Source: Observer.com - Bottom Line Thinking
How to understand and summarize China's current macro economy, analyze and study the problems and causes therein is one of the issues of common concern to the public. Recently, Professor Zhang Jun, senior professor of liberal arts, dean of the School of Economics, and director of the China Center for Economic Research at Fudan University, was interviewed by the Observer on this issue.
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The Central Economic Work Conference held on December 11 and 12 made a profound analysis of the current economic situation and made systematic arrangements for next year's economic work. Many of these new formulations send important signals.
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The Observer Network noted that how to understand and summarize China's current macro economy, analyze and study the problems and causes is one of the issues of common concern to the public. Focusing on this topic, Observer.com invited Zhang Jun, Dean of the School of Economics of Fudan University and Director of the China Economic Research Center, to share his views.
Observer.com: Recently, a number of economists, including you, have mentioned on different occasions the authoritative remarks published in the People's Daily in May 2016, especially one of the judgments, that is, "the mainland's economic operation cannot be U-shaped, let alone V-shaped, but L-shaped." This L-shape is a phase, not a year or two that can be passed." L-shaped is generally referred to as "L-shaped recession", which means a sustained recession, but the current Chinese economy has neither a recession nor a depression. How do you think we should understand and summarize China's current economic situation?
Zhang Jun: How to define the different economic phenomena we see is a matter for economists. Some new concepts have been proposed to describe some new phenomena. For most advanced economies, in the event of a crisis or external shock in the short term, the economy is likely to experience negative growth, which we can call a "recession". If the recession is not reversed for a long time, it may turn into a so-called "depression".
Thirty years ago, Russia and some countries in Eastern Europe experienced a sharp decline in economic output after the implementation of radical shock therapy, and the curve of change was very similar to that of L. So at that time, some economists defined this phenomenon as an "L-shaped" recession.
But if we look at China, there is still an annual economic growth of about 5%-6%, which cannot be called a recession. Compared with 10 years ago, our GDP growth rate has come down, but not dramatically, but slowly. Therefore, in our case, the term "L-shaped" is nothing more than a trend towards slower growth. As for today's growth of about 5%, it is also because of the epidemic. Three years ago, China's economy grew by more than 6% per year, which is roughly in line with our expectations.
As for the L-shaped slowdown in China's economic growth over the past few years, it seems that the government has not been stimulating investment as much as it has done before, but we also need to see whether the reasons for this are convincing. It is hard to imagine that the government would change its approach without realizing the cost of trying to sustain high growth and the unbearable financial risks it would create.
On November 9, 2023, container ships were loading and unloading at Chongqing Chemical Terminal, one of the logistics nodes of the new land-sea corridor in the upper reaches of the Yangtze River in Changshou District, Chongqing.
Based on my observations and reflections over the years, I feel more and more that the slowdown we are seeing is inevitable and cannot be understood simply by the framework of macroeconomic analysis, or even understood as the result of a lack of sufficient intervention in aggregate demand. There are profound reasons for the continued slowdown in economic growth over the years.
As for the negative growth of PPI for a period of time, and the low operation of CPI, these are not so much a manifestation of insufficient demand, but rather the result of a slowdown in the economy, especially the impact of the epidemic in the past three years.
In fact, an L-shaped slowdown in growth is not new, and it is typical of almost all high-growth economies in East Asia. However, if we are Xi to look at this phenomenon through the lens of Keynesian macroeconomics, it is very atypical. If we really apply the conceptual framework of aggregate demand and aggregate supply, we can say that the growth rate has continued to slow down, which is nothing more than the increase in aggregate supply faster than aggregate demand.
I remember that in the winter of 2003, at the 2nd Annual Conference on Chinese Economics held at Fudan University, Professor Lin Yifu discussed similar topics in his keynote speech with the similar concepts I mentioned above, and in those years, we also had a moderate contraction at the macro level, but the GDP growth was still slightly above 8%, although it was significantly slower than the previous growth of more than 10%.
The difference between us and 20 years ago is that this time we have slowed down and there is a "long tail" that we can't go back to. This was the case in several East Asian economies, where the growth curve fell to a new plateau. The reason is that the potential growth rate has come down today, much lower than it was then. Just look at how much investment opportunities today are not as good as they used to be. So there aren't many opportunities to achieve a U-shaped reversal today.
Observer.com: This is indeed a very interesting phenomenon, we need to care about how this "L-shaped" trend is formed, what do you think are the deep-seated reasons behind the slowdown that need to be studied and explained?
Zhang Jun: In my opinion, the specific growth rate may not be so important, in the short term, a little more or less is not a problem, but the concern is that it is indeed slowing down in the medium and long term.
This slowdown is a trend, it's not a short-term downward cycle, so I don't think it's just a matter of demand contraction or the so-called "troika". Of course, the economy has fallen more under the impact of the epidemic in the past three years, and that is another matter.
The East Asian economy is the same as ours, and the slowdown is the next step, a trend. Some of the conditions in the past period of high growth have changed significantly, and it is difficult to support our high potential growth rate. As for where this bottom is in the future, it depends on how big the potential is, and whether the conditions for the release of the potential are met, etc., which we can discuss further, and this is a more important question.
Put simply, how we do next to ensure a reasonable increase in overall productivity is very important. As for whether we can reach a growth rate of 6% or a little higher now, I think it is possible, because before the epidemic our economic growth rate was higher than 6%, and if we have the conditions to make the economy recover better, we should be able to continue the previous trend. The question now is that productivity cannot be allowed to fall and potential growth rates in the next few years.
If you've been following economists' research papers lately, you'll notice that after '08, our productivity growth did turn to a slowdown, a noticeable slowdown. Some studies have also confirmed that this slowdown in productivity is largely the result of a high-investment-driven growth model. Of course, this judgment is not for the GDP growth data of individual years, but refers to a trend.
Some people will inevitably say that the slowdown in productivity is a global phenomenon, and that productivity is slowing down all over the world: on the one hand, the emergence of new technologies has not yet escaped the "Solow paradox"; on the other hand, with the continuous popularization of new technologies for a period of time, technological innovation activities in developed countries have also entered a plateau period, and the momentum of productivity growth will slow down impulsively. However, in addition to the technical slowdown in China's productivity slowdown, the long-standing inefficiencies in capital allocation are also a significant factor.
In this regard, many economists have pointed out that China's economy has been plagued by inefficient capital allocation and resource misallocation for a long time, and it is only short-term prosperity that will mask real problems, which we do not easily see. If you think about it, an investment-stimulus boom would encourage a lot of lending to be allocated to many low-productivity infrastructure projects, and even those with no real productivity growth. Moreover, the more you go to the grassroots level, it seems that the problem will become more serious.
On December 13, 2023, in a production workshop in Jinhua, Zhejiang, all assembly lines were running at full capacity, and workers were seizing the time to make year-end thermos cup orders.
Observer.com: Is it because the systemic financial risk is too high, which has aroused the vigilance of the central leadership, so the Central Financial Work Conference emphasized that it is necessary to comprehensively strengthen financial supervision and effectively prevent and resolve risks. That is, we have to step on the brakes and rectify finance?
Zhang Jun: Governance and financial rectification have also happened many times in the past, and this is part of our macroeconomic regulation and control. Because over-investment can accumulate huge risks in the financial sector, it is often easy to alert the top management to macroeconomic problems. However, if you look at the statements made by the central leadership in 2015, you will find that the top management may have accepted a different judgment from the previous one, believing that our past growth model is unsustainable and needs to be revised, so the idea of "supply-side structural reform" was put forward for the first time. That's a big shift.
This shift is a clear indication that there is a shared view at the top that the slowdown in the years leading up to that was not purely cyclical, but may have been structural. Lowering everyone's growth expectations at that stage and discouraging the chase of high speed is also an important signal to the market. In May 2016, the People's Daily published a lengthy interview with an authoritative figure on the current Chinese economy, which clearly expressed the central government's determination to change the economic growth model.
Of course, this is also controversial in the economics community, because there is no consensus on how to change the growth model. Is it necessary to use administrative intervention to restrict those traditional economic and investment activities? This is indeed very complicated, and theoretically speaking, marketization is the fundamental way to overcome the problem of inefficiency and misallocation of capital allocation, and there was no breakthrough in this problem at that time.
Speaking of which, I would like to mention that the 2013 Central Economic Work Conference first proposed the "new normal", and since then, I have noticed that the top level seems to have gradually accepted this narrative, believing that the mainland's economic development is in the "three-phase superposition" stage of the growth rate shift period, the painful period of structural adjustment, and the digestion period of the early stimulus policy, although the growth rate will be slower, but I believe that as long as we can devote ourselves to cultivating new momentum, our economy will still maintain medium and high-speed growth. This is a consensus at the top.
I believe that the top level has indeed shown unprecedented determination and determination on this issue, and it is indeed carrying out all-round policy adjustments according to this logic. That doesn't seem to have changed to this day. But again, the problem lies in the fact that marketization has not been done enough and has not become a decisive force in structural adjustment. In order to convert to new kinetic energy, the state has instead strengthened the intervention of industrial policy. This deserves a lot of attention, and I am worried that it will lead to a new round of difficult problems in the future.
For example, in recent years, there has still been excessive investment in many of our fields, such as the photovoltaic industry and now lithium batteries, new energy vehicles, green carbon peaking and carbon neutrality and energy storage, etc., which may generate excessive production capacity. The problem is that the government has guided or intervened in the allocation of resources through industrial policy. Once any field is found to be a hot spot, the government will guide the market to increase investment in this field, which will attract a large amount of capital in the short term, and the accumulation of production capacity is very fast. Excessive capacity will eventually lead to an overall deterioration in the industry's profitability, R&D capabilities, and return on investment, as well as huge debt for banks. So, it's possible that while we've limited too much investment in traditional areas, overcapacity in new drivers can still be a big problem.
On December 6, 2023, in Nankang District, Ganzhou City, Jiangxi Province, a freight train loaded with BYD's new energy vehicles left Ganzhou International Dry Port.
Observer: You believe that the fundamental cause of our economic slowdown in the past seven or eight years is the slowdown in productivity, which in turn has a lot to do with overcapacity. I have noticed that Mr. Yu Yongding recently mentioned such a point, he said that overcapacity is a structural problem, an industrial problem. At the macroeconomic level, from the aggregate point of view, there is only the problem of insufficient aggregate demand, and there is no problem of overcapacity, or there is only the problem of overcapacity due to insufficient effective demand. He believes that the problem of China's economy in the past decade or so is insufficient aggregate demand, not "overcapacity". What do you think about this view?
Zhang Jun: Actually, I have said enough about my knowledge earlier. On the surface, undersupply and oversupply are two sides of the same coin, but economics does not mean the same thing. Moreover, I don't think there is any need to overemphasize whether it is a short-term aggregate problem or a long-term structural problem, because most of China's economic problems are long-term. If we already have too much ineffective capacity and a deteriorating rate of return on capital, more policy incentives for investment demand could lead to the accumulation of more ineffective capacity, at least in China.
As for the current monetary and fiscal policies, despite the emergencies of the past three years of the epidemic, China's GDP growth rate is still around 6%, and the nominal growth rate is also about 8%, which should be said to be not much different from our expectations. What's more, in recent years, including this year, the amount of money put into the economy, both in total volume and increment, is still quite large, and the growth rate is significantly higher than the growth rate of nominal GDP. There is a lot of water, and the policy is not as tight as it seems, but the pressure to stabilize the economy is still there.
Therefore, I am afraid that the core of the problem is not whether to further release water to stimulate infrastructure investment, but how to improve our potential growth rate. There is so much we need to improve in this area.
Looking ahead, if our policies do not focus on solving systemic problems, and do not rely more on marketization to overcome the inefficiencies in capital allocation, the problem of investment waste and misallocation will continue to plague our economy, and it may be difficult to stabilize the potential growth rate.
A few years ago, I expressed the view that "decentralization is better than decentralization", decentralization is to reduce the intervention of industrial policies, many things must rely on the market to do, improve the degree of marketization in many fields, and the economy will slowly recover its vitality. Macroeconomic policy over the past few years has generally followed a modest stimulus to demand, ensuring that underlying job creation and short-term GDP growth do not slip too far from our expectations.
I understand very well the intentions of the macroeconomic authorities, and in this context where there are many uncertainties and challenges in the economy that we are facing, it is right to be sound on the macro policy side and not to risk overshoot and volatility. But what is important is that we need to reach a consensus as soon as possible on resolving structural problems and deep-seated contradictions, promote institutional reforms, extrapolate the boundaries of our possibilities, and better unleash our growth potential.