Authors: Li Keaobo, Vice President of the Institute of Chinese Economic Thought and Practice at Tsinghua University (left), Xu Gao, Chief Economist of Bank of China Securities (right), and Lu Ting, Chief Economist of Nomura Securities China (middle).
This article is a transcript of a conversation at the 46th Tsinghua University China-World Economic Forum held by the Institute of Chinese Economic Thought and Practice at Tsinghua University on January 8, 2024.
A lot of information! Li Ke Aobo, Xu Gao, and Lu Ting talked about the economy in 2024
Li Ke Aobo (Deputy Dean, Institute of Chinese Economic Thought and Practice, Tsinghua University):
First of all, I would like to ask Mr. Xu Gao, Chief Economist of BOC Securities, what do you think is the biggest risk to China's economy in 2024 and what do you think are the main highlights?
Xu Gao (Chief Economist of Bank of China Securities):
If simply put, the biggest risk is the lack of demand, 23 years to see the pressure of domestic real estate weakening, 23 years, for example, the automobile industry is very good, export competitiveness is very strong, but because the domestic stock is too serious by the policy, so the downward pressure on the economy is still relatively large. So far, although the policy warm wind is blowing frequently, last year's Central Economic Conference, including the Central Financial Work Conference, has actually released a lot of positive signals, but so far, it seems that the real estate market is still relatively problematic, so from this point of view, it should be said that 24 years is still a year of relatively large downside risks. Of course, when we make forecasts, we take into account that the current policy expectations are still relatively strong, and I think the GDP growth rate in '24 will be similar to that in '23, which is also 5%. Why is the GDP growth target for '24 also set at 5%? Although it is both 5%, because the base has been raised, the situation in '24 should be better than that in '23. You may not only listen to the 24-year economy and policies, but also observe their actions to see if there are any specific measures, so this is a superficial level.
I think at a deeper level, in fact, the problem is quite big, what is the problem?
First, many people think that China's traditional growth model is no longer good, saying that real estate is no longer good, the peak has passed, and they want to go to real estate. The infrastructure is not working, there is too much debt, we can't do it. But have you ever thought that these models are an important reason for the glory of China's reform and opening up in the past 40 years? Real estate and infrastructure, I have talked on many occasions, just look at real estate, just look at infrastructure, have their own problems, real estate is a real estate bubble, infrastructure is the return on investment is too low, can not cover the cost of financing. Taken together, this is China's unique business model of local governments running cities, which is very simple, that is, local governments borrow money to build infrastructure, and the problem of infrastructure is that it has public welfare, and the return on investment of projects is very low, and it is difficult to cover financing costs, not only in China, but also in the world. So the whole world knows that infrastructure is a good thing, it's complicated to do, and it can't be done, when President Biden first took office, he said that the United States was going to build 3 trillion infrastructure, and this number was cut again and again, and then it was gone. Because land is owned by local governments in China, the return on investment of infrastructure can be largely reflected at the social level, bringing about an increase in land prices and housing prices, so local governments can realize the social benefits of infrastructure investment by selling land, and then repay debts, so the account of infrastructure investment is not even at the project level, and the return on investment cannot cover the financing costs.
But at the government level, if you add in the land revenue, it is possible to settle the account. China's infrastructure + real estate model has been engaged in for 20 years, which is an important magic weapon for us to become the envy of the world's infrastructure madness, I think many people he did not understand, thinking that this thing is a bad thing.
Xu Gao, chief economist of Bank of China Securities, delivered a speech at the forum.
Rick Aobo:
This Central Economic Work Conference mentioned that it should be established first and then broken, are our policymakers aware of this problem?
Xu Gao:
I think it's realization, but after realizing it, the real estate part that you see now is too broken, and you have to adjust it, but the policy should be said to be relatively slow so far. And what is the reason for the slow introduction? Because the understanding has not been reversed, there are still many people who think that real estate is a bunch of bad guys, infrastructure is a Ponzi scheme, and policies can only be repaired and repaired, but they do not understand what the real reason for China's success is, and it is different from the West, China's economy is very different from what mainstream Western economists say, but the difference does not mean that we are wrong.
If we talk about 24 years, if we can correct the deviation in time, then I think the economy will have greater development, otherwise, the policy is just forced under the downward pressure of the economy, squeezing toothpaste out, but counting on how good the economy can be, and even saying that we want to continue the glory of the past 40 years of reform and opening up, I think it is more difficult, so I think this is a deep-seated problem.
Rick Aobo:
Your views coincide with the reports we have published. This model has indeed accumulated two problems over the past few years, one is high housing prices, and the other is the heavy debt burden of local governments.
Xu Gao:
First of all, I think this model should be reversed, China's economy is like a bicycle, if it is slow, it will not stand, and this is indeed the case. China's housing prices are indeed high, there is no doubt about it, but what is the reason for the high housing prices? It is necessary to see clearly that this is a problem of land supply, from 2004 real estate called "831 limit", all operational land transfer can only be carried out through bidding, auction and listing, from 05 to the present to the national land supply annual growth rate is negative growth on average, the first-tier city of Beijing, Shanghai, in 05 years, these two cities built about 30 million square meters of houses a year, and now Shanghai can only repair more than 10 million square meters a year, and Beijing can't build 10 million square meters of houses a year, and the supply has shrunk significantly. You will find that if you look at the growth of China's completed housing area, it has not even run out of GDP in the past 20 years, so we all talk about China's overcapacity, and the real estate market actually has a very big shortcoming. So in this case, why don't housing prices rise? I think the very important reason why housing prices have risen and have remained high is that housing prices are originally a price baton, and if something is expensive, it means that the supply of this thing is insufficient, and a relatively high price will lead to more supply, but the problem in China is that the land system leads to the inelasticity of the supply of land to the price, and when the housing price rises rapidly, the land supply may not grow very quickly. More than 10 years ago, when regulating housing prices, on the one hand, we had to tighten the monetary base, and on the other hand, we had to tighten the land roots, and the housing prices rose rapidly, and we had to reduce the supply of land, which made the housing prices rise even more.
On the other hand, in terms of space, in cities where housing prices are rising relatively fast, such as cities in the east, the supply of land is less, and the land is inclined to the central and western regions. Therefore, it is necessary to grasp the main contradiction of this problem, if we say that the price elasticity of land is made, when housing prices rise relatively fast, more land will be supplied, and more land will be supplied where housing prices rise rapidly, and housing prices can be completely controlled.
Rick Aobo:
I would like to add two pieces of information, one is that China's first-tier cities have the lowest proportion of residential land in the world, far lower than those of London and New York. Second, before the epidemic, taking Beijing as an example, a land supply plan would be issued at the beginning of each year, which had not been completed in one year for ten consecutive years, and about 60% of the land was sold in many years. What do you think about local debt, do you see it as a risk, or do you want to acknowledge its historical contribution?
Xu Gao:
I think we should engage in local government bonds, which are China's magic weapon. If from the perspective of Western economics, after the subprime mortgage crisis, Western countries have generally fallen into the trap of deflation, to deal with deflation, in 2022, former Federal Reserve Chairman Bernanke has already made an important speech, he said that deflation will not happen here, has put forward a four-step unconventional easing roadmap for monetary policy to deal with deflation, the first step is to reduce the short end to the federal interest rate to 0, and the second step is to buy long-term treasury bonds through QE and push the long-term risk-free rate down. In the third step, the central bank buys risk assets and pushes the risk premium down. If none of the first three steps work, the fourth step is to run a large-scale fiscal deficit, and then the central bank will demonetize the fiscal deficit. Bernanke said that the fourth step is equivalent to a helicopter throwing money in the sky, without any deflation, deflation corresponds to insufficient demand, without any deflation, without any demand, this cannot be done. So theoretically it's very clear.
We say that Japan has lost 20 years, 30 years, and recently inflation has risen, and the yield curve control policy (YCC) is about to be withdrawn, which is very important because Japan's finances were very strong during the epidemic, including Abe's three arrows in the early stage. On the one hand, China's local government financing platform is the government to create investment projects and create demand. On the other hand, instead of taking money from the central bank, taking money from the financial market, it is actually very similar to the helicopter money that we see Bernanke talking about, because we have ready-made tools, and you don't let him use ready-made tools, and find the problem of insufficient demand, and the pressure of deflation has risen. So from that point of view, it's actually a very useful tool that other countries don't have, we have.
On the other hand, I think that many people have a big mistake in analyzing the macroeconomy, that is, they analyze the macroeconomy as a micro subject, which is wrong. It is necessary to know that the microeconomic subject, regardless of enterprises and individuals, is in an environment that he cannot control, he can only passively accept, and the macroeconomic environment in which he is located is largely determined by the macroeconomy itself, so it is really necessary to look at the macroeconomic constraints, including the constraints of debt, and increase its production capacity. If a country's domestic demand exceeds its production capacity, then the country's debt is unlikely to be sustainable, and either you will have demand-pull inflation, or you will have a large trade deficit and the consequent accumulation of external debt. On the other hand, if a country's domestic demand is insufficient, the supply capacity is excessive, the country's debt accumulation will not be a problem, and even debt accumulation will be needed, in the most extreme case, as Keynes said, the government spends money to hire a bunch of people to dig holes in the ground, so from this point of view, China is obviously an economy with insufficient domestic demand and overcapacity. The problem now in China is that you need to create it domestically, there is a very good ready-made tool, a financing platform, you don't use it, you look at it at the micro level, you look at its micro return on investment and find that it is very low, it can't cover its financing costs, think it's a Ponzi scheme, feel that its debt can't continue, this is not understanding China.
The financing platform plus real estate itself is a business model, put this business model aside, in an economy like China with insufficient domestic demand and overcapacity, to create demand, you need someone to do investment, if you don't get consumption, you need someone to do investment, even if there is no return on investment in infrastructure investment, you should do it.
Rick Aobo:
Your suggestion is that the debt should be borne by the central government department?
Xu Gao:
First of all, the government should be in debt, infrastructure is public welfare, corresponding to public funds, China's characteristic is that the government's debt structure is problematic, the vast majority of the world's government debt, most of the central government debt. Looking at the data given by the IMF, the proportion of central government debt to total government debt in these countries is more than 90% on average, and the proportion of China's central government debt is estimated by various calibers, about 20-40%, which is particularly low. Therefore, it has led to some problems, local government borrowing, non-standardized, not transparent, and even the total number is not clear, and there are thousands of financing platforms borrowing, and the financing cost is relatively high, so a series of problems have been derived. So this thing should be done, but there are all kinds of good ways to do it, that is, the central government issues bonds, and the government bonds are issued to build infrastructure, and the financing cost is relatively low, and it is clear and transparent, so that this model should be more sustainable. Even if the central government does not issue government bonds, the model itself is sustainable.
Rick Aobo:
Many of our scholars agree on this point. The next question is for Mr. Lu Ting of Nomura Securities, there are many new turning points after the Central Economic Work Conference, do you agree, do you think what are the biggest attractions and risks in 2024?
Lu Ting (Chief Economist of Nomura Securities China):
I'll start with the risks, in general, we are now facing a very big problem, which is the lack of demand, and the lack of confidence, maybe the problem of supply, but also the problem of demand. Specifically, first of all, we will face consumption problems in 2024, and in 2023, we will support our economic growth of 5%, and the main piece in the middle will come from the recovery of consumption after the epidemic, and it can even be said to be a retaliatory consumption rebound. In 2024, a year after the end of the epidemic, there will be no rebound in many revenge consumption, and the base will be high, plus we will not have obvious income growth in 2023, and there is also a problem that our wealth, whether it is real estate and stocks, will not grow in wealth, and may even shrink, from this point of view, there will be a certain negative effect on consumption. This is the first aspect.
The second aspect is real estate, now real estate is still very obviously hovering at a bottom, the next time we may face the real estate situation further aggravated, I think this risk can not be underestimated, especially after the epidemic almost a year, the problem of guaranteed delivery of housing in many third, fourth and fifth tier cities is still a more serious problem, if this problem is not solved, off-plan housing is a main body of the entire Chinese real estate market, this aspect will also be affected to a certain extent, which has also caused some downward spiral, or negative cycle, especially between the delivery of housing and everyone buys a house, and real estate developers are selling houses and buying land, which eventually led to some downward spiral in local government finances.
The third risk comes from the international environment, although at the beginning of 2023, everyone was relatively unoptimistic about the United States and the economies of developed countries, and even pessimistic, but in fact, in the end of 2023, the U.S. economy and the Japanese economy will grow beyond expectations. 2024 is different, now it seems that various indicators are showing, and many indicators in the market also tell us that the global economic growth rate in 2024, especially the economic growth rate of developed countries, is a significant decline, the economic growth rate of the United States may be cut in half, and the economic growth rate of Japan may only be about one-third of that in 2023.
The last risk, there is another bright spot in China's economy in 2023, which comes from the "new three", large investment in electric vehicles, power batteries and photovoltaics, some high-speed output, and rapid exports in some aspects, and the base is also high. On the other hand, there are also some irrational phenomena in our investment in these areas in many places. In fact, the price of PV modules has fallen by 50% in the past year, and the price of lithium carbonate has fallen by more than 70%, and we have actually seen some excessive investment in these areas, so these will be our risks.
If we talk about opportunities, it is a year after the epidemic, we have some problems that have actually existed for a long time, especially these problems in real estate, many policies have been released, some debt problems of local governments have been put in front, and everyone is deeply aware of the problems in the middle. So in terms of real estate and local government, it is possible that we will take more effective measures in 2024, especially in real estate, for example, it is very critical to ensure the delivery of housing, if the central government really comes forward and makes a move in these aspects, 2024 will be a year when the world begins to cut interest rates, providing wider space for the fiscal and monetary policies of the Chinese governmentThis is the highlight of China's economy in 2024.
Lu Ting, chief economist of Nomura Securities China
Rick Aobo:
You mentioned consumption as soon as you came up, and last year's data generally showed that consumption contributed a lot to GDP, but the actual feeling and physical consumption did not rise quickly. Some time ago, statistics said that the income of 900 million people is less than 2,000 yuan, and the central government seems to be reluctant to issue consumption vouchers.
Lu Ting:
First of all, I think we have missed the best time to issue consumption vouchers, the best time is in the middle of the epidemic, in 2020 or 2022, and after the epidemic, another consumption voucher will be issued, in fact, the benefits it brings may be very limited, and the cost will be relatively high. First, there is a very high administrative cost for the issuance of consumption vouchers, and there are 1.4 billion people in China, while my family is in Hong Kong, and there are only 7 million people in Hong Kong, so it is relatively simple to issue consumption vouchers; even so, Hong Kong's direct distribution of money is the same for everyone, and it does not mean that the rich will be given less and the poor will be issued more, so why is this so? Because the administrative cost is too high, the distribution of 1.4 billion people in China is very different. This is number one.
Second, after the issuance of consumption vouchers, under special circumstances during the epidemic, we issued consumption vouchers or directly gave cash subsidies, which is quite famous. Our current situation is very special, after the first wave of money, when will we send the second wave, when will we send the third wave, after the first wave, if we consume a little, if we do not send the second or third wave, will the economy face the precipice called fiscal in economics, this is the second reason.
Third, the central government does not issue consumption vouchers and does not give cash subsidies to everyone, and there are other considerations. If we rely heavily on the distribution of cash to stimulate consumption in the middle of this process, we ignore the other serious problems facing the economy, such as the real estate problem we are facing now, the problem of ensuring the delivery of a large number of buildings, and the problem of local finances being very difficult. There are also some problems of confidence in reform and opening up, in which it is possible that our key problems will not be solved and we will rely on printing money. Many countries have printed money and the economy is good, but there are also many countries that have printed money and the economy is not good. There are too many bad examples, don't keep staring at the good examples and forget the bad ones.
So, in general, I think it should be said that giving money is one thing, and it should be noted that if we really want to send money, we really have to consider that we are going to subsidize, who should we subsidize? First of all, there is a retired cadre at the section level, whose retirement salary is 10,000-12,000 yuan a month, and his wife is retired from the enterprise, about 3-4,000 yuan, and another is retired from the enterprise, but because the time from a farmer to a worker is relatively short, it is about 1,500 yuan a month, and the farmer is about 100-300 yuan a month, that is to say, after an ordinary farmer retires and a section-level cadre retires, or after aging, the income difference is about 70-100 times, and the gap is very large。 Take 10,000 yuan, in a small city, the money every month is not enough, but like my family, there is only more than 100 yuan a month, no more than 300 yuan pension, and there are 170 million among the elderly in China.
I've written in the middle of some of the articles that if we really want to send money, who should we send it to? First of all, it should be given to people who we owe for various reasons, and these people have a higher marginal propensity to spend after they have paid money.
Rick Aobo:
Thank you, Chief Lu, for your very warm advice. You live in Hong Kong, you work in a foreign investment bank, and last year there was an obvious phenomenon, that is, US dollar LP funds basically did not invest much in China, how do they view the current Chinese market?
Lu Ting:
Let's talk about the bright side first, I think many people look at the Chinese market, on the one hand, they are envious, the market is too big. Second, China's supply chain is particularly complete, the first thing they think of when they look at China is the population of 1.4 billion, and on the other hand, they take a fancy to our huge supply chain, so they are very envious and want to come in.
On the other hand, it is also facing various problems, in the context of international geopolitical deterioration, but also because the United States, Europe and some other developed countries restrict these companies from investing in China. We need to look at the current environment that these investors are facing objectively. From these perspectives, especially from our own country, we should do a better job of communication.
In fact, in my opinion, it is a bit of a concern, but in this regard, it is really necessary to do a good job of communication when attracting foreign investment and explaining all aspects, especially after the epidemic.