Editor's note: On September 24, the central bank announced a new "three arrows" policy. On September 26, Shu Taifeng, partner of Chongyang Investment and visiting researcher of Chongyang Institute for Financial Studies of Renmin University of Chinese, and Li Xunlei, chief economist of China Thailand International, exchanged views on topics such as the causes of macro difficulties, insufficient economic growth momentum, overcapacity in some industries, weak social expectations, and the downward cycle of real estate.
▲Source: Xinhua News Agency
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●●● The policy is still beyond expectations Shu Taifeng: The day before yesterday, the central bank announced the new "three arrows" policy, please Mr. Li to evaluate the strength of the policy, and what will be the possible follow-up effect? In investment, we often say that "three white lines change faith", and it happens that these three days are three long white lines, and A shares also stood above 3,000 points today (September 26). If everyone's expectations for the economy were weakening before, will the expectations be reversed after the release of this series of policies?
Li Xunlei: Expectations have begun to become stronger from weaker, which is valuable. Expectations management is very important, and in the 2021 Central Economic Work Conference, it was mentioned that China's economy is facing three pressures, the last of which is the weakening of expectations. In 2022, the triple pressure will be re-raised, or the expectation will weaken. The expression in the 2023 Central Economic Work Conference is weak, which shows that (expected) "weak" has become normalized. So, on September 24, the leadership of the financial sector sent a bombshell signal, which should have exceeded expectations. I have always said that "only by exceeding expectations can we stabilize expectations", and since the policy has exceeded expectations, our expectations have also begun to slowly become stronger and begin to stabilize sentiment from the weak in the past.
Next, a brief evaluation of the central bank's "three arrows".
The first arrow is to cut the reserve requirement ratio and interest rates. On September 5, Zou Lan, director of the Monetary Policy Department of the People's Bank of China, mentioned that there is room for RRR cuts, and the prerequisites for interest rate cuts are not yet fully met in the context of narrowing bank interest rate spreads. After he finished speaking, everyone's expectations for an interest rate cut were greatly reduced. But I didn't expect that this time the interest rate cut policy, the interest rate was cut by 20 basis points, and the MLF was cut by another 30 basis points, which is still very large. In terms of RRR cuts, in addition to the 0.5 percentage points reduction, there can be another 0.5 percentage points in the future.
The second arrow is the stock of mortgages. The interest rate cut is already within everyone's expectations, and the mortgage of existing homes will also be lowered after the interest rate cut. At the same time, the down payment interest rate for first-hand and second-hand houses has also been lowered, which is also good for real estate. The third arrow is very rare to say that non-bank financial institutions can use their own bonds, stocks, and ETFs as collateral to obtain treasury bonds and central bank bills from the central bank. To put it simply, treasury bonds and central bank bills are both assets with high credit ratings and good liquidity, which are easy to realize in the market, which is equivalent to the central bank financing you "bonds for bonds". This kind of operation seems to have never been done in our country before, and Western central banks do not seem to have done it, which provides financing convenience for non-bank financial institutions, that is, the central bank paves the way for institutional investors to build bridges. To put it simply, you have to charge, and I will pave the way for you to charge. Therefore, the policy still exceeded expectations. Secondly, there is a scale of 300 billion yuan to provide refinancing loans for listed companies to repurchase. Both of these policies are relatively new and have added unexpected surprises to the market. Therefore, the day before yesterday (September 24) the stock market rose sharply, and yesterday (September 25) everyone was a little uncertain, thinking that after this wave of rise, the monetary policy is clear, and it is not clear whether the fiscal policy will be effective. But unexpectedly, at noon today (September 26), the news was suddenly issued, and the Politburo meeting discussed policies related to the economy, including a package of economic measures such as how to deal with the difficulties we are facing now. I basically feel that the soldiers are ready to go, which makes the stock market appear a long red trend today.
Shu Taifeng: Mr. Li said that "only by exceeding expectations can we stabilize expectations", and I am very impressed by this sentence. The market also saw the creation of two new financial instruments as very much more than expected, as the funds were used directly on the stock market, which had not been seen before. I have seen some comments saying that this is a "battle to defend China's assets" and that it is necessary to support the development of the stock market. Mr. Li has been engaged in capital market research for more than 30 years, in your opinion, is the importance of the stock market unprecedented?
Li Xunlei: Attention has always been attached, but this attention must be implemented. For example, at the executive meeting of the State Council in early January this year, a series of measures to revitalize the stock market and stabilize the market were also proposed. Including several (measures) mentioned by Chairman Wu Qing on September 24, they have been mentioned in the executive meeting of the State Council in January this year, such as system management, medium and long-term capital entering the market, and so on. However, after that, there is no specific detailed rule on implementation.
This time, Chairman Wu Qing mentioned these contents again, which should have been prepared, and we are also looking forward to it. For example, what are the ways to encourage medium and long-term funds to enter the market? How to implement the assessment of market value management? There is also the encouragement of mergers and acquisitions mentioned by Chairman Wu Qing, etc., which provide a series of guarantees for the healthy development of the capital market.
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●●●A subdivision of the 5 billion special government bonds
Shu Taifeng: Mr. Li has said many times before that there is a very important point about fiscal policy, that is, it is recommended to issue 5 trillion ultra-long-term special treasury bonds every year, and it should be issued for 10 consecutive years, a total of 50 trillion special treasury bonds. After the current monetary policy is implemented, do you still adhere to this view? Will it change?
Li Xunlei: As a scholar and a participant in the capital market, I have been studying China's economy for more than 30 years. The difficulties we are facing now are unprecedented since the founding of the country, why do you say that? Because we are now entering the stage of deep aging of the population, the aging rate is accelerating.
In the past, China's urbanization process accelerated, and a large number of migrant workers moved to the city, which stimulated the rapid development of China's manufacturing industry, promoted the rapid development of urbanization process, and brought huge demand. Now, urbanization is slowing down and the aging process is accelerating, a problem that has never been seen before.
Related to this, the real estate market peaked in 2021, which means that the upward phase of the real estate long cycle is over and has entered the downward phase. At this time, the policy must be strong. I wrote an article in November last year titled "How to Deal with the Multiplier Effect of China's Economic Contraction."
In this article, I propose that we should consider the multiplier effect, and we should not carve a boat for a sword. After the second quarter of last year, the economic growth rate began to decline, especially the nominal GDP was much lower than the real GDP, that is, the economic contraction was very obvious.
Once the economy contracts, the multiplier effect will slowly manifest itself. For example, in a house, when you see a leak somewhere, you think of filling the hole. However, you don't notice that there may be water leaks in other places than this place, so the effects will spread. There is both conduction and diffusion, which leads to a growing trend that triggers a negative multiplier effect. In order to curb this negative multiplier effect, the policy intensity must exceed expectations and we must take the initiative. It is not enough to have an ultra-long-term special treasury bond of 1 trillion yuan, and as for whether 5 trillion yuan is more or less, we will talk about it first.
If you feel that there is too much hair this year, you can reduce it a little bit next year, but you must make sure that your expectations are sufficient, and I think this can reverse the downward pressure on the current economy. However, some people say that 50 trillion in 10 years, is this debt too much? It's easy to calculate, if 5 trillion a year is issued from next year, 10 years to 2034. I have roughly calculated the increase in leverage in the past 10 years.
China's total GDP should exceed 200 trillion yuan by 2035. 50 trillion yuan in 10 years, accounting for 25% of GDP, and our current national debt balance accounts for 22% of GDP, adding up to 47%. This proportion is still small compared to the current 120% leverage level of the United States federal government. Even if the general and special bonds of local governments are added, plus the hidden debts of local governments, according to the level of 200 trillion yuan in 2035, it will account for about 120% of GDP, which is not high and acceptable.
At the same time, the strength of the Chinese government is strong, and the scale of assets in the government's name exceeds that of Japan, United States, and the European Union combined. Therefore, even if the leverage is increased a little more, we still have a very strong ability to pay. Someone else asks, isn't this for us to enjoy and for future generations to bear our debts? I think it's overthinking. Because a year's GDP of 200 trillion, 50 trillion debt is not much.
Second, what is the scale of assets accumulated by the government now? China's high-speed railways account for 70% of the world's total high-speed rail mileage, expressways account for 45% of the world's total mileage, and subways account for about 10% of the world's total. We have left a strong infrastructure for future generations, what has United States left behind? What are left of other developed countries? We've been working hard to tighten our belts in the past, so debt really doesn't matter.
Shu Taifeng: There are two points, Mr. Li can further analyze, 5 trillion yuan per year for 10 years, is this debt added to the central government's fiscal expansion? Because local governments have been heavily indebted in recent years, there should be little room for leverage, and you think the central government still has a lot of room for expansion, right?
Li Xunlei: Yes, for example, the leverage level of the central government in Japan is currently 250%, but Japan's local debt is not much, so the leverage level of the central and local governments in Japan is more than 260%.
United States the level of leverage of the federal government is relatively high, the level of leverage of local governments is not high. They are all leveraged by the central government, because the central government has a good reputation, and if it issues bonds, its interest rate is relatively low, that is, the financing cost is relatively low. Therefore, the five trillion I proposed is not a pat on the head, I can give it to everyone