On June 7, 2024, the "CCG Masters Dialogue Luncheon" hosted by the Center for Globalization (CCG) and co-organized by the Beijing International Club was successfully held in the Xianhe Hall of the Beijing International Club, which has a long history of foreign exchanges. Li Daokui, Dean of the Institute of Chinese Economic Thought and Practice at Tsinghua University, delivered a keynote speech at the meeting, and the following is the full text of the translation based on the English speech:
Thank you very much for the introduction and invitation. Distinguished guests, ladies and gentlemen, today is a very special day. Mr. Ronnie C. Chan has just shared with us his true globalist worldview. He calls himself a businessman, and in fact, I think he is the only one who can be called a "GPPE". It's an acronym I coined myself. What is GPPE? It represents global, political, philosophical, and economic, encompassing everything. In college, we had a PPE major, and now, Mr. Ronnie Chan reminds me of GPPE.
Mr. Ronnie Chan has conducted in-depth discussions on many aspects and has put forward many profound insights. In contrast, my statement will be more focused. I'm going to focus on the Chinese economy and I'm going to convey three very concise messages. I hope you will remember these three simple messages.
The first message to be conveyed is that the current state of China's economy is below its GDP (gross domestic product) growth potential. Economic growth has not met the expectations of our economists. Our economic growth is below potential, which not only means that the GDP growth rate is lower than 5.7%-5.8%, which is the norm in both phases of China's economic development, but we also have the problem of inflation. In fact, the PPI (Producer Price Index) has been negative for 10 to 15 consecutive quarters, and the CPI (Consumer Price Index) has been around 0. It's a simple point. I think we, as academics and economists, should be aware of this.
The second point I would like to make is that people are very clear about what is causing the phenomenon of GDP falling below its potential. The problems have been fully exposed, and policymakers, senior leaders, and academia are fully aware of the crux of the problems. There are three very obvious problems.
1. Real estate market
In my opinion, the main problem facing the real estate market is liquidity. This doesn't have to be a long-term or systemic problem, as housing demand will still increase in the long run. Keep in mind that only 50% of the population is currently fully integrated into city life. Another 50% of the population either lives in the countryside and wants to move to the city in some way, or is already living in the city but is unable to buy a house or live with their children in the city, and these groups are what we call migrant workers.
Their income is quite substantial. This morning, I wore a raincoat and rode an electric motorcycle to experience the life of Meituan. These Meituan brothers who have just arrived in Beijing should have a monthly income of close to 10,000 yuan, and if they work hard enough, they will have a monthly income of at least 7,000-8,000 yuan, and a monthly net income of 7,000 yuan after tax, which is a pretty good salary. Of course, they work very hard and I am grateful to them for always giving them extra tips. Therefore, the problem of the real estate market is liquidity, and the current policy has exacerbated this problem to a certain extent. The current policy is to ensure that real estate developers' projects in the city are completed, so local governments are clinging to the down payment for pre-sales, causing developer headquarters to rush for cash and have to borrow. This has put them in a liquidity trap, leading to defaults in Hong Kong and, in some cases, Chinese mainland. This has put pressure on the renminbi's exchange rate, leading to a downgrade of China's sovereign credit rating. Therefore, this is the primary question.
2. Local public debt
The second, more important, issue is local public debt. My team has been working this issue. We are in the process of estimating the level of local debt, and the preliminary conclusion is that it is roughly equivalent to 100% of GDP. How high is 100% GDP? Local governments cannot simply solve the problem by paying debt and interest. The key question is why we do it, and whether it works. Historically, on the whole, the existence of these local public debts has been justified. These bonds are not issued to provide cash subsidies to households. Conversely, in the 15 years since the global financial crisis, most, about 80 percent of public debt has been used to finance local infrastructure.
Looking back, I think China did the right thing. Because labor costs have been low for the past 15 years, land in general has not been as expensive as it is today, and private housing has not been fully developed. This is the perfect time to build infrastructure. If you go to Chongqing, Tianjin, Zhengzhou, etc., each city has a brand new center. With low labor costs, low land prices, and the fact that private housing has not yet been developed, building infrastructure ahead of time is the right decision.
In China, however, the central government is reluctant to provide critical funding to fund infrastructure development, leaving it to local governments. The question now is that these infrastructure investments will last 30 to 100 years. Since my children and grandchildren are going to bear the costs, why not extend the repayment period of the infrastructure debt to 20, 30, 50 or even 100 years? Why not? At this point, however, our government has not moved fast enough to convert local debt into long-term debt. We do this with special care.
This caution is now painful for the Chinese economy, as local governments are important players in a market economy. They are the purchasers of many public services, and because of this, they are delaying payments to many companies. So I think that's the biggest problem facing China's economy today. Local debt must be restructured.
3. Imbalance between supply and demand
The third problem is a long-term one. To put it bluntly, China's economy is a supply-side economy, or China's policy has always been a supply-side policy. When we talk to a certain mayor or governor, he or she is usually very excited. Five minutes after the meeting, he or she will list various local projects, for example, we will have a new solar panel project; We have a new TV screen project; We have a new computer chip production project; We also have a number of projects planned to transform our land into a beautiful new city centre. Their excitement is mainly focused on investment projects.
If you ask them, how is the consumption? Have you relaxed restrictions on motorcycles? They will be at a loss. What does this mean? Are you planning to relax restrictions on buying a car, or do you have other plans? Their answer might be: "We'll think about it." "All mayors and officials, like producers, want other cities to buy what they produce. Their idea is: "You consume, we produce." "However, this mindset poses problems for China. China is very quick to turn 1 into 1 million, but may not be as good as the United States in turning 0 into 1. You know what I'm talking about – innovation from 0 to 1, even though we've peaked in terms of going from 1 to 1 million.
These three problems have led to the current economic growth rate of about 5.3% in China, which should theoretically be around 5.7%-5.8%.
Finally, I really want you to remember that as I speak, policymakers are working hard and policies are being implemented to address all of these issues. In July, a large and very important plenary session of the Central Committee will be held. I don't know exactly what day it is, but it's June, so it's not too far away. I am sure that major policies and guidelines will be announced at that time.
These issues are well understood. So, what are the possible, practical policies to address these three issues? Let's discuss them one by one.
For the real estate market, there are two aspects to the key.
1. Removal of restrictions on home purchases.
Under the previous housing purchase restriction policy, outsiders or other urban residents were not allowed to buy a house in Beijing. These policies did work 12 years ago, in 2012, when the property market was super hot. At the time, I supported housing purchase restrictions, even though I was condemned and even hated by my fellow economists.
But today the situation is completely different. China is phasing out housing purchase restrictions in various cities, with Hangzhou and Xi'an as examples. In Shenzhen, large apartments are now freely tradeable. This is the first point: the removal of restrictions on housing demand. As I said, there are still 50% of the population who have to buy a new property to live in the city.
2. Provide direct financial support for the developer's headquarters
Another policy is to provide direct financial support to the developer's headquarters. I believe that this policy will be implemented, and indeed it is already being implemented, and that there will be more measures in the future. Some developers may be considered misbehaving, and I don't comment on that, they may indeed have done something very bad. However, the economy as a whole should not be penalized by stopping the supply of liquidity to developers, which can lead to a default by the company, which will reduce the credit rating. The necessary liquidity should be provided to the developer's headquarters to ensure their viability and to be restructured at a later date. Don't let these companies bring new troubles to the Chinese economy. So that's the first specific policy I'm looking forward to.
The second specific policy is local debt restructuring, which I am very concerned about and have put a lot of effort into. I've been fighting for this for the past 10 years. There is no other way around this. The only solution, and ideally, to the local debt problem is for the central government to issue a large amount of new sovereign debt, 30 to 50 percent of GDP, and then use that debt to restructure local debt, i.e., replace local debt. Why is this the only way? Because the central government is the most reliable debt repayer. I think there's no doubt about it. China's central government is one of the richest in the world, owning stakes in three mobile operators and six lucrative central government-controlled commercial banks. China Merchants Group and China Resources Group were, and I think remain, the most profitable non-financial conglomerates in the world.
Why not? The central government holds only 20 per cent of the public debt. What are they doing? You know the recent statistics, 12% of the debt of the Chinese Ministry of Finance is held by other central banks. China's central government debt is in high demand, but not in sufficient quantities because the central bank wants to hedge against risk. What if U.S. Treasuries are not a good hedge? Local debt restructuring is the only way. Once we do that, once the Chinese economy is able to do that, the local governments will be liberated and reinvigorated. That's how they should be. I think the direction is clear, but the pace is too slow. I'm trying. I am working hard to promote this work in China.
The third reform measure that I am very much looking forward to is to create incentives for local governments to move from production to consumption, possibly reserving some of the tax collected from local businesses to regions and cities that sell cars, motorcycles, bicycles, and electronics. If you're in a region that can generate a steady stream of consumption, then well, the VAT and taxes associated with consumption should be yours. We need to change the incentives. I think it's time to do it.
Finally, I would like to say a few words: Why is this happening? What evidence do I have? Why am I so confident? A few weeks ago, President Xi Jinping had a very important and, I think, quite interesting meeting with 10 entrepreneurs and economists. At the end of the symposium, President Xi said a few words. There are two things that stick out to me. Now, he said, let us focus on solving the most pressing and pressing problems and revitalizing our economy. Let's get to work on the problem now. Don't just talk about it. Let's talk about the real solution. The other point is, let's restart the reform and make sure that citizens can see the benefits of it.
So, what is the workshop discussing? Consumption and income. Therefore, I am confident that the next round of reforms is coming, which will not only solve the pressing problems that are preventing China's economy from reaching its potential, but also create consumption and generate disposable income for the people. Thank you so much.