Zhao Jian is the founding president of the Xijing Research Institute and a member of the China Chief Economist Forum
When the economy slows, time becomes cheaper, and risk becomes more expensive, it is precisely the time to issue ultra-long-term government bonds. So what is the purpose of issuing ultra-long-term treasury bonds, and what is the purpose of raising long-term money for 20, 30, or 50 years? If we look at the long-term vision of a Chinese-style modern country that has been planned for so long, we will suddenly be able to see the timing of the issuance of ultra-long-term special government bonds at this time before the Third Plenum. Ultra-long-term special government bonds and Chinese modernization, one on the liability side and the other on the asset side, aim to create a new cross-cyclical national balance sheet.
Entering the post-industrial society, the economic growth rate has slowed down, the dividends of the times and the opportunity to make money lying down have gradually disappeared, all kinds of controls have made life and thinking become stagnant, lying flat and egg breaking culture prevails, young people's hearts are no longer full of dreams and passion, and they automatically join the "three no-youth" and "lost generation", and history has really entered the so-called garbage time. At this point, time will become cheaper and cheaper, and the risk-free rate will naturally continue to fall; At the same time, risk has become more and more expensive, people's risk appetite has been decreasing, no one is willing to take risks anymore, the animal spirit full of creative destruction has disappeared, and anticipation and confidence have become the greatest scarcity. This is very different from the fiery atmosphere of "time is money" in the early days of reform and opening up and the early stage of industrialization, when people were full of ambition and passion and seized the day. As a result, people are no longer keen on taking risks, and they are becoming more and more conservative and cautious in their investments. Needless to say, angels and venture capitalists, even the blue chips in the secondary market feel that the risk is too high. Deflation, of course, will lose the value of time, making it better to hold cash and lie flat. Conservatism in consumption and investment is a disaster for a developing economy, and according to the market economy, when the savings rate suddenly rises, demand collapses sharply, and if the government does not come out to create demand to fill the gap, there will be market failure and a huge crisis.
In recent years, China has experienced the largest natural disaster in history, and at the same time, the pain of deep economic transformation has led to a simultaneous decline in the marginal tendency of consumption and the risk appetite for investment. People are stockpiling their monetary income in order to prepare for the uncertainties that may arise in the future – as happened during the pandemic. The methods of accumulation include bank deposits, wealth management products and funds with underlying assets as treasury bonds, urban investment bonds, and traditional safe-haven assets such as gold and US dollars. Money hoarding means the precipitation and disappearance of money, and if banks cannot find suitable businesses and projects to lend, then these savings will not be converted into investment, and the economy will fall into a continuous deflationary spiral. At the same time, because China is constantly cutting interest rates and other countries are raising interest rates, the interest rate differential between China and the United States has inverted the largest and lasted for the longest time, which will also cause currency outflows in pursuit of higher yields, increasing the severity of deflation.
Time is getting cheaper and risk is getting more expensive, which is an inevitable trend in an aging society and a slowing economy. This also provides conditions for the transition from a high-speed development model to a high-quality development model. In order to transform a long-term state-led accumulative-oriented industrialized society into a modern consumer-oriented society dominated by people's livelihood, the government must undertake the mission of the new era, which can be summarized by Chinese-style modernization. After more than 40 years of rapid development, coupled with the catalysis of the epidemic for three years (exports reached a new high at the time of global supply chain disruption), China has become the largest industrial power, and it is not an exaggeration to say that it is an industrial power, and it can be said that it has the abundant material foundation of Chinese-style modernization, because the core of modernization is industrialization. It is important to realize that under the paradigm of digital networks and intelligent manufacturing, the industrial system of a large country has the characteristics of super scale effect and winner-takes-all. Once the huge industrial manufacturing infrastructure is built in a large country and a huge industrial chain ecosystem is formed, the manufacturing cost will be greatly reduced like "Moore's Law" - this is precisely the empowerment of digital technology for industrial manufacturing. Whether it is durable consumer goods such as automobiles, home appliances, and mobile phones, or industrial intermediate products such as machinery, ships, chemicals, and chips, as long as they are mass-produced in China, it is easy to quickly scale and mass-scale, and eventually overcapacity will inevitably occur. If you think of China as a factory (indeed a world factory), the equipment and production lines of this factory are very complete, and the cost of producing 100 cars and 120 cars is spread out without much increase, and this is the operating lever of the enterprise - the economies of scale of mass production of large industries. Chinese modernization has very good material foundations.
But the coin can't have just one side. The flip side of "industrial China" is "debt China", just as the flip side of every company's operating leverage is financial leverage. Because it took a few decades to complete the process of industrialization and urbanization in developed countries for hundreds of years, even if the civilization of the 5,000-year-old country is inclusive, it cannot carry such a fast speed. In the process of rapid accumulation of China's state capital, a large amount of debt and leverage have also been accumulated. The main body of borrowing is mainly concentrated in local government platform companies, real estate companies and state-owned enterprises. Whether debt is the devil or an angel is not the debt itself, but whether the return on assets (ROA) can at least cover the cost of debt. China has the most complete infrastructure and assets centrally managed by the state, but if these assets cannot be revitalized, without the vitality of the market economy and private enterprises, it is like spending a lot of money to build a luxurious stage, if no one sings on it, then it is just an unfinished project, a sunk cost, and the corresponding debt is also a toxic asset. China's current debt problem, which is difficult to recover, is by no means an economic and financial problem, or even a fiscal problem, but a problem of modernizing the country's governance. It is the result of the long-term accumulation of contradictions between the central and local governments in the governance of major countries. It comes from a non-optimal equilibrium formed under the long-term game between the central government and the local government, which allows local governments to bear unlimited responsibilities but limited financial rights, and the huge local deficits accumulated can only rely on "bond issuance + land sales". Whether it is the issuance of bonds or the sale of land, it is actually an overdraft of future credit and finance. As the tenure of local officials becomes shorter and shorter, how to develop in less than two years on average, under the system of the championship system for the promotion of officials, there is a phenomenon of adverse selection of "whoever does not issue debts suffers". Spatially, this is actually a kind of tragedy of the public land, a moral hazard of local competition to overdraft the central credit, and an inevitable outcome of rigid payment. Therefore, we can see that Chinese-style modernization has achievements and costs, which is the dialectic of the movement of things. Seeing only achievements without seeing problems, or only seeing problems without seeing achievements, is a biased and radical view. The ultimate solution to the problem must be to rely on achievements to digest the problem, that is, I have always said to look at the problem from the perspective of development rather than the other way around.
China's modernization is an ultra-long-term national vision, so it needs to be supported by ultra-long-term government bonds. According to a spokesperson for the Ministry of Finance, the ultra-long-term special treasury bonds "focus on key tasks such as accelerating the realization of high-level scientific and technological self-reliance and self-reliance, promoting the integrated development of urban and rural areas, promoting coordinated regional development, improving the security of food and energy resources, promoting high-quality population development, and comprehensively promoting the construction of a beautiful China", which are precisely in line with the essential requirements of Chinese-style modernization.
Chinese-style modernization, ultra-long-term special treasury bonds, one asset side, one liability side, is trying to build a new national balance sheet. It is about 1 trillion yuan per year, and it is estimated to grow year by year, and the main uses are around the essential requirements of Chinese modernization:
1. Maintain national security and social stability, consolidate the party's leadership and realize national unity;
2. To improve people's livelihood, pay attention: the people's will is the biggest national asset, and the people's nature of finance is reflected in the people's nature;
3. Improve social security, increase the income of low- and middle-income groups, reduce the gap between the rich and the poor, and achieve common prosperity;
4. Environmental governance, promote harmony between man and nature;
5. Build a community with a shared future for mankind, fulfill the responsibilities of major countries, and provide global public goods in a chaotic world.
Some will question the fact that China's economy is currently in a tortuous period of recovery, with economic contraction and risk exposure being the main challenges, and that ultra-long-term special government bonds should be used to bail out real estate and local government bonds. Of course, if the real estate runaway and the local debt crisis seriously affect China's modernization, the ultra-long-term special treasury bonds will definitely increase the amount to solve these problems, after all, 1 trillion yuan a year is a drop in the bucket for the debt problem of 100 billion yuan. I still have the same view: real estate and local government bonds are specific products of China's specific stage of rapid urbanization development, and the problems that arise are the result of the accumulation of long-term contradictions, so they also need to be solved by long-term thinking. It cannot be denied their role in the process of industrialization and urbanization in the past, real estate is still the pillar industry of the people, and local governments are still the basic implementation link in the modernization of national governance. To solve this major long-term problem, it is necessary to change our thinking, jump out of the confinement of thinking about debt purification, and find solutions in the big picture and vision of Chinese modernization. In other words, if China's modernization can be carried out in a solid and smooth manner, the problems of real estate and local government debt will of course be solved. In this process, it is necessary to balance the relationship between development and risk, the relationship between speed and quality, and the relationship between breaking and establishment, stability and progress, and the key is to carry out the reform of governance and management mechanisms, and to respect the principles of rule of law and marketization more.
In short, it is necessary to understand the recent issuance of China's ultra-long-term special treasury bonds from the long-term perspective of Chinese-style modernization, so as to understand what these treasury bonds are used for and what kind of national assets they will form. At the same time, it is also necessary to savor the timing of the release, which is before the Third Plenum, from which we can also roughly guess the theme of the plenum and the development focus of the next three years.
