is the most difficult to ask your wife questions often at home, and people are impatient when they ask two more questions, "You don't understand this yet, it's really stupid." I asked a few questions this morning about the virus and still couldn't figure it out.

In short, as a non-scientist, I feel unconscious, this problem is still very serious, I don't know how this South African variant virus evolves, whether this epidemic will be repeated again, it is likely that we will face the largest worldwide recession since World War II, this is the black swan, really do not know, do not dare to take it lightly.

Three gray rhinos, the first is the debt recession, just Yiping teacher said, that is, in the process of responding to the epidemic this time is not the same as the last 08 years, fiscal policy countries are very much used. After the fiscal policy came, there were government bonds issued here, a lot of government bonds were issued, and the level of the entire national debt in the world rose by 18% relative to GDP, although this number is not high, but it is based on the original high base. So whether the epidemic will continue or it is gone, so much debt will always be a trouble in the future, so the interest rate level will increase in the future, and in addition to debt, developed countries have issued a lot of debt, and many people have received free short-term financial funds from the government.

The second gray rhino is the re-layout of the industrial chain. Developed countries have been talking for a long time, before the epidemic, saying that we can't do this, and then engage in the previous globalization, our industry has hollowed out, and we want to move some industries back to our own countries, especially from China. After the epidemic, this understanding has intensified. Many economic scholars, who originally advocated global economic integration, labor division, and cross-border division of labor, are now saying: We must ensure the self-sufficiency of our products. After the epidemic eases, it is certain that developed countries will find ways to force or subsidize to move back part of the industrial chain. What does it mean to move back to the global economy, it must be that the cost of production is rising, because it violates the basic economic laws, the current global layout of the industrial chain is the cheapest, it has been optimized after years of operation, but it will definitely move back for the economic security of these countries, and the cost of moving back must rise, and it must be inflationary pressure. It has also taken a negative toll on many countries, including china's economy, the second gray rhinoceros, visible but unknown when it will come.

The third grey rhino is the low-carbon grey rhino. Developed countries are now riveting to reduce carbon, and advanced economies are far less dependent on fossil fuels than emerging market countries, which have passed that stage. Many places do achieve zero emissions, most famously in Copenhagen, Denmark, where there is a small island. Tourists on this side of the island to see the mermaid sculpture, behind the mermaid is the island, there is a big chimney on the island, this island has achieved zero emissions, the big chimney is burned garbage to generate electricity. Developed countries respond better to low-carbon conditions than we do. So they're trying to limit emissions, or raise taxes or trade carbon, so that the price of fossil fuels as a whole rises and inflationary pressures come again.

To tell a case study, it's interesting that the crude oil market I was working on recently because I tracked their stocks. What are the best and most profitable companies in the world, Mobil, BP is another big company, why are these stocks rising so fast, and I recently studied them carefully, because these companies, although they are engaged in traditional fossil energy, they have decided that whatever the reason, political correctness is OK, social responsibility is OK, they have begun to reduce their crude oil production capacity. In particular, BP, began to engage in new energy. After this reduction, the price went up, the price of energy rose from $30 to $80 now, and the virus has repeated in the past two days, and it has fallen to $70 again. These large enterprises have taken the initiative to reduce carbon for various considerations, actively reduced production, and the price of production has risen, which is equivalent to the second oil crisis in the world. So I think all three grey rhinos exist.

So what is the essence of the low-carbon gray rhinoceros, because the new technology to replace traditional energy sources is not mature, including the immature energy storage technology, it will definitely bring about an increase in costs. So one black swan, three gray rhinos, we have to be mentally prepared.

In 1974, Chairman Mao met with Zambian President Cardavon and for the first time put forward the theory of the division of the three worlds. He said that at that time the United States and the Soviet Union were the first world, Western Europe belonged to the second world, and other developing countries were the third world. I think that the economy of the world today is also three worlds, poor countries, rich countries and China. Teacher Yiping said that rich countries are no problem, they are ready for low carbon, they have a way, they can print money, rich countries are not a big problem, this I agree, poor countries have a big problem. What China does depends on how we respond. China is neither a poor country nor a rich country, China is China, we have both the nature of a poor country and the characteristics of a rich country.

So how should China respond? First of all, we must attach great importance to the economic work in the next few years, no matter when the epidemic resumes, the general secretary has a sentence in the report of the Nineteenth National Congress, and later he also repeatedly said it, and he spoke very deeply. He said that "the great rejuvenation of the Chinese nation is by no means something that can be easily accomplished by beating a gong and a drum, and we must be better prepared to make painstaking efforts than before." When I listened to this remark at the Nineteenth National Congress when I watched live television, I chuckled in my heart. I am afraid that in the coming years, We will have to make preparations for more arduous efforts than in the past, and we must not take it lightly.

Specifically, what to do, my point is that we must find ways to deal with the problems left over from the old growth model in the past, and at the same time, in accordance with the new development concept, we must conscientiously find ways to build our new growth points and change the growth mode. The new growth point is nothing more than two, the first growth point, that is, the 1 billion people in China's economy who have not yet entered the middle income, most of them are in the countryside, and it may be that some members of their families work in the city, but they have not yet settled down, the mentality is not urban people, and they have not been included in the circle of modern economic life in a broad sense.

These 1 billion people are the hope of our new growth point now, if we can spend 15 years to turn 400 million of the 1 billion people into middle-income people, then the middle-income population will double, that is, the world's largest, China's economic growth is very dynamic, the pattern of double circulation will really be formed. What to do, my opinion is that the key is to mobilize the enthusiasm of economic agents. What is an economic subject, in addition to entrepreneurs, the government is also, the government is directly involved in economic activities, the modern economy and Marx studied the market economy at that time is completely different from the point is that the participation of the government is very high, whether in China or developed countries. Government spending accounts for more than 30% of GDP, 35% in developed countries, and some are higher, such as France' 51%.

So our problem now is that the government, especially local governments, does not have enough initiative to participate in economic activities, and it does not understand the development concept of the new era. Sometimes lying flat, afraid of taking responsibility, to be more specific, what is a major problem now, local governments at all levels have spent a lot of money for more than ten years and have built very beautiful infrastructure. Most of China's prefecture-level cities have new cities, generally the government is classified into the new city, the infrastructure is built, the high-speed rail subway, the airport is done well, the debt is also negative, and the debt level is very high. I roughly calculated that it accounted for at least 50% of GDP, so the local government is saddled with a lot of debt, he has no incentive to find ways to absorb the household registration population, because each absorption of a household registration population to pay tens of thousands, often 100,000 costs, kindergartens, primary schools, pensions, health, epidemic prevention, public security, police, public services all cost money, local governments now have no money, they lack of motivation. In addition, after the population is large, the epidemic will be responsible after it comes out, which is the most important reason why the economy has stopped at present. Local governments have the money to carry out infrastructure construction and carry a lot of debt, but there is no incentive to engage in urbanization, and new growth points cannot be built. The initiative of local governments has not been mobilized. The resolution of the Sixth Plenum repeatedly emphasized the "ten clear-cuts." One of the explicit ones is to clarify the decisive role of the market in the allocation of resources, and at the same time to better play the role of the government, how to better play the role of the government. At present, economic incentives are not in place, local governments have a lot of debts, and fiscal taxes are retained very little, mainly because the central government has collected it, and local governments have incentives. Therefore, giving better play to the role of local governments is the core of the implementation of the resolutions of the Sixth Plenary Session.

The second thing is to cultivate new markets and let them play a role. What market? Low carbon market. Now what is our approach, we study Europe, we want to engage in a cap and trade is to limit emissions for some industries, let these people participate in carbon emissions trading, which is not successful at present, why, there are too few companies involved. There are fewer participating enterprises, and affected by monetary policy, the carbon price traded is currently very low, more than 40 yuan a ton, Europe is more than 60 euros a ton, let such a low carbon price to guide the low-carbon market is not OK. How to do it, it is very simple, we should engage in carbon taxation, carbon tax is the simplest, in coal, crude oil, production of this end of the tax. After the tax is collected, the cost of steelmaking will certainly increase and will be transferred to the price of steel. After the price of steel went up, the price of second-hand steel and scrap steel immediately went up. Steel mills are willing to use scrap steel to make steel and reduce coal use. After the scrap comes, the cost of steel will fall, and the output of steel will not be affected, or even rise. What about cement? Cement can not be recycled, so the carbon cost of cement is still rising, so after a few years the construction industry will use more steel, less cement, the steel industry will expand, the cement industry will be reduced, this is the market to play a decisive role. Relying on whom to do it, relying on the government to cultivate it, now it is a separate battle.

I have a friend who is an analyst in the steel industry, he leads the carbon reduction plan of the steel industry, saying how many years of steel production will peak, I said that this thinking is not right, there is no overall thinking, contrary to the general secretary's systematic thinking. The steel industry may increase production, cement should reduce production, copper should increase production, because copper is a necessary material for various electrical appliances, which is system thinking. So what is the market economy, the market economy is tens of millions of computers to calculate together, is distributed computing. The government's computers are no more capable than the computing power of tens of millions of computers, so the essence of the market is distributed computing, and such a complex general equilibrium is calculated step by step.

To sum up, the current international situation cannot be taken lightly, we must be vigilant, one black swan, three gray rhinos, the country must implement the new development concept, conscientiously study the resolutions of the Sixth Plenary Session, and find ways to mobilize the enthusiasm of government departments. My idea is to turn local debts into national bonds at once, and then establish new fiscal discipline for local governments and mobilize their enthusiasm. At the same time, the carbon market should be activated by the method of carbon taxation instead of carbon trading, so that the market can play a decisive role and build the low-carbon economy into a new growth point.

Thank you.