With prices falling and demand becoming more inadequate, economic policy is bound to take a major turn in the next few years.
In the absence of major adjustments to the wealth distribution structure, two situations are very likely to occur: low economic growth to the left, and fiscal deficit financing to the right.
1
On August 9, the PPI and CPI, which reflect the needs of enterprises and residents, were announced. Unsurprisingly, the CPI broke 0 and the PPI continued to grow negatively.
In the face of this data, the market has two views:
One group believes that deflation has become a basic fact, while PMI reaction production continues, and if the problem of excess is not solved, prices will hover around the 0 axis;
The other group believes that core inflation has turned to a year-on-year increase of 0.8%, the decline in PPI has also slowed, coupled with the low base effect (CPI fell after September last year, PPI downward trend continues) prices are likely to have bottomed out, and then there will be a U-shaped reversal in prices like the central bank said a few months ago.
Either side is a short-term view, and whether it is right or wrong depends entirely on whether consumption can expand after August and whether the economy can be launched to offset the pressure on prices caused by the current economic contraction.
But in response to the problem of insufficient consumption in response to lower prices, one thing is certain: our CPI fluctuations are indeed becoming more and more "weak", demand (investment and consumption) is declining, and economic heat is declining - which will inevitably force the emergence of major economic policies.
The chart below is China's CPI chart.
Don't look at how the single month is, to look at the whole, there is a very obvious trend overall: the peak is getting lower and lower, the price trend is downward as a whole, and the level of price growth in the past few years after the epidemic has caught up with 2015 (look at the cluster size formed by the bars).
In the 1997 Asian financial crisis, we deflation, the policy took advantage of the opportunity of joining the WTO in 2001, opened the export-led economic growth, and the price economy took off rapidly;
In the subprime mortgage crisis in 2008, external demand suffered a heavy blow, and the policy shifted to domestic demand stimulation and opened the "4 trillion yuan" plan, and prices took off and economic growth turned around;
From 2012 to 2016, PPI continued to have negative growth for more than 50 months, CPI was sluggish, and the policy used the "PPP" model to partially reduce production capacity through real estate, which brought animal prices to take off in exchange for three years of stable economic growth (slowing down).
This time we are once again faced with insufficient demand, what major economic policy shift will occur?
The author believes that there is a high probability of opening the Japan-US model - fiscal deficit financing to subsidize enterprises and residents to ensure economic growth.
Strictly speaking, there should be three options.
Recently, a scholar in the Japanese system wrote an article analyzing the root causes of China's current economic problems and pointing out three options for the future, including the option of fiscal deficit financing (which is also the most supported and most probable by domestic scholars), and the other two are the "ignore it" ostrich faction and the strong liquidation hardliner.
2
You know, economic growth and credit growth in the era of credit economy are almost synchronous. In the context of an underdeveloped domestic equity market, credit manifests itself as bank loans, that is, liabilities.
The reason why it is impossible to stimulate domestic demand to revitalize the economy like the three deflationary periods mentioned above is mainly because since 2008 economic growth has almost completely relied on the leverage of residents, and the leverage ratio of residents has increased from 18% in 2008 to 62% now.
The reason why it is judged that the Japan-US model will be opened is mainly because the only one in China that has the ability and motivation to increase leverage is only ZY Finance.
The problem now is that insufficient consumption makes investment by enterprises not active, and the spontaneous contraction of the economy must be broken with the help of a third party. It is no longer possible to rely on external demand to drive the economy, and it can only be used as an important internal circulation auxiliary option.
According to data from the National Finance and Development Laboratory, taking 2022 as an example, China's macro leverage ratio calculated using total credit is 279%, of which 21% is the ZY government, 32% is local government, 73% is urban investment, 91% is non-urban investment enterprises, and 62% is residents.
ZY has the lowest fiscal leverage.
In addition, according to S&P's article "Leverage Ratio of Chinese Enterprises Ushered in a Turning Point":
Due to the decline in consumption and economic growth, the leverage ratio of enterprises will peak in 2023, and investment will remain moderate in the next three years, and it is difficult to rely on encouraging private enterprises to increase leverage.
In this way, the task of stabilizing economic growth is only ZY Finance.
3
So what about deficit budgets? Where is the money spent after ZY fiscal leverage?
In the past, we have followed the EU's insistence that 3% of GDP be regarded as the upper limit of the fiscal deficit, and consumption has been very small, and how to increase the deficit ratio is not a simple economic problem.
In addition, after the leverage, the money is likely to be used for recurring expenditures such as social security for two reasons:
1) Investment drives are becoming increasingly unsustainable.
Since 2010, more than 40% of China's economic growth has come from investment, and now investment income is rapidly declining—according to the Bank for International Settlements, our total debt/GDP ratio has risen from 190% in 2010 to 297% in 2022.
2) If government-led investment continues, wealth distribution will further deteriorate and squeeze private enterprises.
Recently, a Japanese economist published an article entitled "Balance Sheet Crisis: Three Options for China's Economy", which used data to roughly estimate and pointed out that government-led investment has had two negative effects:
First, the distribution pattern of wealth generated by investment is difficult to flow to private enterprises and residents.
The distribution of wealth is roughly 6:1:3 for official (local and state-owned enterprises): unofficial (private enterprises and residents): and creditors (investors). Wealth flows to residents, how domestic demand expands;
Second, a large number of zombie enterprises with "implicit government guarantees" have gathered.
In order to survive, zombie enterprises suppress the demand for loan renewal and cannot effectively reduce interest rates, which virtually increases the investment costs of private enterprises and the difficulty of obtaining loans.
In summary, there are only two paths in front of us:
One is to endure the gradual decline of the economy, do not take too many actions in the policy, continue to deleverage local and housing enterprises, and rely on encouraging private enterprises to increase leverage and cultivate new industries to temporarily stabilize the economy;
The other is to rely on the leverage of ZY finance to alleviate the pressure of local debt, and at the same time use more of the borrowed money on basic social security to indirectly reduce the consumption cost of residents, leaving investment space to private enterprises to complete the strategy of expanding domestic demand.
At present, there are few effective voices for policy, but the decline in economic growth caused by low prices is bound to force major policy adjustments. After all, the overall goal of "reaching the level of a moderately developed country in per capita GDP by 2035" is inseparable from an annualized economic growth of 4.6%.
This is both a commitment and a sine qua non for stability.
Always, there is not much time left for us, and I firmly believe that the economic transformation of the past few years will definitely take place - the readjustment of economic policy!
Otherwise......