On October 18, the third quarter of economic data was released, and the GDP in the first three quarters increased by 9.8% year-on-year. On a quarterly basis, the first quarter increased by 18.3% year-on-year, and the second quarter increased by 7.9% year-on-year. In the third quarter, the year-on-year increase was 4.9%. On a sequential basis, GDP grew by 0.2% in the third quarter. Affected by a series of factors such as the repeated new crown epidemic, real estate regulation, and power control and production limitation, the momentum of China's economy in the third quarter dropped significantly, and the downward pressure on economic growth increased significantly. What are the main factors affecting the economic data in the third quarter? What will happen to the economy in the fourth quarter? As the pressure of "imported inflation" increases, how will China respond? In response to the above questions, the Observer Network hereby interviewed Ding Yifan, former deputy director of the World Development Research Institute of the Development Research Center of the State Council.
【Interview/Observer Network Liu Hui】
The third quarter economic data was mainly affected by energy targets
Observer Network: In the first three quarters, the gross domestic product increased by 9.8% year-on-year, and the third quarter increased by 4.9% year-on-year, and everyone is also analyzing the reasons behind it, which may be affected by the epidemic, flood conditions, real estate reform, and energy targets. How long can the impact last?
Ding Yifan: The most important factor behind the decline in the data in the third quarter is still energy supply, which limits industrial production, industrial production has declined, and GDP has also declined.
Comics: In the first three quarters, China's economy increased by 9.8% year-on-year, and continued to recover steadily. Image source: Visual China
The impact of energy targets is short-term, because our policies have begun to adjust, such as the price of industrial electricity has begun to float, requiring residential power supply, and adjusting the price mechanism, so power curtailment is only a short-term impact and will not appear in the long term.
Of course, we are now facing an energy transition, so we need to encourage faster investment and development of new energy sources. At present, the instability and energy storage problems of new energy, that is, photovoltaic and wind energy, are difficult to solve, and now a variety of nuclear energy technologies go hand in hand. I still agree with this point, we have both energy needs, but also to green environmental protection, more safe and stable nuclear energy is the key to truly solving energy problems in the future.
China is now also working on new nuclear energy technologies, and our country has first completed the critical test of the fourth generation of nuclear power units, after which nuclear energy will bring unexpected effects to energy transition and supply.
Observer Network: In addition to the impact of energy targets, there is also a discussion that real estate reform may be a factor.
Ding Yifan: The real estate reform has already begun, which should not be the main reason for the economic downturn in the third quarter. The so-called real estate reform is not the high housing prices in Beijing and Shanghai that we imagine, these first-tier cities real estate is not too risky, the risk is mainly third-tier and fourth-tier cities, especially in the northeast, such as Heilongjiang, where the population outflow is serious, the real estate bubble is very large, if you do not take administrative orders to shrink, the future will be a financial time bomb.
We can't just let the economy face downward pressure to relax the market and let the real estate market rise again. Once the real estate bubble bursts, the risks and later impacts, and the damage to the Chinese economy cannot be estimated. Therefore, real estate regulation and control cannot be relaxed, and there can be no slackening.
Observer Network: Evergrande Group is facing a serious debt crisis, the impact of which may affect the entire economy, will this create a vicious circle in the real estate market?
Ding Yifan: The problem of Evergrande is because our real estate company borrowed too much before, and the financial company did not strictly control the real estate-related loans, which was exposed in Evergrande Group.
These listed companies can borrow from each other, so it often happens that when a company can still raise funds, the debt ratio is not high, and once it cannot be financed, its debt rate will rise rapidly. When the debt ratio rises rapidly, the entire company's assets go wrong.
This situation is not uncommon in Western countries, and China's financial institutions in the past have relaxed the management of real estate lending, so the risk exposure is now more obvious. However, the direct impact of Evergrande's debt incident on the financial market is relatively small, and more is that the supervision in the process of operation and development of the real estate industry will tend to be normalized.
Observer Network: Based on the above analysis, is it possible that the current real estate reform and energy targets will continue?
Ding Yifan: We will definitely continue to do these things, the question is not whether to do it, but how to do it.
On this point, I am reminded that the Western accusations against China are also often "dichotomous", but many problems are not simply explained by "dichotomy". That is to say, there is no problem with what we are going to do, and we will not stop doing it because there are some problems, but because we did not do it well, so something went wrong. But after the accident, the whole negation of our choice is even more absurd, our choice is not a problem, but the practice is not prudent enough.
Why is there a problem with energy reform? Because the local government issued a mandatory order, in order to achieve the carbon reduction target, a simple and rough standard was drawn, and how much must be reduced each year, the practice is to directly pull the electric gate to prevent production. The rough simplicity of management produces such results, so the reason for this problem is the management method.
As we all know, from high-consumption energy to clean energy, there will be a transition during the transition, and to make a smooth transition, the process must take into account the factors of technological progress, if we take into account the management, the measures taken will not be so arbitrary and simple.
We now have several new nuclear power plants under construction, which will greatly alleviate the current energy shortage problem. Adding to the dynamics of technological progress, carbon emissions could decline much faster between 2025 and 2030 than they do now. In the process of reducing thermal power, we will also become more calm and realistic.
Observer Network: Economic growth has slowed down for two consecutive quarters, do you think the economic data in the third quarter has bottomed? In addition to the long-term epidemic and consumption pressure, what problems need to be solved in the short term?
Ding Yifan: Now that we have entered the last quarter, the pressure in the third quarter is largely caused by the lack of energy supply, and this situation is improving, so the fourth quarter should be alleviated, not worse than the third quarter.
However, the economic pressure in the fourth quarter was still relatively large. Facing the pressure of inflation in the short term and the problem of rising commodity prices, this is a very troublesome thing, not easy to solve, and it is related to the international market and people's expectations for economic recovery.
Because these prices are not something we can decide, and despite a lot of efforts by China to circumvent their effects, until now, we are still in the minority. Commodities are priced in U.S. dollars, where foreign markets determine domestic market prices.
We have created some commodity futures markets over the years, such as iron ore, but the market is relatively small and cannot determine the price of the entire international market. In this case, the change in the price of the international market is not under our control on the one hand, and on the other hand, it will also affect our price level.
China now has a lot of export orders, but the price given to us by others cannot be said to rise. Of course, China's current bargaining power, or bargaining power, is also growing, as China's irreplaceability becomes more and more apparent.
In this context, we can pass on some of the rising costs of raw materials to the downstream or the next family, which originally has no ability to pass on. In the past, if we wanted to produce and maintain the market, we had to swallow our anger and not raise prices, and digest some of the costs of price increases, which was the most miserable stage of China's manufacturing industry. The advantage now is that Chinese products are irreplaceable, and when India and Vietnam cannot produce, foreign companies have to entrust China to increase price production.
China's increased bargaining power in international markets is good for Both Chinese manufacturers and exporters, but some exporters are less willing to lose these markets, so they may also accept some losses.
Observer Network: There are downward factors in economic growth in the fourth quarter, but the supporting factors are also obvious, do you think there will be some big moves in macro policies in the fourth quarter?
Ding Yifan: I don't think there will be more policies in the fourth quarter, the current economy is a relatively stable state, we emphasize the new normal and high-quality development, rather than high-speed development, so there is no need to destroy the current quality-oriented development structure for the sake of speed.
We have introduced new measures to promote the rate of economic growth, or to solve the employment pressure, but now there is no, we are not facing severe employment pressure, on the contrary, the problem of insufficient labor. In this context, I think there should be no more distorted regulation.
A modest appreciation of the renminbi can cope with global inflation
Observer Network: Commodity prices continue to rise, PPI (industrial producer prices) broke through 10%, how long can domestic inflation last? How will inflation in the United States affect us?
Ding Yifan: Domestic inflation may continue for some time. On the one hand, the global raw material supply chain is blocked, costs and prices are rising, and on the other hand, our market is not able to regulate, which makes China's inflation less optimistic.
The domestic PPI (Industrial Producer Price Index) exceeded 10% year-on-year growth rate, hitting a record high, which means that the profits of many domestic enterprises are declining and operating costs are increasing.
However, domestic inflation tends to be moderate overall, and we also have some policy space to resist inflation.
The United States is now most affected by inflation, which is why the United States is negotiating with China. In fact, the impact of Chinese manufactured goods on US prices is very large, the United States previously underestimated the impact of the trade war with China, out of thin air to China's exports of products to increase the price, the final result is to increase the pressure on the lives of the American people, now can only negotiate with China.
Moreover, the Biden administration attaches great importance to next year's midterm elections, so he wants to use all means to maintain the Democratic Party's control over the majority of the House of Representatives, so it is important to maintain prices, which is naturally inseparable from cooperation with China.
Cooperation with China would have to some extent necessitated the removal of the additional tariffs and sanctions of the year, which could be politically criticized by republicans. Therefore, on the one hand, the Biden administration has to ask for China, on the other hand, it also needs to be tough, and we can see that the US policy toward China is also relatively contradictory.
U.S. crude oil prices reach $80 a barrel or exacerbate inflation. Image source: Visual China
Observer Network: In addition to inflationary pressures, the United States is now more troubled by the problem of stagflation.
Ding Yifan: Yes, stagflation has begun to emerge in the United States, and the United States is now particularly worried about this matter. This was reflected in the fact that inflation in the United States once again exceeded market expectations to 5.4% in September, and the core PCE (Personal Consumption Expenditure) price index also reached a new high.
The original estimate in the United States was that with the injection of vaccines, the employment and economic situation gradually improved. The reality is that there has been no improvement, the employment rate is lower than expected, economic growth is unmotivated, prices are rising, and the end result is stagflation.
Observer Network: The risk of global stagflation has been fully emerged, and China is in a period of economic transition, how should we respond?
Ding Yifan: In the future, the high inflation rate in the United States will definitely cause the dollar to continue to depreciate, thus triggering the world to enter the next round of inflation. In this context, China allows the RMB exchange rate to be priced with market fluctuations, and the probability is that the RMB will appreciate for a long time.
As the economy continues to recover, inflation in the United States remains high. Image source: The Wall Street Journal
For China, in the context of global inflation, the appreciation of the renminbi is a particularly good means, and we can compare the experiences of Germany and Japan. If you implement loose monetary policy for fear of currency appreciation, you are actually making the mistake of Japan's bubble economy.
After the Plaza Accord in 1985, the seven industrial countries jointly intervened in the market, devaluing the dollar, and the West German mark appreciated with the yen. The Japanese government and the government of the Federal Republic of Germany have adopted a completely different response. The Japanese government, concerned that the appreciation of the yen would affect its export-oriented development policies, adopted a loose monetary policy in an attempt to hedge against the impact of the yen's appreciation, which in turn stimulated a bubble economy in the real estate market and capital markets.
The Government of the Federal Republic of Germany knows that the appreciation of the mark has an impact on exports, but it holds the belief that "the strong mark can force German companies to improve product quality and improve competitiveness", allowing the mark to appreciate and not taking any measures to intervene in the market. As a result, the product quality of German enterprises is getting better and better, the market demand is getting stronger and stronger, and Germany's trade export surplus is getting bigger and bigger with the appreciation of the mark.
Germany has adopted a completely different attitude from that of Japan. The government of the Federal Republic of Germany believes that the appreciation of the mark is a good thing, because after the appreciation of the mark, the bulk of the business is priced in dollars, the mark appreciates, then the mark can buy more goods, and the mark appreciation offsets the pressure caused by the rise in the price of commodities. We are now also facing a situation where the appreciation of the renminbi helps to depress the "imported inflation" caused by the import of raw materials.
After that, the dollar depreciated, the mark continued to appreciate, everyone anchored the exchange rate to the mark, and later, before the birth of the euro, the entire European currency was based on the mark, and Germany gained many benefits such as export growth and industrial transformation through this initiative.
At that time, Germany was very confident, I asked Helmut Schmidt himself, he was the chancellor at the time, Schmidt told me that he saw this as a good opportunity to force German companies to upgrade, to use mark appreciation as a means to force enterprises to become stronger.
Later, it turned out that German products appreciated with the mark, German products became irreplaceable, and the export surplus was larger than decreasing, which is Germany's bottom line.
The more the renminbi appreciates and the cheaper the imported raw materials, the more it can withstand "imported inflation." I don't think we should underestimate China's export companies, which are still quite powerful and very competitive in the international market.
First, we must have enough confidence that enterprises can withstand this wave of pressure through upgrading, not to make cheap money, to make fast money, through this "phoenix nirvana", the end will be better, just like the German experience.
The second is to take it step by step, in the process of forcing enterprises to transform and upgrade, to give enterprises time and space to grow.
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