Finding the optimal solution: when “three-phase superposition” meets “triple pressure”

  The basic characteristics of the current economic operation are summarized as “triple stress”: demand contraction, supply shock and weakening expectations. This “triple pressure” appears in the context of “three-phase superposition”, that is, the key period of changing the development mode, optimizing the economic structure, and transforming the growth momentum. Structural, institutional and cyclical problems are intertwined. Constraints on China’s economic growth are accumulating, the space for maneuvering has become narrower, the elements that need to be balanced have increased, and it has become more difficult to find the optimal solution.
  At present, China’s economy is in the process of “catching up” to “being caught up”, which has important implications for supply-side reform and demand-side management. In terms of supply-side reform, it means to change from the introduction of innovation to independent innovation, from the input of the number of factors to the improvement of total factor productivity (TFP) and human capital, to give play to the decisive role of the market in resource allocation and pricing, and to activate market players. Vitality, give full play to the synergistic effect of various ownership economies, and adjust and upgrade industrial institutions; in terms of demand-side management, it is required to take boosting final consumption as a strategic basis to liberate pent-up consumption. At the same time, reduce the dependence on imported intermediate products and external markets, optimize the trade structure to increase added value, and promote the construction of urban agglomerations to form returns to scale and improve investment efficiency. In this process, the counter-cyclical policy should take into account the cross-cycle, and the aggregate policy should take into account the requirements of structural transformation.
When “three-phase superposition” meets “triple pressure”

  The Central Economic Work Conference, held from December 8 to 10, 2021, summarized the basic characteristics of China’s current economic operation as “triple pressures” – shrinking demand, supply shocks and weakening expectations.
  The triple pressure has formed a negative feedback, causing China’s GDP growth rate to fall to 4.9% in the third quarter of 2021, the Organization for Economic Cooperation and Development (OECD) composite leading indicators in October and November still maintained a downward trend, retail and passenger consumption in December The high-frequency data of the car shows that the demand side has shown signs of recovery, but the decline in the bill interest rate indicates that the financing demand of the real economy is still sluggish. The growth rate of land transactions and new housing starts in 100 large and medium-sized cities is still negative, and real estate sales and inventory pressure in third- and fourth-tier cities are relatively high. It is expected that the GDP growth rate in the fourth quarter of 2021 may further decline to below 4%, and the growth rate for the whole year can still be maintained at 7.9%-8.1% – higher than the potential growth rate and the global average growth rate (IMF forecasts that the global GDP growth rate in 2021 growth rate of 5.9%).
  The current consensus is that there will be greater pressure on domestic steady growth in 2022, especially in the first half of the year. This is not only due to the high base in the first half of 2021, but also to the misalignment of internal and external economic and policy cycles. After the outbreak of the new crown epidemic, China’s economy and production capacity took the lead in recovering. The expansion and slow convergence of overseas supply and demand gaps maintained a high export boom in China, and also made the domestic counter-cyclical aggregate policy return to normal earlier. However, since the fourth quarter of 2021, the central banks of the United Kingdom and the United States are accelerating their withdrawal from unconventional monetary policies as inflation pressures continue to exceed expectations. The Bank of England has already taken the lead in raising interest rates, and the Federal Reserve is also accelerating the reduction of asset purchases, which will end in the first quarter of 2022, and may start raising interest rates in the second quarter. The marginal slowdown of overseas demand recovery and the gradual easing of supply bottlenecks will help to accelerate the convergence of supply and demand gaps, and enterprises may change from active inventory replenishment to passive inventory removal. Under the baseline situation where the epidemic is under control, external demand will face greater pressure in 2022. The domestic fiscal rearrangement in 2021 and the fiscal frontend in 2022, as well as the monetary policy’s measures in reducing the reserve requirement ratio and interest rate, are all taking into account cross-cyclical and counter-cyclical adjustments.
  In order to better understand the “triple pressure”, it can also be placed in the context of the “three-phase superposition”. On the one hand, it helps to clarify the long-term and short-term nature of the pressure; Growth and structural considerations.
  In the first half of 2013, the Politburo discussed the economic situation, it was the first time that China’s economy was in the “three-phase superposition”. A comprehensive system analysis was carried out.
  First, the growth rate shift period, that is, the average growth rate of more than 10% in the first 30 years of reform and opening up is gradually downgraded. This is determined by the general laws of economic development. Long before the financial crisis, the potential growth rate of GDP determined by the supply side had already entered a downward range. In terms of labor force, around 2004, China experienced a “Lewis Turning Point”. The labor force transferred from rural to urban areas changed from surplus to shortage, and labor costs began to rise. The total dependency ratio bottomed out in 2010. In 2014, the proportion of the population over the age of 65 exceeded 10%. The former demographic dividend has turned into a “population debt”, and labor supply (quantity) has become a drag on GDP growth. If there is no disturbance from the new crown epidemic, it is expected that China’s total population will “peak” around 2025. Capital accumulation (investment) faces multiple constraints of falling household savings rate, falling marginal rate of return and rising debt leverage. The growth rate of TFP also began to decline after reaching 11.4% in 2007, and fell to the range of 3%-4% before the epidemic.
  Second, during the period of structural adjustment pain, this is an active choice to speed up the transformation of economic development mode, and it is also a process of survival of the fittest and market clearing. Since 2015, the supply-side structural reform with “three eliminations, one reduction and one supplement” as the core has gradually become clearer, and its connotations have been continuously enriched. Since the 19th National Congress of the Communist Party of China, a consensus has been reached on the transformation of the economy from a “high-speed” to a “high-quality” development model and guided by the five new development concepts of innovation, coordination, greenness, openness and sharing. In 2016, the Brexit and Trump’s election to the United States led to changes in globalization. In 2018, the Sino-US economic and trade conflict became apparent. Facing the unprecedented changes in a century, the decision-makers proposed to build an “internal cycle as the main body, domestic and international dual”. The new development pattern of circular and mutual promotion”. This requires innovation to become the first driving force on the supply side, and (domestic) consumption to become the strategic basis on the demand side. In the process of switching from imported innovation to independent innovation and external demand to domestic demand, there will inevitably be a “fault zone”. In order to achieve a smooth landing of the economy, policies must play a counter-cyclical adjustment role.

  Third, during the digestion period of the previous stimulus policies, after the big crisis, external demand shrank sharply. In 2008, the Central Economic Work Conference issued the “Four Trillion” plan, which promoted China’s economy to buck the trend in 2009-2010 and made important contributions to the recovery of the global economy. A path to growth driven by high debt leverage. According to data from the Academy of Social Sciences, from the end of 2007 to the end of 2019, the leverage ratio of China’s real sector increased from 145% to 247%, and the non-financial corporate sector increased from 96% to 152%, all of which are at the forefront of the world. In 2012, China’s GDP growth rate fell below 8% for the first time, down 6.3 percentage points from 2007. Real estate and infrastructure investment played an important role in maintaining a growth rate of over 7% from 2013 to 2015.
  From the Great Crisis to the Pandemic, real estate has gone through three complete cycles. During this period, the leverage ratio of the household sector continued to climb from 18% to 56%. From 2013 to 2018, the growth rate of infrastructure investment has always been higher than that of real estate and manufacturing investment, forming a stubborn cycle of “land finance – infrastructure investment – real estate development”. The local government’s fiscal revenue is highly dependent on land transfer fees, and both the government and the financial sector are coerced by real estate. Finance is deviating from reality to virtual reality, shadow banking risks are accumulating, and Internet finance represented by P2P is chaotic. Preventing and defusing financial risks is still the focus of policy. In addition, high housing prices force residents to save more, and high leverage depresses residents’ consumption. The siphon effect of real estate on capital has made the investment in the manufacturing industry obviously insufficient, and the problem of “financing difficult and expensive” for small and medium-sized enterprises has not yet been alleviated.

  Unbundling dependence on land and real estate and preventing and defusing financial risks have been the main policy lines in recent years. After the Central Economic Work Conference in 2016 first proposed the positioning of “housing and not speculating”, the 2019 July 30 Politburo meeting once again proposed “not to use real estate as a short-term means of stimulating the economy”. Even during the COVID-19 outbreak, the government has introduced corresponding strong regulatory measures in response to the overheating of the real estate market in some areas. The “New Asset Management Regulations” introduced in 2018 will be fully implemented by the end of 2021, and there is no turning back for breaking the rigid exchange and net worth.
  Before the new crown epidemic, the “three-phase superposition” was still deepening. The 2019 Central Economic Work Conference reiterated, “We must soberly realize that my country is in a critical period of transforming its development mode, optimizing its economic structure, and transforming its growth drivers. Structural, institutional, and cyclical issues are intertwined.” The superimposed ‘influence continues to deepen, and the downward pressure on the economy increases’. In addition, the reversal of globalization, changes in Sino-US relations, and the challenges of the new crown pandemic are superimposed. Constraints on China’s economic growth are accumulating, the space for maneuvering has become narrower, the elements that need to be balanced have increased, and it has become more difficult to find the optimal solution. How to break the situation, we can only take history as a mirror, not follow the old path, strengthen the determination of reform and opening up, further release the reform dividend, and promote the transformation of growth momentum to innovation and the transformation of strategic base to consumption.
Stages of China’s Economic Development: From Chasing to Being Chased

  From a population perspective, economic development can be divided into three stages (with photos). The first stage is the stage of rapid urbanization (+industrialization). This is a typical dual economic development stage, the “Lewis turning point” has not yet appeared, and the labor supply is close to infinite elasticity. At this stage, the labor market is a typical buyer’s market, capital owners receive most of the surplus value, and wage growth is slower than GDP growth. Since the marginal propensity to consume of the capital owner is lower, and the income is more used for saving and investment, a feature of this stage is the improvement of the organic composition of capital—capital deepening. For a capital-scarce economy, capital deepening is an important supply-side force driving economic growth. Consumption as a share of GDP continues to decline due to lower wages and a widening gap between the rich and the poor. At the same time, urbanization and industrialization are advancing rapidly in the process of capital accumulation and the transfer of rural labor to cities.

  Once the Lewis turning point is crossed, the economy enters the second stage – the mature economy. The surplus of rural labor has turned into a shortage, the labor market has begun to meet the shortage of supply, the wage increase may exceed the GDP growth, the unskilled labor will increase even more, the distribution method that is not conducive to labor owners is reversed, the gap between the rich and the poor is narrowed, or No further expansion. With the increase of residents’ income, the share of labor compensation and consumption in GDP will also increase. The overall production capacity is overcapacity, but labor substitution, consumption-oriented and investment to promote industrial upgrading continue to expand. The trade structure is significantly different from the first stage, with the complexity of export products and the position of the global value chain gradually increasing. Urbanization and industrialization are still advancing, but at a markedly slower pace. The economic growth rate has dropped from a high speed to a medium and high speed.
  Stage III is the chased stage. The Lewis turning point is superimposed on aging, and the labor shortage is more severe. However, the rise in wages encounters a bottleneck, because labor-intensive industries will either choose to relocate or replace labor with capital. As urbanization and industrialization completes, investable opportunities become scarce and returns on capital continue to decline. At this stage, the supply side is the main constraint on economic growth, and the stagnant economic growth can only be reversed by the new technological revolution. If it is only divided from the two dimensions of speed and quality, the common feature of the first two stages is high speed, and the third stage pays more attention to the quality of development. Among them, the second stage can also be understood as the transition from high speed to high quality. transitional stage of development.
  Two major structural inflection points in China’s labor market have already occurred. In terms of the relative costs of labor and capital factors, 2008 was an important turning point. Of course, this is not only brought about by the “Lewis turning point”, but also the aging of the population. In 2010, the peak of the proportion of the labor force and the bottom of the total dependency ratio have appeared, and the wage index began to rise, indicating that China has entered the second stage. Compared with other Asian economies, demographic factors pose a greater challenge to the Chinese economy. Japan and South Korea have a certain time interval from the “Lewis inflection point” to the aging inflection point, but China appears almost simultaneously. This is the reason why Japan can still maintain a medium-speed (or medium-high-speed) growth for 20-30 years after the “Lewis turning point” occurred in the 1960s. Because of this, China’s golden growth window will shrink significantly. Starting from the labor-intensive sector, China is entering a stage of being caught up. This has important implications for supply-side reform and demand-side management.
Supply-side reform: from introduced innovation to independent innovation

  In the final analysis, it is innovation and the proliferation of innovation that have changed the political and economic landscape of the world. Developed countries are the main force of independent innovation, so they are more dependent on education, research and development (R&D) investment (especially basic scientific research) and the improvement of human capital. In the early stage of economic take-off, late-developing countries will rely more on the introduction of innovation to narrow the gap with developed countries, but whether they can absorb and absorb the speed also depends on the country’s human capital accumulation, R&D investment (more emphasis on experimentation). development and applied research), infrastructure and institutional change.

  The global diffusion of innovation has formed a “geese matrix” of the industry, and the leader of independent innovation (especially general technology) plays the role of “leading geese”, becoming a net exporter of new technologies and new products in the early stage of the product life cycle country. The process of trade is also a process of innovation spillover, and independent innovation countries will always be subject to competition from other countries. This may prompt it to relocate parts of its industrial chain to developing countries with lower labor costs. In this process, the late-developing countries will gradually master the core technology, and the industrial chain will also tend to be perfected, thus becoming a net exporter of products.
  Since the end of the 1980s, China has built a “world factory” in only 20 to 30 years. This is not only because foreign-funded enterprises have brought advanced technology and management experience and cultivated talents, but also because they are “building” China themselves. The rapid rise of China’s manufacturing industry, the establishment of the world’s largest trading nation and the establishment of the center of the value chain, are directly related to foreign direct investment (FDI). What is difficult to quantify, but also more far-reaching, is the spillover effect of knowledge and technology, and its increase in labor productivity. In terms of R&D, a study by PricewaterhouseCoopers (PwC) showed that in 2014, foreign-invested enterprises accounted for 81% of the total R&D expenditure of Chinese companies. The number of foreign-invested R&D centers in China increased from less than 30 in 1999 to 600 in 2004, more than 1,300 in 2013, and more than 1,500 in 2015. The R&D work of foreign-invested enterprises in China has shifted from low-cost support to local operations, serving local needs and basic research fields. Hundreds of foreign companies have established research links with Chinese universities and research institutions. For example, Siemens has established research and technology relationships with more than 200 universities in China, and many Chinese high-tech spin-offs come from funded research centers and projects

  The joint venture model is an important channel for foreign-invested enterprises to spill over. For foreign parent companies, forming joint ventures with local companies will help them leverage the location advantages of local partners, quickly enter new markets, and transfer technology and expertise to the joint venture companies, which will help them gain competitive advantages and expand the market. share; joint ventures have significant positive technology spillovers not only to the parent company of the local partner, but to the industry as a whole. The results of regression using enterprise panel data show that when the sales share of a joint venture increases by 10%, the productivity of a typical Chinese local company in the industry also increases by an average of 10%; for every 10% increase in the market share of the Chinese partner parent company , the productivity of other firms will increase by about 4.5%. The spillover effect of Sino-US joint ventures is even more pronounced. This is the so-called “late mover advantage”.
  The current problem is: on the one hand, the speed of self-innovation in frontier countries represented by the United States has slowed; on the other hand, there is less room for technology spillovers. Although China still has a large space for learning in the field of high-precision technology, the channels for learning are also narrowing. Since 2010, China’s productivity growth has continued to decline, and has now fallen below real GDP growth. This will obviously drag down GDP growth and slow down the convergence to innovation frontier countries. As the constraints of land, population, resources and capital will only get tighter and tighter, how to tap the potential of late-mover advantages and, more importantly, enhance the ability of independent innovation is the key for China to become a high-income country, achieve its 2035 vision and The key to the “two centenary” goals.
Demand-side management: liberating pent-up consumption

  In aggregate terms, the downward trend in the contribution of net exports and investment to GDP growth is certain, and structural optimization is an inevitable choice to avoid dragging down GDP growth and agglomerating financial risks. Conversely, increasing consumption follows the trend, but the release of consumption potential still depends on the elimination of institutional barriers and the role of policies in secondary distribution.
  High savings rates and low consumption rates are considered a feature of the “Asian model”. Compared with other Asian countries, China and Singapore have high savings rates, peaking at more than 50%. The peak was 41% in South Korea (1988), 40% in Taiwan (1986), 38% in India (2008), and 34% in Japan (1991). Confucian culture is considered to be an important reason, but cultural factors can neither explain the main part of the difference in savings rates between Asian countries and Western countries, nor the differences within Asian countries. In the case of China, it is not so much a culture as a series of forced savings, repressed consumption and an unreasonable distribution system that lead to high savings.
  The direct reasons for the insufficient consumption of residents are the slow growth of residents’ income and the intensification of the gap between the rich and the poor. The related explanations include four aspects. First, the dual structure of urban-rural and labor markets distorts the market-based pricing of factors, especially land and labor. Second, the investment-driven growth model produces financial repressive arrangements. The essence of financial repression is to transfer the cost of industrialization and export to the residential sector. For example, under the arrangement of the compulsory foreign exchange settlement and sale system, the central bank and the financial sector bear the cost of hedging foreign exchange, but at the expense of the high interest rate difference between deposits and loans. Forms are transferred to the residential sector, so that deposits do not receive returns corresponding to the scarcity of capital. Third, export-oriented trade policy. All forms of trade intervention have a wealth transfer effect, and all policies that encourage exports and increase import costs are equivalent to raising consumption taxes and suppressing consumer demand. Fourth, before the “7.21 exchange rate reform” in 2005, the RMB exchange rate was significantly undervalued, which was equivalent to taxing imports, subsidizing exports, and levying domestic consumption taxes. The wealth transfer effect of an undervalued renminbi is to shift wealth from consumers to manufacturers and wealthy classes with net assets overseas. Whether from the tax effect or the wealth transfer effect, the undervaluation of the RMB exchange rate will depress consumption. It wasn’t until 2015 that the IMF’s assessment report said the yuan was “no longer undervalued.”
  In addition, the systems that suppress consumption also include: the lack of social security system, loose environmental protection, low rural land expropriation prices, etc., all of which have suppressed the consumption of the residential sector to varying degrees. All export-oriented policies have the effect of suppressing household consumption, which is equivalent to forced savings, increasing loanable funds, and thus reducing investment costs. China’s comparative advantage is not only cheap labor, but also cheap capital. Labor is cheap, but capital appears to be free, even a negative cost. In the context of the great population reversal and global changes, the only option is to unleash the potential of consumer demand.
  In a word, in the process of China’s economic transition from high-speed to high-quality development, it is the best solution to build a new dual-cycle development pattern with five new development concepts.
  Whether the transformation of the dual-cycle pattern can be realized depends on whether various reform policies can be implemented, whether we can win the tough technical battle, and whether we can correct the institutional obstacles to repressed labor and forced savings in the old model. The question is whether a fair, orderly, just and healthy market order can be established. Because the costs and risks of economic behavior secured by government credit and discriminatory policies will be socialized and likely to be transferred to vulnerable groups.