continued..
During the national finance work conference last year, the General Secretary and the Premier strongly criticized the Chinese financial sector with a pile of literary-sounding polemics, saying that they were entertaining themselves without the slightest consideration for reality, and that the financial sector was in chaos and was a horrible sight to behold.
Apart from this financial arbitrage, what do most businesses do with their money? Forty percent of it goes to the stock market, speculation, and buying stocks of financial companies, but not investment into primary business. Then can this be considered a good situation for listed businesses? You can say goodbye to the equity pledges, game over. As an economist, I am opposed to the government bailing out the market. If stock pledges collapse, let it be: what’s the point in bailing them out? What are you doing using stock pledges for other purposes anyway? What did you do with the loans you get from stock pledges?
I’m acquainted with many bosses of listed companies. Frankly speaking, a large part of their equity pledge funds did not go into their primary business, but used on speculation. They have many tricks. They buy financial products; they buy housing. The government said listed companies have spent 1-2 trillions on speculative real estate. Basically China’s economy is all built on speculation, and everything is over leveraged.
Starting in 2009, China embarked on this path of no return. The leverage ratio has soared sharply. Our current leverage ratio is three times that of the United States and twice that of Japan. The debt ratio of non-financial companies is the highest in the world, not to mention real estate.
Having shared all this data with you, shouldn’t we be arriving at a conclusion now?
“The swallows come back every three years.” [This is a to the three years of RMB growth between 2005 and 2008.] Now they are back again. The economic decline has created a lot of pressure, so now the government brings back its old set of tricks: relaxed currency regulations, aggressive monetary policies, relaxed financial policies, and aggressive capital financing policy.
But now I want to ask a question. Everyone in the audience is an alumnae of Renda business school and capable of thinking independently, so give it some thought: Will these policies work? Can they solve China’s fundamental problems? It’s not that our currency regulation this year was not relaxed enough—we released 400 billion yuan in liquidity, 2.3 trillion yuan in hedging or medium-term lending facilities. 2.3 trillion times the money multiplier is about a dozen or so trillion.
Three monetary policy “arrows” have been fired, also known as “Bank Chief Yi’s three arrows.” The first is loans, the second is issuing debts, the third is to solve the problem of stock pledges. Even more mind-blowing was the .” [Guo Shuqing (郭树清), CCP committee secretary of the People’s Bank of China and chairman of the China Banking and Insurance Regulatory Commission, said in November that banks’ lending to private companies need to meet the “125 Target,” which means that in new corporate loans, the big banks should issue no less than one-third of the loans to private firms, medium and small banks should issue no less than two-third of the loans to private firms, and in three years the goal is for banks to lend no less than 50 percent of its loans to private enterprises among their loans to new companies.]
We recently went to the Pearl River Delta and some other regions to conduct field research, and locals told us that the local officials invited the bank chiefs over to meetings and told them which banks to turn to for loans. What is this nonsense?
So we need to reflect on our current problems: can these policies of ours solve the deeper issues?
As for the debt-for-equity swap, the capital market has issued many policies but I don’t see any of them will really be useful. It’s been another two months since October 19, have they been effective? So we have to ask ourselves: What has really gone wrong with our economy?
My own reflection has reached its conclusion: The problem with the Chinese economy is no longer speed or quantity, but quality.
The official report of the 19th Party Congress is an excellent report. So is the report of the Third Plenum of the 18th Party Congress. All of these major decisions were beautifully written and made all the right points. Sadly, they have not been followed through. The structural problems we face as a country, the “Six Big Imbalances,” are not sufficiently addressed. Think about it, entrepreneurs and alumni of Renda business school in the audience, can any radical credit policy or monetary easing solve these problems?
Moreover, these credit and monetary policies can only make short-term adjustments that are incapable of fundamentally solving the “imbalances” I mentioned earlier. We are still trapped within the box of the old policy and the old way of thinking. The key to whether transformation will be successful is the vitality of private enterprises—that is, whether policy can stimulate corporate innovation.
We have been making a game of credit and monetary tools for so many years. Isn’t this the reason we are saddled with so many troubles today? Speculation has driven housing prices sky-high.
The problems that private business actually faces are not difficulties in financing. What is it then? They are afraid of unstable policy and the government not keeping its word.
The leader of the State Council said it clearly in a meeting of the Standing Committee: in China, the government is what can be least trusted. Therefore, in order to solve the debt problem, first, the government has to pay back debts it owes businesses, the state-owned enterprises have to pay back debts they owe private enterprises, and large private enterprises have to pay back debts they owe smaller ones. The three costs keep going up [production cost, transnational cost, and systematic cost], therefore tax cut and fee reduction is the primary appeal.
My basic assessment of the overall issue is that these short-term monetary credit schemes are wholly incapable of solving the problem. For the Chinese economy to continue growing in a truly stable fashion, and extricate itself from its present quagmire, it must implement the following three essential reforms: tax system, reform in the political structure, and reform in state governance.
How to reduce taxes and fees? The structure of the government must be streamlined by cutting large numbers of staff. Personnel must be let go and expenditures have to drop, which means that structural reforms have to be carried out.
Professor Zhou Qiren (周其仁) of Peking University is someone I respect and admire deeply. All these years, he has been saying: what is China’s biggest problem? The costs of societal administration are too high.
Then there are the matters of governmental reform and reforms in the structure of state governance. Of course, there’s also reform of academia and research.
I hear that the day after tomorrow, there’s going to be a grand conference to mark the 40th anniversary of the “reform and opening up.” I sincerely hope that we’ll hear something about further deepening of reforms at that conference. Let’s wait and see if any real progress can be made on these reforms.
If this doesn’t happen, let me conclude on these words: the Chinese economy is going to be in for long-term and very difficult times.
During the national finance work conference last year, the General Secretary and the Premier strongly criticized the Chinese financial sector with a pile of literary-sounding polemics, saying that they were entertaining themselves without the slightest consideration for reality, and that the financial sector was in chaos and was a horrible sight to behold.
Apart from this financial arbitrage, what do most businesses do with their money? Forty percent of it goes to the stock market, speculation, and buying stocks of financial companies, but not investment into primary business. Then can this be considered a good situation for listed businesses? You can say goodbye to the equity pledges, game over. As an economist, I am opposed to the government bailing out the market. If stock pledges collapse, let it be: what’s the point in bailing them out? What are you doing using stock pledges for other purposes anyway? What did you do with the loans you get from stock pledges?
I’m acquainted with many bosses of listed companies. Frankly speaking, a large part of their equity pledge funds did not go into their primary business, but used on speculation. They have many tricks. They buy financial products; they buy housing. The government said listed companies have spent 1-2 trillions on speculative real estate. Basically China’s economy is all built on speculation, and everything is over leveraged.
Starting in 2009, China embarked on this path of no return. The leverage ratio has soared sharply. Our current leverage ratio is three times that of the United States and twice that of Japan. The debt ratio of non-financial companies is the highest in the world, not to mention real estate.
Having shared all this data with you, shouldn’t we be arriving at a conclusion now?
“The swallows come back every three years.” [This is a to the three years of RMB growth between 2005 and 2008.] Now they are back again. The economic decline has created a lot of pressure, so now the government brings back its old set of tricks: relaxed currency regulations, aggressive monetary policies, relaxed financial policies, and aggressive capital financing policy.
But now I want to ask a question. Everyone in the audience is an alumnae of Renda business school and capable of thinking independently, so give it some thought: Will these policies work? Can they solve China’s fundamental problems? It’s not that our currency regulation this year was not relaxed enough—we released 400 billion yuan in liquidity, 2.3 trillion yuan in hedging or medium-term lending facilities. 2.3 trillion times the money multiplier is about a dozen or so trillion.
Three monetary policy “arrows” have been fired, also known as “Bank Chief Yi’s three arrows.” The first is loans, the second is issuing debts, the third is to solve the problem of stock pledges. Even more mind-blowing was the .” [Guo Shuqing (郭树清), CCP committee secretary of the People’s Bank of China and chairman of the China Banking and Insurance Regulatory Commission, said in November that banks’ lending to private companies need to meet the “125 Target,” which means that in new corporate loans, the big banks should issue no less than one-third of the loans to private firms, medium and small banks should issue no less than two-third of the loans to private firms, and in three years the goal is for banks to lend no less than 50 percent of its loans to private enterprises among their loans to new companies.]
We recently went to the Pearl River Delta and some other regions to conduct field research, and locals told us that the local officials invited the bank chiefs over to meetings and told them which banks to turn to for loans. What is this nonsense?
So we need to reflect on our current problems: can these policies of ours solve the deeper issues?
As for the debt-for-equity swap, the capital market has issued many policies but I don’t see any of them will really be useful. It’s been another two months since October 19, have they been effective? So we have to ask ourselves: What has really gone wrong with our economy?
My own reflection has reached its conclusion: The problem with the Chinese economy is no longer speed or quantity, but quality.
The official report of the 19th Party Congress is an excellent report. So is the report of the Third Plenum of the 18th Party Congress. All of these major decisions were beautifully written and made all the right points. Sadly, they have not been followed through. The structural problems we face as a country, the “Six Big Imbalances,” are not sufficiently addressed. Think about it, entrepreneurs and alumni of Renda business school in the audience, can any radical credit policy or monetary easing solve these problems?
Moreover, these credit and monetary policies can only make short-term adjustments that are incapable of fundamentally solving the “imbalances” I mentioned earlier. We are still trapped within the box of the old policy and the old way of thinking. The key to whether transformation will be successful is the vitality of private enterprises—that is, whether policy can stimulate corporate innovation.
We have been making a game of credit and monetary tools for so many years. Isn’t this the reason we are saddled with so many troubles today? Speculation has driven housing prices sky-high.
The problems that private business actually faces are not difficulties in financing. What is it then? They are afraid of unstable policy and the government not keeping its word.
The leader of the State Council said it clearly in a meeting of the Standing Committee: in China, the government is what can be least trusted. Therefore, in order to solve the debt problem, first, the government has to pay back debts it owes businesses, the state-owned enterprises have to pay back debts they owe private enterprises, and large private enterprises have to pay back debts they owe smaller ones. The three costs keep going up [production cost, transnational cost, and systematic cost], therefore tax cut and fee reduction is the primary appeal.
My basic assessment of the overall issue is that these short-term monetary credit schemes are wholly incapable of solving the problem. For the Chinese economy to continue growing in a truly stable fashion, and extricate itself from its present quagmire, it must implement the following three essential reforms: tax system, reform in the political structure, and reform in state governance.
How to reduce taxes and fees? The structure of the government must be streamlined by cutting large numbers of staff. Personnel must be let go and expenditures have to drop, which means that structural reforms have to be carried out.
Professor Zhou Qiren (周其仁) of Peking University is someone I respect and admire deeply. All these years, he has been saying: what is China’s biggest problem? The costs of societal administration are too high.
Then there are the matters of governmental reform and reforms in the structure of state governance. Of course, there’s also reform of academia and research.
I hear that the day after tomorrow, there’s going to be a grand conference to mark the 40th anniversary of the “reform and opening up.” I sincerely hope that we’ll hear something about further deepening of reforms at that conference. Let’s wait and see if any real progress can be made on these reforms.
If this doesn’t happen, let me conclude on these words: the Chinese economy is going to be in for long-term and very difficult times.
