Xiang Songzuo, a renowned macroeconomist, is a director and deputy director of the International Monetary Research Institute at Renmin University of China. He is also a member of the Advisory Committee and Research Committee of the Official Forum of International Monetary and Financial Institutions (OMFIF) and the editor in chief of Global Finance magazine. Mundell, who studied under the "Father of the Euro" and won the Nobel Prize in Economics in 1999, is an outstanding alumnus of the School of International Relations at Columbia University and one of the founders of the NASDAQ listed company Huayou Century. I have served in the Shenzhen Branch of the People's Bank of China and multiple enterprises.

work

His main works include "Bernanke's Monetary Theory and Policy Philosophy", "Exchange Rate Crisis - The Roots and Consequences of Global Liquidity Excess", "Don't Play with Exchange Rates", "Mondale's Collected Works of Economics" (translated into 6 volumes), "Zhang Wuchang's Economics", "Financial Crisis and National Interests", and so on. The work has won the China Book Award, the National Top Ten Economic Readers Award of the Economic Daily, and the National Excellent Book Award of Universities. I have won the first Wu Yuzhang Scholarship, Visiting Scholar Scholarship from the National Scholarship Council, and other multiple awards. Xiang Songzuo gradually transitioned from a financial practice school to an academic school of theoretical research, with a rigorous academic research attitude, emphasis on data explanation, clear logic, strong persuasiveness, and a broad strategic perspective. Over the years, the intense market washing has a strong financial sensitivity. During my study abroad, I delved into classic Western economic works, as well as the history of the US economy and global finance, especially the evolution of the international monetary system. I have written numerous papers in economics and management. Published in "Managerialists", "Economics", "Securities Times", "China Securities News", "Contemporary Financiers", "Leaders", etc.

He was invited to participate in the "International Monetary Roundtable" (co sponsored by former Federal Reserve Chairman Volcker, Mundell, Harvard University's famous international financial scholar Cober and Czech President) and the "World Knowledge Forum" (co sponsored by IMF, OECD and South Korea's largest newspaper group), and delivered a keynote speech on RMB exchange rate and Asian regional currency issues.

Early experiences

I graduated from Huazhong University of Science and Technology and Renmin University of China in my early years, and studied at the University of Cambridge in the UK and Columbia University in the United States. Learning from Mondale, the "father of the euro", the founder of international macroeconomics, and the winner of the 1999 Nobel Prize in Economics, Xiang Songzuo has profound knowledge of the international exchange rate and the RMB exchange rate policy, and supports the RMB fixed exchange rate policy. He is an outstanding alumnus of the School of International Relations at Columbia University and one of the founders of the NASDAQ listed company Huayou Century.

Works during the academic period

During my student years, I participated in writing and editing multiple economic works, including "Autumn of Existence and Death", "New Concepts of Market Economy", "New System of Market Economy", "Series of Books on Moving towards Market Economy", and "Series of Books on National Equilibrium". Doctoral thesis "Property Rights Theory and Enterprise System". The work has won the China Book Award, the National Top Ten Economic Readers Award of the Economic Daily, the National Excellent Book Award for Universities, and so on. I have won the first Wu Yuzhang Award, the National Scholarship Council Scholarship Program, and multiple other awards. From 1993 to 1998, he worked at the Shenzhen Branch of the Central Bank of China, serving in multiple enterprises and the Shenzhen Branch of the People's Bank of China. He served as the Deputy Director of the Planning and Funding Department, the Deputy Director of the Credit Management Department, and the Director of the Financial Debt Management Office. During the 1997 Asian financial crisis, together with my friend Zhang Qingfang, I extensively summarized the lessons of financial crises in various countries and co authored "Financial Crisis and National Interests".

Xiang Songzuo: Five Key Issues that China's Economy Must Face Up to

Source: Phoenix Caizhi

This article is a keynote speech titled "Five Key Issues and Countermeasures of the Chinese Economy" delivered by Xiang Songzuo, Director and Deputy Director of the International Monetary Research Institute of Renmin University of China, at the high-end forum of "New Economy, New Finance, and New Challenges" in Nanjing on October 21.

I am very pleased to have the opportunity to discuss China's economic and financial issues with everyone. Indeed, in the past few years, the Chinese economy has entered a new state: there are many problems, challenges, difficulties, and discussions. Today, I would like to focus on discussing the five key issues of the Chinese economy, which are all major issues that everyone present must face up to.

These five questions are: 1. How to resolve high leverage or debt difficulties? 2. How to achieve stable development of the real estate market? 3. How to ensure the basic stability of the RMB exchange rate? 4. How to stimulate the vitality of the private or private economy? 5. How to prevent the economy from further shifting from reality to emptiness?

Can the pressure of sustained economic downturn be fundamentally alleviated, and can China's economy transform from its past growth and development model to a new one? In the short term, these five issues will be a long-term and very troublesome problem for us.

1. From the latest economic data for the third quarter, it can be seen that

Taking a look at the recently released economic data for the third quarter, of course, the official interpretation is all very positive. As an independent researcher, I would like to propose my own perspective on the many difficulties faced by the Chinese economy today from a more micro, comprehensive, and systematic perspective at the industry and enterprise levels.

I have a few simple sets of data here. What can be seen from these data?

From January to September, in the first three quarters, the growth rate of private investment, also known as private enterprise investment, was only 2.5%, while the investment of state-owned capital reached 23%. There is now a lot of discussion, is the "national advance and private retreat" accelerating? If private investment maintains a low rate for a long time, the downward pressure on the Chinese economy will continue to increase. The reason is simple, because today private enterprise investment accounts for two-thirds of all investment, close to 70%. If the trend continues, whether 6% can be maintained will be a huge question.

The real consumption of residents fell below 10% for the first time. With the boom of real estate this year and the boom of stock market last year, there will be a foam here today and a foam there tomorrow. How about the real income and consumption of the people? If consumption continues to decline, from double digits in the past to single digits today, what can we rely on to drive the Chinese economy?

Industrial added value is a unique indicator in China, which is not widely used by other countries to measure economic level. This indicator can reflect both the efficiency of industrial production itself and market demand. The industrial added value is only 6% this year, and I am quite concerned about whether we can achieve the 6% target set by the Ministry of Industry and Information Technology by the end of this year. As you all know, before 2012, our industrial added value was basically 18%, or even more than 20%, but now it has dropped to 6%, indicating that both domestic and international market demand is very weak today. The central government proposes to reduce production capacity and inventory, as the profitability of industry is indeed worrying.

Real estate prices have skyrocketed for 11 consecutive months, and every time they do, as an independent researcher, I am definitely not happy. I am very worried about continuing to excel like this. How can we achieve stable development of real estate? The sharp rise or fall in asset prices is not a reassuring thing.

Finally, the export data for September was released, followed by CNN and Bloomberg in the United States, and even global stock markets were affected to some extent. Regarding these data, I have two basic judgments to raise for everyone's criticism. Our economy grew by 6.7% in the first three quarters, and the joke has also been compiled. All three quarters were 6.7%, so precise that we won't discuss this issue today. There is a data that shows that from January to September, 80% of the GDP growth in the first three quarters was driven by private enterprises, mainly indirectly or directly by real estate and infrastructure. Therefore, I believe that the Chinese economy is already facing an economic policy triangle dilemma. What is the 'Triangle Dilemma of Economic Policy'? The speed of labor productivity continues to slow down, the leverage ratio ratio of the entire economy continues to rise, and the effect of economic policies continues to decline.

The third is the RMB exchange rate, which is not isolated, but closely linked to debt, asset prices, property prices, and economic downturn issues. Since 2005 and until 2013, the RMB exchange rate has been unilaterally appreciating. Why has it suddenly become unilaterally depreciating today? In 2005, I wrote a book about exchange rate theory, titled "Don't Play with Exchange Rates". I warned for many years that at that time, many people predicted that the RMB exchange rate would soon appreciate to one to one against the US dollar, and even the chairman of a large state-owned bank has retired. He asked me in person, saying, Professor Xiang, why is it bad for the RMB to appreciate to one to one against the US dollar? Why do you oppose it? Why are you suddenly worried about devaluation again today? What is the problem?

The last two problems are more troublesome. Today, it is impossible to talk about the vitality of the private economy and the problem of the economy "turning from reality to emptiness". Everyone wants to hype and create a foam. The government wants to create a foam, enterprises want to create a foam, banks want to create a foam, and individuals want to create a foam. They want to see their own asset prices soar, and finally nothing goes up and down.

2. How to resolve high leverage or debt difficulties?

What level has the debt problem reached today? The overall debt (government, non-financial enterprises, and individual residents) combined reaches 280% of GDP, totaling approximately 118 trillion yuan. Compared to global debt, it has also reached the top rank. We have been from a very low level in the past, and since 2008, we have suddenly skyrocketed to such a high level. Last year, our finance minister, Mr. Lou Jiwei, expressed a very sharp point in a speech at Tsinghua University. For the first time, he saw the incumbent minister speak so sharply. He said at the time that in the past thirty years, China's so-called rapid growth has accumulated a pile of excess capacity and a pile of debt. This is his original words.

The debt of non-financial companies is the most troublesome part, according to the latest estimate, it has reached 125 trillion yuan, almost 200% of GDP, and is almost the world's largest. Japan, the United States, Europe and many other countries also have high debt ratios. Their leverage ratio ratio is mainly concentrated in the government, and the debt ratio of enterprises is not high.

This raises a very serious question. With such a high leverage ratio and debt ratio of enterprises, will there be a so-called balance sheet crisis in China? When Japan's economic foam burst, in 1990 and 1991, many Japanese enterprises had very high leverage ratio. Later, Japan fell into the so-called recession, mainly the recession of the balance sheet. Today, most of our manufacturing companies have a debt ratio exceeding 65%, real estate has a debt ratio of 73%, and some companies have exceeded 80%. In the past, we might need a dollar worth of debt to drive a dollar worth of GDP, but today we need at least four dollars worth of debt to drive a dollar worth of GDP, and we can't do it anymore.

We won't talk about last year's data. The data for the first three quarters of this year has also been released. The GDP growth this year is only 3300 trillion yuan, new bank loans have reached 10.16 trillion yuan, and the total amount of social financing has increased to 13.46 trillion yuan. Can this be sustained by debt?

Today, China's banking system is already the world's largest, with bank assets exceeding 200 trillion yuan, equivalent to 40% of global GDP. The transformation of development mode is not an empty statement. The economy has rules, and even when we talk about Chinese characteristics, there are universal rules behind them. Don't always think that you are a unique person.

The issue of non-performing loans has recently sparked heated debate. According to data released by the Global Financial Stability Research Group of the International Monetary Fund, the non-performing loans in China's banking system have reached 16%. Many people in China refute this, such as Qin Xiao, former chairman of China Merchants Securities, who wrote a detailed analysis in a long article. However, according to his analysis, although the numbers are different, there is no fundamental difference in opinion.

Just like the two sides of a coin, the other side of high debt is the non-performing loans of banks, which indeed requires us to attach great importance. Today, if our non-performing loans continue to rise, even according to the Basel Agreement and the corresponding standards of the China Banking Regulatory Commission, I believe many commercial banks will correspondingly shrink their capital and credit.

We have seen the soaring of real estate in the past year and a half. According to the estimation of several domestic research institutions, the leverage ratio ratio of residents has reached the level of Japan's real estate foam peak that year. Today, our two major leverage ratio are very high, corresponding to the problem of banks. Behind this data is the fact that the economic system has had a lot of trouble this year. Since 2013, many companies have accumulated high amounts of debt, with approximately 40% of new credit being used solely to repay interest and not for new investments or business activities. Behind this trouble, we cannot blame any individual or department. It is a matter of system and mechanism.

The State Council has just introduced the concept of debt to equity swap to solve the problem of high debt and high credit for enterprises, which is not a pleasant statement but also to reduce the burden on state-owned enterprises. Can we continue to solve this kind of difficulty forever, if we work on it again and again? Fifty percent of credit financing is owned by state-owned enterprises, which contribute only 40% of GDP, 30% of fiscal revenue, and 20% of employment.

How about real estate? Every time they encounter real estate tycoons, they scoff and disdain at us economists, because they always believe that real estate is the most important thing in China, and without it, the Chinese economy would be ruined. However, from a research perspective, the social resources you occupy are not commensurate with the established path, and the distorted property rights structure and growth strategy of enterprises have exposed investment and credit structure anomalies.

The total amount of bank loans and social financing is increasing, and the average investment cost of credit remains high for a long time. Why? Since 2009, the annual increase in bank loans has basically exceeded 100000 billion yuan, compared to 12.76 trillion yuan last year. In the first three quarters of this year, 10.16 trillion yuan has been disbursed, usually in large quantities in the fourth quarter. I don't think the 14 trillion yuan this year can withstand it. The total amount of social financing reached 13 trillion yuan last year and 14 trillion yuan this year.

The inefficient allocation of credit resources and the actual decline in the return on investment and wealth accumulation of society as a whole, while the public fell into unrealistic illusion of high returns, which led to wave after wave of asset operations and asset foam. Social financing scams, Ponzi scams, happen all the time.

Why?

Marx mentioned more than 100 years ago that virtual economy and finance fundamentally do not create value. Although I don't fully agree with his statement. This year, with so many investment hype, financial products, and wealth management products, the question of who will create returns for such a huge amount of financial assets is very serious. Why has the market never given commercial banks an appropriate valuation? Investors' eyes are still bright.

Today, when discussing the debt issue, we will return to a fundamental issue. The less elegant way to say it is called "taking aphrodisiacs" or "taking stimulants". Eating it like this can lead to major problems, and now the problem has arisen.

The current method, I am clearly opposed to the government's investment in debt to equity swaps, and I do not understand why the State Council has issued such a guiding opinion. If debt to equity swap is a market behavior, let banks and enterprises negotiate on their own. Some people say you are too naive, and I also know that we need to help state-owned enterprises reduce their difficulties. But what are the consequences of such poverty alleviation?

The whole world is discussing whether China will experience a debt crisis or financial crisis, and my conclusion is quite similar to yours. China will not experience a Western style debt crisis, which is still a true Chinese characteristic. Because first of all, the Chinese government owns almost all the banks, financial institutions, and the earliest debts, and the meat is rotten in the pot. China does not yet have the bizarre financial derivatives of the United States, so the possibility of a subprime crisis is unlikely. China still strictly manages its asset accounts. The proportion of foreign investors holding China's asset accounts is still very low. It seems that the Capital adequacy ratio ratio of national commercial banks is still relatively high. At the same time, we have political advantages. In the 1990s, our solution was to set up a coordination group, called the National Leading Group for Enterprise Merger and Bankruptcy Coordination. There was an office under it. I was the office director of the Shenzhen Branch of the People's Bank of China at that time, Colleagues refer to it as the 'Breaking Cooperation Office', and I served as the director of the 'Breaking Cooperation Office' for four years. Today, such "cooperative organizations" have been established again in various regions, with their names changed and the essence is the same. Some banks go bankrupt, and some enterprises are insolvency. The ultimate goal is to see who pays the cost. The most important concept in our economics is cost, and the ultimate goal is to see who pays the cost.

The characteristic of China is that some companies go bankrupt themselves because they do not have a real property owner, and banks cannot go bankrupt. So who will pay the final price? The state imposes an invisible tax on all taxpayers, and the ultimate financial risk is borne by the general public, while the wealthy can easily escape the debt burden, further exacerbating the wealth gap. International experience shows that every financial foam caused by credit has further worsened the gap between rich and poor.

Objectively speaking, high leverage and high debt itself mean that investment is difficult to sustain, and the growth rate of GDP will inevitably continue to decline. Faced with increasingly deteriorating financial risks, if stabilizing confidence in the financial market is a challenge for all investors, decision-makers, and regulators, any disturbance will affect people's strong concerns about all assets. We need to respond highly to these issues.

Due to China's special system, state-owned banks and state-owned enterprises are essentially driven by finance. It may seem like finance and finance can be separated, but it is essentially difficult to separate. It may seem like credit driven, debt driven, or currency driven, but fundamentally it is still driven by finance. Where does the financial money come from? We must reflect on this pattern today. The issue of debt is the focal point of all problems.

3. How to achieve stable development of the real estate market?

Is there a problem with real estate? Those who have bought a house, those who have bought many houses, are happy, while those who have not bought a house are complaining and frustrated. However, those who study the economy cannot rely on emotional drive. The real estate industry in China faces two seemingly opposite risks, but the essence is the same. One is the soaring house prices in large cities, with a strong investment atmosphere. The other is that in most third and fourth tier cities, there is a huge pressure to destock the property market. Some cities have prices but no markets, and the market remains depressed, namely, positive foam and negative foam.

China's real estate industry faces three major dependence symptoms: firstly, the government excessively relies on land finance; Secondly, families excessively rely on real estate wealth; The three banks excessively rely on mortgages and development loans. In a sense, the saying that real estate is kidnapping the Chinese economy makes sense. More than half of the provincial capital cities in China have started to rely on land sales revenue for their local finances, with some places exceeding 80%. The financial revenue of land is more than a confused account, without people's representative supervision, and a large account is published every year, so the local leaders are very happy to use it. Why is the family overly dependent? More than 60% of China's total wealth today is in real estate, which is problematic from a macro asset perspective. Banks, as I just mentioned, over 40% of loans are related to real estate, let alone real estate mortgages. Although the proportion of mortgage loans may not seem high, they have recently grown rapidly, exceeding 20%. Three major overdrafts: government overdraft finance, household overdraft consumption capacity, and bank overdraft credit.

Is there a foam? How to judge the real estate foam, I think we should look at three points: the ratio of house price to income, the ratio of house price growth to income growth, and the rental yield. All three data show that the foam is serious in some cities. In Shenzhen, the housing price to income ratio has already ranked first in the world, with an average of 22 times. With hundreds of years of global experience, the normal annual income ratio for a standard home and a family of three is four to six times. How many cities in China are under ten times today?

My concern about real estate is that the rapid growth of real estate over the years is the main reason for exacerbating China's income gap and wealth gap. To what extent is China's income differentiation? The Gini coefficient released by the National Bureau of Statistics has already reached 0.47, what is the concept? The United States is the country with the most severe income gap in Western capitalism, with a Gini coefficient of 0.42. The New York Times wrote an article a few years ago, stating that in 2002, 20% of Chinese people owned 80% of their wealth, and in 2012, 10% owned 90% of their wealth. Western media articles may not be entirely trustworthy, but at least they sounded a warning. Leaving cities such as Beijing, Shanghai, Guangzhou, and Shenzhen, we will explore the vast countryside to see what is really happening. The widening wealth gap is closely related to the frenzy of real estate.

My second biggest concern is that cities like Shenzhen may suffer from the 'Hong Kong disease'. What is' Hong Kong disease '? Is there an industry in Hong Kong? Even the top executives of the Hong Kong government have admitted that there is a lot of trouble. Hong Kong cannot attract people from all over the world who truly want to engage in technological innovation. Housing prices are too expensive, and it can only attract those engaged in finance and real estate to play here. How about playing around? Recently, there has been a joke circulating online that even Huawei's own employees are discussing on BBS. Mr. Ren Zhengfei advocates striving every day, and it is better to buy a house after ten years of struggle. Sometimes I think that if I graduated with a PhD today, I wouldn't be able to stay in Beijing. Today, the doctor is looking for a good job in Beijing, with an annual salary of 200000 to 300000 yuan. How can he survive in Beijing? If all the megacities in China, those cities with the best resources, young people can't stay here and concentrate on scientific research, mathematics, physics, chemistry, engineering and art, is there any hope for this country?

So friends, we have thought about these issues. We are only concerned about when housing prices will rise and when we can cash out and make money. Have we ever thought about how much long-term harm it will cause to the Chinese economy?

Two days ago, Robin Lee, the founder of Baidu, said at the campus job fair of University of Science and Technology of China that young people should still look for development opportunities in Shanghai, Beijing and Shenzhen, which caused great controversy. Some people say that I work at one of the best companies in China 100 degrees, and it's also difficult for me to survive in Beijing. Some people say it's okay, relying on parents, parents in law. This is an unhealthy state.

Is it really so difficult for real estate to achieve stable development? In the past decade, the cycle of our real estate regulation has been fifteen months, and in some places it has been less than a year, known as the midnight chicken crowing. I just sent out the document and then I said I can't. Just said it didn't change, but here comes the file again. On May 9th, authoritative figures in the People's Daily criticized the constant surprise, why can't stable decision-making be achieved?

I understand that if these three policies can be stabilized, decision-making can be stabilized. Firstly, ensure sufficient supply of land, based on the trend of urban population; Secondly, it is strictly prohibited for bank credit to hype up houses. Banks can provide loans for improved first and second homes, while other houses cannot be lent. This is the experience of many countries around the world. Unexpectedly, someone can hype up dozens and hundreds of houses with bank credit. I don't know how he did it. Isn't this a dereliction of the financial regulatory system? Thirdly, property tax. Buying a few or dozens of vacant apartments over there is a huge waste of social resources, and I won't say if you're right. I went to the United States last month, and some friends in San Francisco asked, 'What's the matter with you Chinese people buying a large house here and leaving it vacant?'? Vancouver is also a city where empty houses cause resentment among locals. The same is true in China, where there are vacant houses everywhere. Why can't we collect taxes?

It's not difficult, it's inaction, not wanting to do, it's long-term obstruction from vested interests, long-term dependence on land finance, and always wanting to rely on real estate to drive the economy. I want to make a bold prediction here. The policies introduced before and after National Day may change again in the next six months or nine months. The rooster started crowing again in the middle of the night. We can bet, of course, I hope I lose.

4. How to ensure the basic stability of the RMB exchange rate?

The exchange rate issue is very simple, and today everyone is worried about whether the exchange rate will depreciate. Because the economy has encountered many difficulties, and more importantly, asset prices are much higher compared to the world.

In Beijing, Shanghai, Guangzhou, and Shenzhen, including Nanjing where you are located, if you sell any dilapidated apartments, you will definitely buy a HOUSE in the United States. Any house can be converted into US dollars at today's exchange rate, which is 1 million US dollars. One million dollars is definitely a luxury mansion in the United States. I have visited the house where Steve Jobs once lived, next to Stanford, and at the current market price, it is only four million dollars.

The depreciation of the exchange rate is facing objective pressure, especially after October 1st, when the RMB was included in the IMF Special Drawing Rights currency basket, China objectively faces the "Mondale impossible triangle theory" law. Independent monetary policy, stable exchange rate, and continuous opening of the capital account can only choose between the three.

But China still has the ability to achieve relative stability or stable fluctuations in the RMB exchange rate. I have a suggestion, hoping that the monetary authorities can more clearly inform the goals of exchange rate policy and not let everyone guess. My conclusion is that based on the degree of openness of our capital account, the RMB account will not experience significant depreciation. Of course, in terms of management, the pressure we face is enormous.

5. How to stimulate the vitality of the private or private economy?

I will only say a few words about this issue. Why is the vitality of private enterprises at least insufficient today? Many private entrepreneurs lack confidence and cannot see the future clearly. The old question has returned. What are the most basic successful experiences of our reform and opening up over thirty years ago? The past model of rapid economic growth in China was called government led+market competition+latecomer advantage. The most basic experience, I believe, is the continuous deepening of market vitality.

If there is no extremely clear and affirmative answer to this question, how can the vitality of the private economy be stimulated? This is a particularly big problem that we are facing and a fundamental issue related to China's future development. We should go back to the major resolution of the Third Plenary Session of the 18th Central Committee and let the market play a decisive role, but my feeling today is not very good. Many of the current practices seem to deviate from the basic principles of the Third Plenary Session of the 18th Central Committee.

The system and system for achieving the second historic leap in China's economy must be market led, technology led, and innovation driven.

6. How to prevent the economy from further shifting from reality to emptiness?

Finally, regarding the shift from reality to emptiness, regulatory authorities and government departments should take some measures to address this issue. Many years ago, I criticized why state-owned large enterprise groups can do anything. Today, many large enterprises, you don't know what their main business is, such as banks, trusts, securities, and real estate. After a listed company has raised funds, it should expand its main business. It is a great mistake for us to regulate by controlling banks, holding securities companies, acquiring financial institutions, and buying wealth management products.

Everyone wants to engage in finance, everyone wants to engage in speculation, everyone wants to participate in the virtual economy, and who will ultimately engage in the real economy? I really don't understand why our state-owned enterprises are so wildly involved in finance and real estate. This is a great mistake, a great mistake, a great dereliction of duty, and ultimately leads to great failure.

This problem must be solved, and enterprises must be guided by mechanisms to shift their attention to scientific research and the real economy. If this problem is not solved and we still hope to expand the market value, income and profit by relying on asset foam and speculation, China's economy will be very, very dangerous.