China is undergoing unprecedented changes in 40 years, says economist


I want to share my reflections with you, school mates, entrepreneurs, and everyone who is sitting here today.

In 2018, the Chinese government has three fundamental misjudgments:

First, the national economy is slowing. 2018 was a special year; many important things have happened this year, and the most important is the slowing economy.

How serious? The State Bureau of Statistics gave an increase rate of 6.5%. But a report by a study group from a very important organization internally painted another picture: China’s factual GDP growth was only 1.67%. And another source even gave a negative percentage.

Here I am not going to tell who is more accurate, but the government truly has its misjudgment on its economy this year.

Secondly the Sino-US trade war, we also we a misjudgment there. We have underestimated the consequences. Almost a year has passed now since that war was started, and let us recall what our mainstream media has said: “With the trade war, the Americans have lifted a stone to smash its own toes;” “China will be winning in the end!” “Going big, China wins big; going medium, China wins medium; going small, China wins small”.

Where are those mainstream media now? To speak the truth, we have made too many mistakes in the judgment on Sino-US trade conflicts, on the developments of the trade war and on the international conditions. We need to have deep reflection there.

As a matter of fact, the Sino-US trade conflict is no longer a trade war, not economic war, but conflicts between two values.

We are sure that Sino-US relation is now at a crossroads, facing great historical challenges, without a good solution.

We have noticed recently the arrest of Huawei CFO Meng Wanzhou in Vancouver. Western media like BBC have reported the containment by Western Alliances on Huawei. What does it tell us? This is not just a trade or economic issue.

In the past we talked about China’s strategic opportunities for economic development. Do these opportunities still exist today? In my opinion, they are quick fading now.

Third, private enterprises are severely hit. From all the released data, we have seen a sharp decrease in private investment; and the confidence of private entrepreneurs have been badly hurt.

I think we are facing at least five questions.

First, we are still making mistakes in transformation of the economy. This economic slow-down will be a long process, which in itself is not bad deal. But we have noticed that 78.5% of GDP growth has come from consumption and the third industry.

Our governments have taken that a good thing, saying that our economic transformation is making process. In the past we have relied on investment and trade. Now the increase comes from consumption and the third industry. That sounds reasonable.

But in such a big country, how can we maintain sustainable development with only the support of consumption, with a dramatic decrease in investment?

It might be good news; but we have seen more of a bad side.

In the past 40 years of reform and opening-up, we have five times of consumption trends: one the problem of food and clothing solved; two the three big pieces of household appliances; three information consumption; four automobiles; five real estate.

Now we have seen the fifth trend coming to an end: sales of automobiles decline sharply; real estate sales decline sharply. We are facing great difficulties.

Second, financial risks. When the economy is going down, financial risks increase; banks have more difficulties to attract investment. Our media has told that wrong policies, lack of coordination, deviated execution, and tightening supervision all added to the constraint of credit consumption. Those are truly some of the main reasons, but they are not the root causes.

According to official statistics, breaches by enterprises this year will be more than 120 billion yuan; there are lots of bankruptcies; many enterprises collapse, including state-owned ones.

Bohai Iron and Steel used to be one of the World’s 500 Giants. When it collapsed, it left a debt of 192 billion. We have calculated it at 280 billion.

Debt by local government is also a great trouble in the financial market.

According to the State Auditing Authorities, government debt amounts to 17.8 trillion yuan. Mr He Jian, deputy secretary of the NPC Financial and Economic Committee, put the figure at 40 trillion. What’s worse: none of these local governments are ready to pay for their debts.

Third, stock market is down. In think China’s stock market is far from its worst. We can see that only the collapse of Wall Street in 1929 can be compared to our crisis. Most stocks will lose 80%, some even 90%.

When we have the reflection on the stock market today, what is the pain there?

Some people scold the Securities Regulatory Commission, criticizing its Chairman Mr. Liu. That is unfair. The regulatory policies are wrong, their implementation not effective; policies for stock market might also be wrong. But that’s not the key issues.

Look at our profits. The banks and real estate sector took away two third of the total profits. The profits of 1,444 small and medium listed companies are no completion to a single Industrial and Commercial Bank. How can this kind of stock market be healthy with a bull?

We buy stocks for the companies’ future profits, not betting on information. Robert J. Shiller from Yale University said something like: the stock market is not an economic balance sheet in the short-term, but on the long-term basis, it is.

On October 19, several policies were publicized and vice premier Liu He was taking the call. What about the result? Last Friday, 2600 was broken and it has kept at that level for long. Where is the bull?

The stock markets behave some badly and this only tells China’s economy is in deep trouble.

Fourth, financial industry has gone from materialized to abstract. China’s economy is slowing down. Our past expansion, the way it increased, and our way of thinking all have problems. From materialized to abstract, that’s what Zhou Xiaochuan, former chairman of the Central Bank, has said.

What are our financial risks today? Hidden risks, complicated, sudden, infectious, damaging; structural balance is in trouble; too many people are violating the law and regulations.

We want to avoid the Black Swan and the Grey Rhino. Some journalist has asked Mr Zhou, “Where are the black swans?” “How many of them?” Mr. Zhou refused to answer.

The black swans are all around you, like the P2P schemes, don’t you see?

What about grey rhinos? The block chains, don’t you see? Real estate is another.

They are all virtual economies, unreal, too many of them, the only purpose is arbitrage.

At the National Finance Work Conference, both the general secretary and premier have criticized China’s finance sector, accusing them of playing games, running away from reality, and causing astonishing turmoil.

Apart from the arbitrage, many enterprises have used the money in other investments rather than their main production. In the past 10 years, IPO has raised more than 9 trillion yuan, and 90% of the money was spent on stocks, futures, and in financial investment. The investment is not in production. Do you think they can do well there?

I personally know many entrepreneurs and bosses of listed companies. To be honest, most their loans from banks have been used to buy houses or financial products.

According to official data, these listed companies have spent over one trillion yuan in real estate leverage. They play it nationally, leverage and more leverage.

Starting from 2019, China will be on a no-return way, with more leverage. Our leverage is now three times the America’s average, and two times of Japna’s. The debt accumulated by enterprises is the highest in the world.

Fifth, our short term monetary policies won’t solve the fundamental problems.

At times of slow-down, the government has only the old stuff of solutions: losing money control, more aggressive credit policy, favorable fiscal policy and positive capital policy.

Will these solve the fundamental problems? The monetary policy is already lose with 4 trillion more in circulation, hedging in medium terms releasing 2.3 trillion; in liquidation, that adds up to a dozen trillion.

The credit policy shoots out three arrows: loans, bonds, and equity pledge finance.

These policies, we must think, can they solve our deep-rooted problems?

In my opinion, in the capital market, those policies won’t solve the problems. Two months has passed since October 19; do we see the good results? What truly is the problem?

My conclusion is: this is not a question of speed or quantity; it is a question of quality.

In the 19th Congress Report or Report of the Third Session of 18th Congress, the words look beautiful, but reality is another story. In respect of China’s structural problems, the 19th Congress has listed 6 imbalances; I don’t think that has told the full picture.

Those short-sighted credit, monetary, and fiscal policies won’t solve the “imbalanced, comprehensive” problems in development.

We must carry out three substantive reforms.

In essence, we have not jumped out of the traditional framework of policies and thinking. The success of transformation and upgrading comes from vitality of private enterprises. The key is the government’s ability to inspire this vitality.

The core problem for private enterprises is not the difficulty in getting loans or the high interests to pay for those loans. The key problem is the continuity of policies, their fear of the government’s accountability.

To solve the delinquencies in payments, the governments must be the first to pay the debt to the businesses; state-owned enterprises shall pay the debt to the private enterprises; big businesses shall pay the small businesses. With the increase of costs, tax reduction is the first step to take.

Again, my basic conclusion is: those short-term policies won’t solve long-term problems.

For real and sustained development and to come out of today’s plight, China must carry out three reforms: tax reform, political reform and state power reform.

How to lower the taxes? Governments must be streamlined, number of personnel largely cut. We need a small government, with lower costs. With this, China must undergo a political reform.

Professor Zhou Qiren from Peking University said, the biggest issue in China is the cost of administration, too high.

And political reform, the administrative system must be reformed; in addition, the system of science and education must be reformed.

These days China is celebrating its 40 years anniversary of reform and opening up, and I sincerely hope to hear the sound of the horn for deepening reform and opening.

Let’s just wait and see.

By Xiang Songzuo
Translation by staff editor

Xiang Songzuo is Deputy Director and Senior Fellow at Center for International Monetary Research, Renmin University of China.


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