Lu Ting: There are several consensuses and differences in China's economy

Lu Ting is the Chief Economist of Nomura Securities China and a director of the China Chief Economist Forum

On September 28, the 2024 Tsinghua PBC Chief Economist Forum was held in Beijing, and Lu Ting, Chief Economist of Nomura Securities China, attended and delivered a speech. In the past week, he has deeply felt the significant changes in the market atmosphere. On the foreign investment side in particular, there was a time when foreign investors were cautious about Chinese assets, but in the last week, the number of global investors requesting conference calls and video conferences with China has risen sharply, reaching a new high in recent years. Lu Ting believes that this week's policy is "the desire of the people", and for the entire market, it is like "a long drought and nectar", and the market response is enthusiastic.

He believes that the shrinking real estate industry is one of the most important factors in the economic downturn, and many of the current policy goals are focused on the purchase and storage, but in fact, priority should be given to ensuring the delivery of housing.

At the same time, from a short-term perspective, in view of the current financial difficulties of local governments, it is necessary to increase the amount of money raised through the issuance of government bonds and increase transfer payments to maintain the basic operation of local governments, especially in places where there is no stable industrial base income. Without remedies, there is likely to be more profit-seeking enforcement and cross-regional distant-water fishing practices, leading to a deterioration in the business environment.

Here is the text shorthand:

The past few weeks have been very different for us, and I have clearly felt the change in the atmosphere on the front lines of the market, especially on the foreign side. There was a time when foreign capital basically didn't touch our assets, but in the past week, we have received various requests from global investors for conference calls and video conferences with us, which can be said to be a new high in recent years. As far as the economy as a whole is concerned, this week's policy is the desire of the people, and for the entire market, there is a feeling that it is a long drought and a sweet dew, and the response is very enthusiastic.

Just now, several teachers have made very good explanations on some issues, which are very profound. I would like to combine the discussions and debates in the past period of time, as well as this week's policy, to make some analysis of the consensus and divergence of the main points of view at present.

First, let me talk about consensus. The first point is that there is a risk that the downward pressure on economic growth will increase, and there may have been a controversy before, but this week, when the Politburo meeting of the Central Committee faced up to the difficulties, I believe that it has now become an absolute consensus.

The second consensus, which I believe has clearly seen in recent months, is that no matter what we are doing now, many people may not want to discuss it anymore, but the shrinking real estate industry is one of the most important factors in the downward pressure on the economy, or the most important factor.

Thirdly, the problems we are seeing now are not just the direct impact of the real estate industry. We recently wrote a report called the second wave of shocks, which is about the derivative shocks brought about by the downturn in the real estate sector. First of all, the impact on the financial aspect, especially the profit-seeking law enforcement in some places, the impact of distant-water fishing law enforcement on the confidence of entrepreneurs. The second aspect of the impact on national wealth is that our housing prices are still falling, and in the past, the price of real estate has fallen at an annualized rate of about 10%. Third, the impact on credit and the credit system in China as a whole, because the price of our collateral is falling, liquidity is rising, and these derivative shocks are indeed increasing.

The fourth consensus, which does not need to be discussed now, should be increased in terms of easing and stimulus policies. We also know that there is some room for traditional monetary policy, but after the RRR and interest rate cuts announced this week, there may still be room for it, but the effect in this regard may be limited. For example, I think a policy like a RRR cut may have some effect, but in view of the current problems in the economy, its effect may be relatively small in my opinion. What are the policies that are really expected in the future? I think the consensus now is that fiscal relay is needed. In fact, it depends on the combination of non-traditional monetary policy and fiscal policy, and some of the policies that we announced in the three ministries on September 24 are already non-traditional monetary policies, especially for the stock market. In terms of the direction of fiscal development, I think the recent consensus is that we can't just stimulate infrastructure production as we did before, we need to focus on consumption, we need to focus on household income, and even solve some of the problems that have arisen in the middle of China's economy, including the problem of excessively low fertility.

There is also a certain consensus that we should pay attention to household income and consumption, and the direction of our fiscal efforts should go in this direction. But I believe that there are significantly fewer economists who support universal money distribution and consumption vouchers than before, and we are starting to think more about specific support, especially for low- and middle-income groups, income groups and disadvantaged groups.

Finally, after the continuous contraction and downturn of the entire real estate sector, which has caused a considerable impact on local finances, we have realized that fiscal reform is not a medium- to long-term problem, but also a short-term problem that needs to be solved urgently.

The second divergence, we are still asking: how much room is there for interest rate cuts? Is it possible for us to push our policy rate and bank deposit rate down even further, or even below 1, as some countries have done? Second, to what extent can central banks stimulate the stock market through their supply of funds? Can our stock market go it alone? Of course, in this regard, I think there is a certain consensus, everyone believes that after the monetary policy, including some non-traditional monetary policies, other policies must keep up, otherwise the stock market will not have the foundation to continue to rise.

Third, how strong is the stimulus? Now that the Politburo has proposed that the real estate industry should stop falling and stabilize, how should we do it? Is it to collect and store or to ensure the delivery of the building? From the end of April and May, we can at least feel that the policy is focused on ensuring the delivery of housing, how to solve this aspect? I think it is very important to think about how to exert financial strength in the future. The latter two questions are very specific, how to provide financial subsidies for specific groups of people? Which specific demographics? Of course, there is some controversy about the direction of fiscal reform.

Let me now make some personal observations.

First of all, I think that when the stock market is rising, we still need to remain calm about the fundamentals of the economy, and we must know that there is still room for some aspects, but it is limited. In my view, a rate cut is not a sufficient condition for economic recovery, this is the consensus, and it is no longer even the most important necessary condition. In my opinion, the basic mechanism of stock market financing should be restored in an orderly manner at the appropriate time. One of the pressures of the economic downturn this year is the stock market financing problem and the decline in VC and PE financing, which has brought some negative impacts on the supply of funds in the middle of the economy and the credit chain behind it. Third, in my opinion, real estate stability is definitely a very important prerequisite for economic stability, and ensuring the delivery of housing is the focus.

Finally, in terms of short-term, medium-term and structural reforms, I would like to talk about two issues related to supporting low-income groups.

From a short-term perspective, in view of the current financial difficulties of local governments, it is necessary to increase the way to raise some funds for the issuance of treasury bonds, increase transfer payments, and maintain the basic operation of local governments, especially in places where there is no stable industrial base income. Exports are the best this year, and there are no places to stabilize export industries, and the finances of these places need short-term relief. Why? Without remedies, there may be more profit-seeking enforcement and cross-regional distant-water fishing practices, leading to a deterioration in the business environment.

From the perspective of short-term emergency measures, I very much agree with Mr. Yu Yongding's statement, in fact, infrastructure construction cannot be abolished, but we have also seen that we have many problems in infrastructure construction in the past ten years. In the short term, we need to form a certain amount of expenditure, we need to provide the final demand, and accelerate the national key projects that have been started, and the key projects across regions, because these projects have been carefully certified, especially in densely populated and more developed areas, and the population is still flowing into the local infrastructure construction. We need to find ways to generate expenses in a short period of time, but without causing serious problems in the medium to long term.

In the short and medium term, I believe that the priority is to ensure the delivery of housing, and on the other hand, we should increase the expenditure of specific groups of people. Talking about structural reform here, as we just talked about fiscal reform, it is actually no longer a medium- or long-term issue, or even a short-term urgent task of the moment. I very much agree with Mr. Yu's remark on the importance of infrastructure just now, but I also add here that we all know that the infrastructure construction in some places in the past decade or so may indeed have excessive problems, and are there any lessons and experiences worth learning from behind it? In my opinion, when a country as large as ours is building network infrastructure, in fact, the central planning is very efficient, such as highways, high-speed rail, these are indeed the most efficient places in the world, and this achievement in the past two or three decades is recognized by the world.

However, when we started to focus on urban infrastructure construction after the initial completion of the nationwide infrastructure network, we found that this aspect was not as efficient as before. In many places, we have seen that in some small and medium-sized cities and counties, there is excessive infrastructure construction, but at the same time, we see that infrastructure construction is far from enough in large cities. At least in terms of the level of economic development, the efficiency of this is problematic, why? Because the allocation of resources in all aspects is not determined according to the flow of population and the supply and demand of the market. How can we solve this problem, or at least alleviate it? I believe that in terms of fiscal reform, our transfer payment system should be changed, and it should be changed according to the movement of people. In terms of land allocation, the planning of urban land should also be adjusted according to the flow of population.

Let's talk about two aspects.

First, in terms of real estate, I believe that the most important pressure on China's economic downturn in the past few years has come from real estate, and the clearing of real estate problems is the key to today. I think that guaranteeing the delivery of housing should be the core, and it should be better than the collection and storage. Now many of our policy goals are focused on the collection and storage, many people think that 300 billion is not enough, it should become 3 trillion, but I think 300 billion is not needed, and the reasons behind it may be very complicated. But the most important reason is that China's real estate is a pre-sale system, a futures market, not a spot market. In our past, 90% of new home sales were pre-sales, off-plan, and many people thought that the problem of real estate was that they had built too many houses and not sold them, but in fact, they had sold so many houses and not finished them. For example, on Country Garden's balance sheet, there are almost 36,000 houses that have been built and not sold, 730,000 houses that have not been completed and delivered, and 350,000 houses that are being built and not sold, which is about a "1:20:10" relationship.

Of course, some data from the Bureau of Statistics may give everyone the impression that there is a lot of inventory, but these inventories are often mortgaged, and they are not real estate that local governments can buy in sets, which is why the 300 billion funds collected and stored are only used for one or two hundred billion. The problem we need to solve is the problem of market failure and government failure in the middle of the pre-sale system, and to solve the problem of confidence, to let the buyers know that you can get the house, which is the most important thing to rebuild market confidence.

The International Monetary Fund suggested that the equivalent of $1 trillion from the central government should be used to solve the problem of guaranteeing the delivery of housing, perhaps this figure is a bit high, I made an estimate in October last year, about more than 3 trillion, maybe my figure is a bit conservative. The most important debt chain in the real estate industry is not between real estate developers and banks, but between developers and buyers; To clear the market, it is possible to rebuild confidence so that the real estate market can be in accordance with the goal of stopping the fall and stabilizing in accordance with the goal set by the Political Bureau of the Central Committee.

Another policy recommendation is based on an article I wrote in early August. If the interest rate of the stock of housing loans is reduced and the delivery of housing is to help the middle class, and the social security pension can also effectively improve the income expectations and consumption power of residents in a low-cost way. A brief look at the structure of China's pension, in the top 7% of the group, their pension income is about 7,000 yuan per month, enterprise retired employees are about 3,000 yuan per month, accounting for 38%, accounting for 55% of the majority of urban and rural residents, the average monthly pension is 225 yuan. If it is found that the implementation cost is relatively low and can greatly alleviate the gap between the rich and the poor, and at the same time the money will be used in a high proportion, the part of the people who only get 225 yuan per month should be subsidized. Behind them is China's 300 million migrant workers, who account for half of China's non-farm payrolls. If they know that their income after retirement is not 200, but 500 or 800, their consumption will also increase, and this will even change China's investment in human capital to some extent, because we need 300 million migrant workers to provide more educational support for their children, which I think is more significant.

At present, China's economy is facing many challenges, but through reasonable policy adjustment and reform, it is expected to achieve stable and sustainable economic development.

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Lu Ting: The Reasons for the Volatility of the Global Financial Market and the Mainland's Coping StrategiesFan Gang, Ronnie Chan, Chen Huai, and Lu Ting's Discussion on the Current Real Estate Market (Full Text) Lu Ting: Cautious Discussion on "Sending Money"