Original Liu Xiaobo
This past weekend, a 30,000-word long article swiped the screen, adding another dry wood to the "popularity" of Gu Chaoming, chief economist of the Nomura Research Institute in Japan.
Koo Chaoming is the most talked about and controversial economist in China in the past year. He was born in Japan, studied in the United States, holds American citizenship, speaks English as his first language, has worked in Japan for a long time, and his ancestral home is Taiwan.
His main views were disseminated through two books, The Great Recession and The Chased Economy. Both books have been published in China, and Gu himself has been interviewed many times by China's top economists, media outlets, and Internet influencers.
Let's talk about who Gu is, what he said, and why it has aroused resonance and controversy among the Chinese people.
Koo's father was a politician in Taiwan, China, who lived in exile in Japan for a long time after the 228 Incident in 1947 and gave birth to Koo Chaoming in Japan in 1954. Koo was deeply impressed by Japan's post-World War II economic depression and poverty. In 1967, 13-year-old Gu Chaoming went to the United States, became an American citizen, received a secondary school to college education in the United States, worked for the Federal Reserve after graduating from college, returned to Japan in 1984, and worked for Nomura Securities in Japan for a long time.
Ten years after Koo arrived in the United States, he was surprised to find that Japan, which had been impoverished after World War II, had risen rapidly, and its per capita income had quickly surpassed that of the United States, giving birth to a large number of world-class enterprises. Then came the dramatic bursting of the economic bubble, and then the lost 30 years. So far, Japan's economy is only one-sixth of that of the United States (72% of the United States at its peak), and its per capita income is only 41% of that of the United States.
Japan's rise, bubbles, and prolonged recession have led Koo to think deeply about the reasons for this, and put forward two important concepts: a balance sheet recession and a catch-up economy.
Koo's key points include:
1. Under normal circumstances, the economic downturn can be solved by monetary easing. However, the bursting of violent asset bubbles, such as Japan in the 90s of the last century and the United States in 2008, is not an ordinary economic downturn, but has the nature of a "balance sheet recession", which needs to be solved by special medicine.
2. The so-called "balance sheet recession" refers to the insolvency of a large number of enterprises and households after the bursting of a violent bubble. At this time, those who have cash flow will be given priority to repay their debts, and those who have no cash flow can only go bankrupt. Enterprises have become very cautious in investment, and even reduced investment in technological upgrading, and the investment of the whole society continues to shrink, and the economy may collapse. In this case, if you just cut interest rates and increase the supply of base money, you will fall into a "liquidity trap", that is, monetary policy failure. Japan in the 90s, and China in the last two years, he thinks this is the case.
3. When the "balance sheet recession" appears, it is necessary to increase the intensity of fiscal policy, issue government bonds, increase the government deficit, and the government will use the money to invest or reduce taxes for enterprises. Gu believes that there is no need to worry too much about the government's debt ratio, and there is no need to be limited by the traditional "warning line." The reason why Japan has lost 30 years is that it has not prescribed the right medicine, and has been exerting efforts on "monetary easing + structural reform" for a long time, and has not made enough efforts in fiscal investment. Although the Japanese government's debt ratio is as high as 250%, he believes that it can be even higher if necessary. His advice to China is also to increase government investment in projects that have an annual return higher than the 10-year Treasury yield (2.3%).
4. The economic development of various countries and regions can be roughly divided into three stages: first, the process of urban industrialization before the arrival of the Lewis inflection point (labor from surplus to shortage); The second is the Golden Era, that is, after the economy has passed the Lewis inflection point, the society has entered a state of interactive growth of savings, investment and consumption; The third stage is the "Pursued Era", which is actually the era of outflow of production capacity and capital in pursuit of low costs. This gave birth to Koo's second important concept – the economy being caught up.
5. When an economy enters the "catch-up phase", the income gap will increase. At this time, it is necessary to reduce taxes and fees, and relax the supervision of enterprises to reduce enterprise costs and retain enterprises. At the same time, we should increase investment in education and replace the demographic dividend with a talent dividend.
It is difficult to say that both of Koo's concepts are 100% original, but he has made an important contribution to the economy by raising the problems that everyone is aware of, studying and naming them, which has attracted widespread attention.
The reason why Koo has become popular in China in the past year is that our current situation is very similar to that of "balance sheet recession" and "catch-up economy".
For example, the following chart shows the balance and growth rate of household loans in China since 2017:
Since the second half of 2021, as real estate has entered a period of deep adjustment, the balance of household loans has been hovering around 38 trillion yuan, and has declined year-on-year in the last four quarters.
The situation is much the same for businesses. So in terms of fixed asset investment, we see a significant K-shaped differentiation. In the past year or so, the growth rate of private investment (private enterprises + foreign capital) has been hovering around 0%, driven by state-owned investment (government + state-owned enterprises).
From January to May, the growth rate of private investment fell from 0.5% in January to March to 0.1%, while the growth rate of state-owned investment fell to 7.1% from 7.8% in January to March.
In this case, although the central bank continues to cut the reserve requirement ratio and interest rates, the derivation rate of broad money M2 has been declining, and the symptoms of a liquidity trap have appeared.
What to do?
According to Koo's suggestion, it is necessary to intensify the fiscal policy and increase government investment by issuing more treasury bonds and local government bonds and increasing the deficit.
In fact, China has been doing this all along, but Koo suggested that it be more forceful.
Koo's views caused an uproar online, with some radical opponents arguing that he was digging a hole in China because he could not be trusted because of who his grandfather was and what his father was. Of course, whoever talks like this often does not understand the economy, but only the struggle and the flow. Among the more well-known economists in China, there are also many people who think that Gu's views are one-sided, including Lin Yifu.
Views similar to those of Gu seem to be becoming mainstream, such as the latest statement by Sheng Songcheng, former director of the central bank's statistical survey department:
For example, Li Xunlei's latest suggestion:
The state has also been issuing additional government bonds, just look at the table below:
Recently, the central bank and the Ministry of Finance have also jointly announced that the central bank will normalize the trading of treasury bonds in the secondary market in the future, which means that the era of treasury bonds is coming.
The logic is that land finances have shrunk, balance sheets have declined, and government revenues and investment capacity need to be increased through bond issuance. The issuance of a large number of treasury bonds requires an institution with a "market maker", which is the central bank.
In fact, this means a change in the way China prints money, which used to print money to buy a surplus (foreign exchange appropriation) or give priority to printing money to large state-owned banks (PSL and MLF are equivalent to injecting profits into large state-owned banks), and in the future, it will support finance.
So Koo's view, or a view similar to Koo, prevailed.
According to Koo himself, after he proposed a "balance sheet recession" in 1997, he directly suggested that the Japanese government should increase fiscal spending, but because his views were not mainstream, they were not accepted, so that Japan groped in the dark for twenty or thirty years.
After the subprime mortgage crisis in the United States in 2008, Ben Bernanke, the chairman of the Federal Reserve at the time, read his book and stepped up fiscal policy, so the United States came out of the subprime mortgage crisis in five years. Europe did not initially accept this theory, so it took 10 years to recover from the effects of the 2008 crisis.
In fact, Japan's "lost 30 years" are not only a balance sheet recession, but also a combination of the United States' suppression of the Japanese economy (the Plaza Accord + requiring Japan to abandon the semiconductor industry), as well as China's opening up and the relocation of Japanese companies (that is, the concept of "catch-up economy" proposed by Koo later).
After the rise of Japan's economy, it is like a pool of abundant water. China is the sponge next to it, and it is very big. When the barrier between water and the sponge is removed, of course, the sponge absorbs water.
After the opening up of Chinese mainland, the siphon effect on Japan and Taiwan is very obvious.
But today, China is facing a similar situation.
In the past few years, we have been in the first stage, the stage of urbanization and industrialization. Then there was a Lewis inflection point in China, and the demographic dividend was gone.
At this time, we should enter the second stage - the golden period of development. Since the demographic dividend is gone, the wages of ordinary workers will rise; Coupled with industrial upgrading, the income of bosses, technicians, and the middle class has also increased significantly. This is the golden stage of overcoming the middle-income trap, that is, the stage of moving from developing countries to developed countries.
But before we have fully entered the golden period and enjoyed the golden period, the suppression of the United States is coming, and the great changes unseen in a century are coming, and we have entered the stage of "catching up economy" in advance, and foreign capital, including some domestic capital, has moved capital production capacity and jobs to Vietnam, India, Mexico and other places.
Gu believes that at this stage, it is necessary to reduce taxes and fees for enterprises, relax supervision and restrictions on enterprises, and increase investment in education. But some of our recent practices don't seem to be quite in line with his advice.
As for Koo, the United States accepted his advice after 2008, so it got out of the subprime mortgage crisis in five years. This statement is also worth scrutinizing. The strong economic recovery ability of the United States is closely related to the strong attraction of talents and the strong ability of scientific and technological innovation. Japan's weak recovery ability is also related to the fact that it is a non-immigrant country, its weak attraction to global talent, and its lifetime employment system.
So, I don't think Koo is 100% right, his theory is more focused on government behavior and short- and medium-term effects. But his research is enlightening, groundbreaking, and worth paying attention to and learning from.