Li Xunlei | Cube Let's talk about columnists
Recently, I read a story about building a photovoltaic power generation park on a desert, and I thought it was very interesting, so I would like to share it with you.
The Tara Beach Desert in Qinghai, in Gonghe County, Hainan Tibetan Autonomous Prefecture, Qinghai, has more than 12 hours of sunshine per day, which has a natural solar advantage. In 2012, the state plans to build a largest, most efficient and most powerful photovoltaic power plant in the Tara Beach Desert.
However, the vegetation coverage rate of the desert is very low, and the problem of wind and sand is very serious, if the yellow sand flying in the sky causes the electric board to be damaged, or the blockage problem cannot work normally, such economic losses will be huge. So the developers planted grass to increase the vegetation coverage and prevent sand and dust from damaging the panels.
I didn't expect the grass to be planted smoothly, and the reason is that the electric panels are relatively large, which can absorb a lot of light for the grass, and under their protection, the fresh grass does not have to be dried into dry grass because of the strong sunlight. Due to the large temperature difference between day and night, every night, when the water vapor encounters a photovoltaic panel with a relatively high surface temperature, it will immediately liquefy into small water droplets and fall on the grassland, which is regarded as precipitation in the local internal circulation.
But another problem arises, because the moisture content of the grassland is too high, so high that the fresh grass grows wildly, its height has exceeded the height of photovoltaic panels, which seriously affects the absorption of solar energy by electric panels. At first, they used manual mowing, but the 60-square-kilometer photovoltaic park required a lot of labor costs. So they came up with another clever trick, asking the shepherd to graze sheep in the photovoltaic park, and the sheep will not "cut the grass and remove the roots" when they eat grass, and the grass can be regenerated. In this way, we can not only ensure the smooth development of photovoltaic power generation, but also develop a green and environmentally friendly pasture.
This story tells us that in the implementation of decisions, there are often some extraneous things. If we can consider all kinds of problems that may occur one by one when making decisions and make plans, we can improve the success rate and avoid unexpected increases in input costs. In fact, this is to develop the habit of thinking systematically, and it is best to solidify the system problem in the form of lists.
We often use the word "unexpected" to describe the occurrence of events that were not predicted in advance, but from a probability or logical point of view, there should be no such thing as an "unexpected" event. For example, in a coin toss, there is a 50% probability that both heads and tails are heads, is it possible that they will be heads 10 times in a row? Of course, it is possible that the probability is 0.5 to the power of 10, that is, one in a thousand.
I've always disliked the term "economic miracle" to describe high economic growth, because no economy has ever experienced high growth, and Japan has had 20 years of high growth, but then it has been low or even negative for a longer period of time. High growth is always phased, there is always a time for spring breeze in the short term, and the long term is subject to probability distribution.
Generally, people with relatively developed image thinking are more inclined to believe in miracles, hoping that the difficulties they are facing at the moment can be miraculously overcome, or that the people behind them can have a way to resolve them.
I also found a phenomenon that the way of thinking that everyone is accustomed to in the field of natural sciences often "short-circuits" in the field of social sciences. For example, it is common to hear the judgment that "either white is black", in fact, in addition to black, there are many colors such as red, orange, yellow, green, blue, purple, etc.
For example, in the past, the contribution of finance and real estate to the mainland's economic growth was relatively high, so it was necessary to "move from virtual to real", but after "deprivation" (for example, real estate development investment has experienced negative growth for three consecutive years, and M1 also showed negative growth in April), residents' deposits have increased significantly, and the growth rate of private investment is still relatively low, indicating that there is still a "middle ground" that may take a long time before "moving towards reality".
In the field of macroeconomics, the judgment of the trend of a certain indicator requires higher system thinking. For example, what are the factors that should affect the exchange rate? It is generally believed that the main factor is the interest rate, but the interest rate is divided into real interest rate and nominal interest rate, which interest rate has a greater impact on the exchange rate?
In addition, the state of national economic development, balance of payments and foreign exchange reserves, economic policies, external situation, government credit, social expectations, etc., will have an impact on the exchange rate. Moreover, there is a correlation between these factors, and at different stages, one of them may become the main factor affecting the exchange rate. This requires improving the ability to think systematically, not seeking a sword.
Personally, I believe that the most important factor affecting the exchange rate and the most important factor affecting the stock market is "expectation of the future". Therefore, the most important factor in maintaining the stability of the exchange rate is to increase people's confidence in the future. If this judgment is true, then the rise and fall of interest rates is no longer the most important.
For example, in 2018, there were four countries in the world with deposit rates above 20%, namely Argentina, Suriname, Venezuela, and Haiti, but the exchange rates of these countries have depreciated sharply. Therefore, if a country is socially or economically unstable, it will be difficult to maintain the stability of its exchange rate, no matter how high the interest rate is.
On the other hand, if interest rate cuts are effective in stabilizing the economy and can improve everyone's confidence in the future, then interest rate cuts may instead become a trigger point for the country's exchange rate to strengthen. Therefore, the macroeconomy is a big system, and the various subsystems in it are also related to each other. The exchange rate is actually a reflection of a country's comprehensive national strength, and it also reflects its integration with the global economy.
Recently, the economic circles have had a heated discussion on the financial data released by the central bank from January to April, because the M1 growth rate and social finance in April were negative, and the main reason for the negative value is that the central bank has restricted low loans and high deposits and manual interest rate adjustment in order to prevent funds from idling, so as to squeeze out the "water" in social finance.
However, this only explains the "negative number", but does not explain why M1 has been weakening for a long time and banks are difficult to borrow. The central bank's first-quarter monetary policy report pointed out that "from a domestic point of view, effective demand is still insufficient, business pressure is greater, there are more risks and hidden dangers in key areas, and the domestic circulation is not smooth enough".
The Central Economic Work Conference at the end of 2023 has a very thorough analysis of the pressures facing China's economy, such as mentioning overcapacity in some industries and blockages in the domestic circulation, which all reflect the structural problems of China's economy.
Virtually all countries have structural problems, but for different causes. For example, behind the high inflation in the United States is a lack of supply, such as outdated infrastructure and the relocation of low-end manufacturing. The Central Economic Work Conference first raised China's structural problem as "insufficient effective demand" and listed it at the top of the six major difficulties. Therefore, I believe that the lack of effective demand is the core problem we face today and in the future.
Why are the structural problems between China and the United States opposite? This is because consumption contributes a large 80 percent of the GDP composition of the U.S. economy, with 330 million Americans spending more than China's 1.41 billion people (in dollar terms), while investment contributes significantly to GDP in China, roughly twice the global average. Investment (capital formation) ultimately increases supply, for example, China's manufacturing industry accounts for 31% of the world's value added, but demand (17.6% of the world's population and 14% of the world's consumption) is relatively limited.
As a result, there is a clear complementarity between China and the United States, but unfortunately, China's share of merchandise exports to the United States has fallen from the first place to the level of 20 years ago due to the deliberate reduction of imports from China by the United States.
For this reason, we cannot hope to increase the share of global exports to deal with the lack of effective demand, as proposed by the Central Economic Work Conference at the end of 2022 - to give priority to the recovery and expansion of consumption.
In my opinion, the term "expanding domestic demand" is completely correct, but it is rather general, because domestic demand includes investment and consumption, and the problem we are facing is that aggregate supply is surplus relative to aggregate consumption. If we continue to expand investment in domestic demand, that is, it is equivalent to increasing supply, will the problem of oversupply become even more serious?
China's economy is still in the stage of catching up, to achieve the goal of great rejuvenation, the reform and opening up 45 years ago has made outstanding achievements, especially the infrastructure construction has been in the world's leading position, the total mileage of expressways in the world, the total mileage of high-speed rail accounts for two-thirds of the world, the city is full of high-rise buildings.
However, at the same time, the problems of high debt repayment pressure in the residential sector, the problem of local debt, the problem of overcapacity in some industries, and the risk of small and medium-sized financial institutions have become the blocking points of the internal circulation. Therefore, from the perspective of systems thinking, it is very important to smooth the large cycle, and there is nothing wrong with the investment-pull model, and the key is to see whether the cash flow can be kept smooth.
Today, expanding consumption has become the consensus of the whole society, but from the data of the first quarter, the growth rate of social zero (consumption) is only 4.7%, if you exclude service consumption, the growth rate of commodity consumption is only 4.1%, and the growth rate of investment in manufacturing is as high as 9%, indicating that the future supply capacity of goods will still exceed consumer demand, unless consumption is greatly improved. In order to increase consumption, in addition to the "old for new" measures, I am afraid that there must be more powerful measures.
I remember that the writer Ye Xin said that he was very impressed: after the end of the ten years of turmoil, the mainland advocated tree planting and greening to increase the forest coverage rate, but the effect has not been good. It wasn't until 2000 that he went to the countryside of Jiangxi and was very happy to see the trees in the shade. Ask the villagers why the greening was not good in the past, but now the greening is so good? The villagers replied that in the past, cooking and burning firewood, but now burning coal, naturally no one will cut down trees.
Drawing inferences from this story, it shows that in order to expand consumption and increase the driving force of consumption on GDP, it is still necessary to start with "increasing the income of urban and rural residents and expanding the scale of middle-income groups (Central Economic Work Conference)". I remember that in the past, when prices were high, it was always emphasized to reduce the cost of circulation, but with little effect. Eventually, supply came up, and inflation quickly came down.
Another example, the current real estate market is relatively sluggish, the price decline is shrinking, as the main body of the purchase of the residential sector is shrinking the balance sheet, if this time hope that the residential sector to increase leverage, it is estimated that the effect is not good. Because the investment behavior of the household and business sectors is always pro-cyclical, only the government can be counter-cyclical. The better way is to cut interest rates and enter the market with fiscal funds, and the larger the interest rate cut and the larger the scale of the entry, the better the effect.
It can be seen that in the macro system, we must grasp the core issues, and the so-called outline is clear. But sometimes some seemingly unrelated factors can also cause big things. You've all heard of The Butterfly Effect, where a butterfly flapping its wings in Brazil can lead to a tornado in Texas a month later.
This effect shows that there are fixed numbers and variables in the development of any thing, and in a dynamic system, a small change in the initial conditions will drive a long-term and huge chain reaction of the whole system. It emphasizes that seemingly unrelated things in the ecosystem are actually a causal effect of things.
The small question I am currently concerned about is that in 2019, before the epidemic, the total fertility rate of the mainland was about 1.5, and now that the epidemic has passed, the total fertility rate has dropped to 1.1 and it is difficult to recover. It's rare to see a detailed and in-depth analysis of this, but I think the consequences will be far greater than the tornado caused by the fluctuation of butterfly wings.
Next year will be the 80th anniversary of the end of World War II, which means that the world is about to go through an 80-year phase of peace, which is very rare in the history of mankind. But peace is a process of accumulating problems and pressure, while war is a process of releasing pressure and overthrowing the past. Over time, problems such as social division, structural distortion, and class solidification will become more and more prominent, which can explain why there are more and more gray rhinos around the world.
Therefore, systems thinking is not only about what are the big problems and how they relate to each other, but also about the small things that can trigger the big problems. We should not only pay attention to the system with a short logical chain, but also the system with a long logical chain.
(This article was originally published in the WeChat public account of "Li Xunlei Finance and Investment", original title: On the importance of system thinking)
Editor-in-charge: Shi Jian | Review: Li Zhen | Supervisor: Wan Junwei