In 2021, the world economy will return to the growth track. At the same time, the world economy has encountered new problems in 2021, and the stagflation that has not been encountered in 40 years has emerged. The economy is decelerating, but prices are rising. And in the midst of the global economic slowdown, there has been a situation that has never been seen before, with developing countries decelerating faster than developed countries, or developed countries growing faster than developing countries. Judging from the current situation, this trend will continue in 2022. Developed country economies also experienced a deceleration after the third quarter of 2021. As a result, global growth is expected to be lower than the potential growth rate again in 2022, thus returning to the low growth trend before the epidemic. But unlike before the pandemic, inflation is rising. U.S. inflation was 6.8 percent in November 2021, the highest level since 1982.
As we all know, before the 1980s, with the collapse of the Bretton Woods system, the rise in prices in the United States became a prominent problem in the world economy, forming a wage-price spiral, forcing the Nixon government to begin to use administrative means to forcibly freeze wages and prices. Now that prices have risen so high, the market has questions, is it now encountering a stagflation that has not been encountered in forty years? If so, will it take anti-inflation measures like the ones did back then? We believe that the current situation is similar and different compared to before the 1980s.
The similarity is that this price increase has both cost push and demand pull. From the perspective of cost advancement, under the impact of the epidemic, there has been an irregular price increase in the supply chain of production, warehousing, transportation and other logistics, which has increased the overall production cost. This is most evident in China, forming a huge external supply impact on downstream enterprises, especially small and micro enterprises. In terms of demand pull, in order to alleviate the damage caused by the epidemic to the economy, all countries have adopted loose macroeconomic policies, especially monetary policy. In contrast, developed countries have more relaxed policies, particularly in the form of direct financial assistance to low-income groups. As a result, although the economic situation is not good, consumption is relatively strong, which in turn drives up prices. The cycle of cost push and demand pull was an important reason for the stagnation of advanced economies in the 1970s.
The difference is in the historical context in which it takes place. 40 years ago, in the context of the "Cold War", there were still two parallel markets determined by two very different economic systems. Economic globalization under the current world pattern market economic system is no longer two parallel markets. The world has formed three independent but interdependent sectors: one is the manufacturing sector of emerging Asian economies represented by China, the other is the resource and energy sector represented by the Organization of the Petroleum Exporting Countries, which touches on product exporters, and the third is the developed countries as consumer markets. These three sectors have formed a global industrial chain with a clear chain under economic globalization, although complex. Because economic activities are transmitted along this industrial chain, various economic phenomena, including "stagflation", become global, rather than independent events in a certain sector and a certain region.
From the perspective of the global industrial chain, on the supply side, the impact of the epidemic has disrupted the production order, the bottleneck of supply has occurred, causing the price of energy resources and other prices to rise, and through the industrial chain, it has been transmitted to emerging economies to promote the cost of manufactured products, which is also the basic reason for the rise in China's PPI. On the demand side, developed countries are the main consumers of global products, and their market size and consumption tendencies determine the export performance of developing and emerging economies. Under the impact of the new crown epidemic, in order to alleviate its harm to the economy and society, developed countries have generally adopted direct financial subsidies for vulnerable enterprises and groups. While stimulating consumption, it has maintained stable employment in related industries, especially the service industry. This also causes price increases due to demand pull-ups, which can be transmitted back to developing economies.
Due to the different positions of countries in the same global industrial chain, the impacts they suffer are different, so the economic performance and price rise are also different, which determines the countermeasures taken by different countries.
At present, the Fed's approach is to try to manage liquidity separately from interest rates, that is, to tighten liquidity, but interest rates do not move, and the means is to reduce the scale of bond purchases. Judging from the current situation, the original target set to be completed by June 2022 was advanced to the first quarter. This means that there is no possibility of raising or not raising interest rates after the first quarter of 2022. In other words, U.S. monetary policy is now taking a slow turn, and the biggest policy risk in 2022 is whether it will take a sharp turn, when will it become a sharp turn?
A sharp turn in US monetary policy will bring risks to the global economy and finance: First, the risk of fiscal and monetary policy advancing and retreating together. Under the impact of the epidemic, fiscal and monetary policies are increasingly bound together, forming a de facto MMT, thus forming a policy of common progress and retreat, and it is necessary to retreat together. The Central Bank will reduce the size of treasury purchases, the Treasury Department will reduce Treasury issuance, we expect the Fed to reduce Treasury bonds by about $780 billion in 2022, and the US Treasury Treasury Bond supply will decrease by $113 million in the same period. Due to the current phenomenon of stagflation in the economy, it is necessary to have fiscal and monetary policies at this time, and at this time, we will divide our forces and perform our respective duties, that is, monetary policy is anti-inflation, and fiscal policy is to promote growth. However, the convergence caused by the binding of fiscal and monetary policy not only makes such opportunities lost, but also has the potential to bring greater economic fluctuations.
The second is the spillover risk caused by the shift in US monetary policy to the global economy and finance. This will have a very big impact on emerging economies. While not excluding the currency crisis caused by capital outflows and currency depreciation, people are also worried about debt crises, especially in low-income countries. The impact of the pandemic on the economies of low-income countries is so severe that in the first half of 2020, when the epidemic was just spreading globally, many countries in sub-Saharan Africa already had difficulties in repaying their debts and demanded relief from the international community. An Official Cease-And-Go Agreement (DSSI) was formed under the unanimity arrangement. China has also signed debt relief agreements with nineteen African countries and reduced interest-free loans due to fifteen countries. As the impact of the epidemic eases, debt restructuring will once again be on the agenda. The risk of prefabricated new debt crises and old debt restructurings will be intertwined and will be a sign of spillover risks in the 2022 SHIFT in U.S. monetary policy.
In general, the world pattern in 2022 is three difference orders, what difference order? The first is the difference in controlling the epidemic, the vaccination speed is not the same, the speed of opening is not the same, can the production order be restored to normal, and do employees dare to go to work normally? Second, it is rare to see developing countries growing at a lower rate than developed countries in so many years, is this growth rate difference a short-term phenomenon or a long-term trend? What is its impact on the world economic landscape? Third, it is also because these differences determine the monetary policy of various countries, the inconsistency of fiscal policy, and ultimately manifest itself in the difference in interest rates, and this interest rate difference will lead to the flow of international capital back and forth, impacting the economies of various countries and bringing financial risks.
I would like to discuss the Chinese economy in the face of current changes in the global economy. The COVID-19 pandemic has changed the trajectory of the world economy, with the emergence of an epidemic cycle, manifested in the impact of the epidemic - economic downturn - macroeconomic policy easing to hedge - epidemic easing - economic recovery - loose macroeconomic policies need to be withdrawn. Therefore, the performance of the world economy in 2020 and 2021 is a mirror symmetry relationship, and China is no exception, and the performance is more prominent. In the third quarter of 2020, china's epidemic was under control, and the economy resumed growth and grew at a relatively high rate. Correspondingly, the economic growth rate in the third quarter of 2021 was relatively low year-on-year. This also means that China has come out of the epidemic cycle. But at the same time, although China's economy has come out of the epidemic cycle, it is exports that are leading China's economic growth, which is beyond expectations. Since the second quarter of 2020, China's exports have bucked the trend, with a year-on-year increase of 31.4% in the first 11 months of 2021, an average growth of 13.8% in two years compared with the same period in 2019, and 14.7% of the world export market in the past two years. It has changed the decline in the past 10 years and has become a leading force driving China's economic growth. From the substantial increase in export volume, we can understand why the energy shortage, it is not very much related to carbon reduction, not only because there is no change in the carbon trading price in 2021, but also the supply of coal is also growing, the main reason for the energy shortage is that the original export industry that withdrew from production re-entered production, so that the machinery and equipment that was originally thought to be surplus were put back into use, and the demand for energy, especially electricity, was increased.
At present, the leading role of exports in China's economy is weakening. New export orders have been in the contraction range for 6 consecutive months, the number of exports has fallen sharply, and the export performance is more dependent on export price support. It is also from this perspective that if the world economy is put back on track, China's export return to normal will not only weaken its contribution to GDP, but also the demand for energy will weaken accordingly, and due to its impact, we expect coal prices to fall sharply in 2022.
If the decline in exports is a high-probability event, China's economic growth in 2022 will mainly rely on the expansion of domestic demand, but the situation in 2021 shows that it is not optimistic. In terms of final demand, that is, consumption, the average growth rate of social retail sales in two years is less than expected. I would like to focus on intermediate demand, that is, the decline in investment. Among investments, fixed asset investment has fallen the fastest, the most worrying of which is real estate, and real estate leading indicators are all down. Although some policies have begun to be introduced, especially in the financing arrangement, the improvement is mainly from mortgage loans, the main chain of real estate funds is still relatively tight, and it is expected that the downward trend of real estate will continue to be maintained in 2022. Since real estate investment accounts for about 1/4 of investment, such a sharp decline has become a major drag on China's economic performance. In this sense, the most important arrangement in macroeconomic policy in 2022 is to see if there is an intermediate demand, that is, what kind of investment can hedge the downward trend of real estate investment. Counting on infrastructure investment to hedge against the downside of real estate investment, we believe that at least in the first half of 2022, we will not see this prospect, and investment growth in 2022 will depend on the manufacturing industry. Although the investment growth of the manufacturing industry in 2021 is still satisfactory, on the one hand, due to the rapid growth of investment in the high-tech information industry, on the other hand, due to the relatively rapid growth of investment in the export industry, however, the investment in the high-tech information industry accounts for a low proportion of the entire manufacturing investment, and the proportion of export industry investment is high, due to the downward trend of exports in 2022, investment will also decline, resulting in the decline of the entire manufacturing investment. From this point of view, consumption is less than expected, investment will decline, and the economic growth rate in 2022 is worrying. This is why the Central Economic Work Conference proposed that stability should be the first word, and stability of the economy is the first priority, and only stability can advance.
The Central Economic Work Conference is very accurate in judging the current economic situation, demand contraction supply shock, expectations weakened, this triple pressure led to economic downturn, needs macroeconomic policies to deal with. But what I'd like to discuss more is the cross-cycle problem behind this triple pressure. This is a question of macroeconomic policy response ideas, and the core is how to understand the recurrence of the challenge of stable growth. As mentioned earlier, China's economy has come out of the epidemic cycle, which is manifested as the high point of economic recovery in the third quarter of 2020, and the third quarter of 2021 is the inflection point of economic normalization, which also indicates that China's economy has entered a normal cycle determined by the already economic structure, that is, the economy has returned to the pre-epidemic state. Before the pandemic, the central issue in China's macroeconomic policy was "steady growth." However, compared with the steady growth before the epidemic, the problems of the epidemic cycle and the normal cycle appeared at the same time due to the two cycles of the epidemic and the normal cycle, causing the economic speed to decline so quickly, making the macro-control of the counter-epidemic cycle and the cross-normal cycle more necessary and urgent. It is worth emphasizing that the two cycle problems appear at the same time, especially the recurrence of the traditional stable growth problem, which first shows the arduousness and complexity of the economic adjustment of the economic structure to high-quality development. It is not that it can be turned around by talking, and it is a long-term task to turn to high-quality development. Second, it is precisely because the shift to high-quality development is a long-term task and a process, so special measures to stabilize growth are needed in the short term to avoid economic derailment. Although it is an operation against the short-term cycle, it is also to buy time for long-term work. From 2022, it is necessary to provide 12 million jobs, and the economic growth rate should also be maintained at about 5.5%, so the macroeconomic policy in 2022 should fully take into account the need to expand aggregate demand.
In view of this, I would like to comment on the significance of the Central Economic Work Conference. First of all, active fiscal policy should improve efficiency and pay more attention to precision and sustainability. Second, prudent monetary policy should be flexible and moderate to maintain reasonable and sufficient liquidity, because China's leverage ratio is declining, so monetary policy relaxation can be achieved. Third, there is a need for special emergency arrangements for the downturn of real estate. In addition to increasing the construction of affordable housing, the most important thing is to promote the healthy development and virtuous circle of real estate due to the city's policies. The Central Economic Work Conference stressed the need to strengthen the guidance of expectations, explore new development models, and adhere to the principle of renting and purchasing at the same time to accelerate the development of the long-term rental housing market, which is of great guiding significance. This is because for Chinese real estate, there is a new background that has never been seen before, and the growth of Chinese is about to enter a historical inflection point. Since 1998, China's real estate has continued to rise, and its background is that the population has also continued to grow, but from 2021, this background has begun to change, making the basis of the whole discussion change.
It is also based on the changes in the historical background of Chinese, and more emphasis needs to be placed on high-quality development. The Central Economic Work Conference particularly pointed out that in the new stage of development, profound changes have taken place in China's domestic and foreign environment, and major theoretical and practical issues need to be correctly understood and grasped. In fact, everyone reviews that all the policies introduced in 2021 are correct and reasonable, but when added together, there are inexplicable problems, synthetic fallacies are generated, and decomposition fallacies are formed. Therefore, it is necessary to emphasize correct understanding and grasp.
The central economic work conference put forward a new understanding in five aspects: We must correctly understand and grasp the strategic objectives and practical ways to achieve common prosperity. The most important thing is to make the cake bigger and better first, and then say how to divide the cake well; we must correctly understand and grasp the characteristics and behavior laws of capital. To give play to the positive role of capital, the orientation of reform and opening up is to establish and improve the socialist market economy, in the market economy, capital is a factor of production, reform is to enliven this element, this is the basic experience of China's reform in the past 40 years, the attribute of capital is expansion, expansion of course has its negativity, global experience shows that these negativity, that is, negative externalities can be eliminated by regulatory methods; to correctly understand and grasp the supply of primary products, we must adhere to the priority of economy and implement the comprehensive economy strategy. This is a change in the mode of production and way of life, in other words, it is necessary to change the mode of economic growth with the change of production mode and way of life; it is necessary to correctly understand and resolve major risks, and to carry out the two principles of coordinated and classified implementation and accurate bomb disposal in accordance with the overall situation of stability, and to do a good job in risk disposal. Among them, accurate bomb disposal is particularly important, and this is reflected in Evergrande's risk disposal; it is necessary to correctly understand and grasp the carbon peak carbon neutrality. Low-carbon economy is both a mode of production and a way of life, to achieve carbon peak carbon synthesis, first of all, from the demand side, through energy conservation to reduce carbon, rather than blindly from the energy supply side to reduce carbon, not to mention the elimination of coal to reduce carbon, but peak and carbon neutrality can not be full of their efforts.
The correct understanding and grasp of these five aspects is of great significance to the future development of China's economy and society, and 2022 is a critical period for these understandings and grasps to form policies and can be implemented. This is because China's per capita GDP has reached 12,000 US dollars, which is before the threshold of high-income society, whether it can enter a high-income society without falling into the "middle-income trap" has become a serious challenge of reality, and more profoundly, even if it enters a high-income society, the problems it faces are not the same as those faced by low-income societies. High-quality development must have forward-looking thinking, a comprehensive and coordinated reform arrangement, and the formation of a sound policy system to facilitate consistent and long-term unremitting efforts. Hopefully, 2022 will break the game.
(The author Cao Yuanzheng is the vice president of the Chinese Macroeconomic Society, the chairman of BOCI Research Co., Ltd., and a member of the academic committee of the Primus Macro Forum, and this article is the author's speech at the Primus Macro Forum hosted by the China Development Research Foundation with the theme of "Macroeconomic Situation Outlook and Policy Analysis in 2022".) ）
This article originated from China Economic Network
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