In 2023, the expected economic recession has not come yet. Although the Russia Ukraine crisis is not over yet, high debt, high interest rates and high inflation go hand in hand, and the scar effect of the epidemic is still there, the overall world economy is better than expected, supported by the economic performance of the United States and Japan that exceeded expectations.
However, the world economy still faces many challenges:
Global trade continues to slow down, and industrial chain restructuring is still in progress. The recession risk of the US economy has narrowed significantly, but there is still uncertainty about whether it can make a soft landing as scheduled, and the impact of the Federal Reserve and the European Central Bank on future monetary policy.
In terms of geopolitics, the conflict between Russia and Ukraine that lasted for two years has not yet ended, while the conflict between Palestine and Israel has started again, and the geopolitical risks have obviously shown an upward trend.
In the long run, population and climate issues are becoming more and more urgent.
What will happen to the world economy in 2024? What will happen to China's economy?
The economic pattern is stable with changes
From the end of the 14th century, the era of navigation, until 2018, due to technological progress and productivity improvement, strengthening economic ties has always been the main line of world development.
After China's accession to the WTO in 2001, the process of economic globalization has accelerated significantly. At the beginning of the trade conflict in 2018, some people believed that the world economic pattern began to enter into anti globalization. However, with the continuous evolution of the Sino US competition, the new crown attack, and the Russia Ukraine war, more people believed that the trend of the world economy was not the anti globalization of "decoupling" in the true sense, but the solution of the new balance of security and development under the new global political pattern, In this process, with the slowdown of globalization process and the reconstruction of new blockization pattern.
On the one hand, globalization and industrial chain restructuring are intertwined, and "hard decoupling" has not occurred for the time being.
Trade conflicts superimpose geopolitical tensions, and international economic relations are significantly affected by special tariffs, export controls, investment reviews, economic sanctions, politicization of financial decision-making, frequent government intervention, and so on. However, globalization and industrial chain restructuring are intertwined, and a thorough "hard decoupling" has not yet occurred. For example, in 2022, the bilateral trade volume between China and the United States will reach a record high.
Although "hard decoupling" did not occur, the trade dependence of Europe and the United States on China has declined. For example, the positive growth of Sino US trade volume in 2022 is greatly affected by price factors, while the proportion of China's trade with the United States in its total trade volume declined from 14.21% in 2017 to 12.04% in 2022, and the proportion of the United States' trade with China in its total trade volume declined from 16.34% in 2017 to 13.08% in 2022.
It is expected that the trade dependence between China and the United States and between China and Europe will further decline in 2023. For Southeast Asia, as the destination of industrial chain transfer, although its exports to the United States have increased, the scale of imports from China has also increased.
On the other hand, the world economy is becoming more and more blocky, but the overall pattern remains unchanged.
Corresponding to the reconstruction of the industrial chain, the world economy has roughly formed several blocks. In addition to direct trade, China, the United States and Europe also maintain close indirect trade through these blocks. Close trade ties are also maintained between countries in the block, as well as between countries in the block and China, the United States and Europe. In this complex trade situation, China's position as the global super trade node has not changed, and the position of China, the United States and Europe as the world's three largest trade nodes has not changed. Therefore, the overall pattern of global trade has not changed, but the trade power balance within the pattern has undergone marginal changes.
Specifically, these blocks are the American block represented by the United States, Canada, Mexico and Brazil, the European block represented by the United Kingdom, the core countries of the European Union (Germany, France), the Central and Eastern European countries (Czech Republic, Poland), and the Asian block represented by China.
The situation of Asian blockchain is a bit complicated. In addition to the large blocks with China's economy as the core, there are Southeast Asia blocks with India and ten ASEAN countries (Thailand, Malaysia, the Philippines, Singapore, Vietnam, etc.) as the core, and East Asia blocks with South Korea, Japan, and Taiwan as the core.
The reason why South Korea, Japan and Taiwan of China are divided into one block is mainly because of their global influence in the semiconductor field. From the perspective of the Russian Ukrainian war and the impact of the epidemic situation, in addition to traditional bulk commodities such as food, oil and natural gas, semiconductors such as chips have become increasingly influential in the global economy.
There are similarities and differences in the problems of different regions
Americas Block
Most obviously, China, the United States and Europe are facing very different economic situations.
At the Central Economic Work Conference in 2021, China summed up the main difficulties in the process of economic recovery as "triple pressures", that is, shrinking demand, supply shocks and weakening expectations. In fact, so far, the process of economic recovery is still facing these three pressures.
The most prominent performance is the lack of demand, especially the lack of consumer demand, so there has always been a discussion on whether China is facing deflation. The main problem facing the United States and the European Union is high inflation.
The essential reason for inflation is the sudden expansion of the gap in the real economy and the substantial easing of monetary conditions. Specifically, the causes of this round of inflation in the United States may mainly include three aspects:
First, the disturbance of energy prices and food prices, which is the main reason for inflation in the EU and the secondary reason for inflation in the United States;
Second, the inflation brought by the supply chain, including the impact of trade disputes, epidemic impact, and the Russian Ukrainian war on the industrial chain and supply chain;
Third, the demand driven by the growth of residents' disposable income.
The growth of residents' disposable income can be divided into three reasons:
First, in response to the impact of the epidemic, fiscal and monetary cooperation has taken large-scale stimulus measures, which has brought income and consumption growth in the short term. This indirectly supported the record high trade volume between China and the United States in 2022, because the consumption of American households needs to be supported by China's exports;
Second, the US housing loan interest rate is a fixed interest rate, and the net interest income brought by the continuous interest rate increase of the Federal Reserve to residents has increased;
Third, because the employment market continues to be strong, the decline in price inflation exceeds the nominal wage growth, resulting in a substantial rise in real wages.
The market is concerned about whether this cycle of interest rate increase has ended and when the inflection point of interest rate reduction will occur after the rapid interest rate increase in the past two years.
This round of inflation in the United States appears to be overheated demand, but in fact the underlying reason is the imbalance and insufficient supply of the commodity market and labor market caused by the COVID-19 epidemic. Only the recovery of the commodity and labor markets can reduce inflation. However, the sustained high boom in the job market has made the Federal Reserve have no obvious intention to significantly change its interest rate policy in the foreseeable future.
However, there are two circumstances that may affect the monetary policy choice of the Federal Reserve.
The first is the extent of fiscal expansion and sustainability.
During the epidemic, the United States introduced three rounds of fiscal stimulus policies with a total size of up to $5 trillion, which led to the rapid expansion of the federal government's debt. Under the background of interest rate increase, the federal government debt after maturity needs to be continued at a higher interest rate. As of November 17, 2023, the scale of federal government borrowing has reached $33.74 trillion, which means that every 1 percentage point increase in interest rate will increase the interest cost by more than $330 billion annually, accounting for about 1.3% of GDP.
But 2024 is the general election year of the United States. Judging from the current situation, it seems that the presidential election of the United States will be Trump and Biden, and the economic results will directly affect the votes. So you see, although the US federal government debt will reach the ceiling in 2023, the Biden government will not be willing to adjust its deficit finance at all. In fiscal year 2023, the deficit expenditure of the federal government will reach $2 trillion, and the deficit ratio will reach 7.5%, nearly twice that of 2022.
This is very important. If the fiscal policy does not change, the monetary policy of the Federal Reserve will inevitably return to easing in the future.
In fact, 2024 is a special year. In addition to the US general election, India, the UK and so on all welcome general elections. The governing philosophy and interest demands of different political parties will marginally affect the global pattern.
The second situation is that the financial market or financial institutions begin to have problems.
At the beginning of 2023, due to the ultra long interest rate increase of the Federal Reserve and the bank's own problems, Silicon Valley banks and signature banks will face risks one after another. At that time, the market was discussing whether the Federal Reserve would stop raising interest rates. However, because inflation was still high at that time, and the Federal Reserve judged that the probability of systemic financial risk caused by the risks of the two banks mentioned above was low, the Federal Reserve did not stop raising interest rates.
But now the 5.6 trillion commercial real estate in the United States is facing new problems. As the epidemic has changed people's working habits, the vacancy rate of commercial office buildings in San Francisco, Chicago, Dallas and other cities has exceeded 20%. The rent of commercial real estate has declined but the operating cost has not declined, which will lead to the inability of some property owners to repay bank loans.
It is estimated that about 6% of the assets of large commercial banks in the United States (with total assets of more than 250 billion dollars) are real estate loans, accounting for 60% of their regulatory capital; 13% of the assets of regional banks are property loans, accounting for 160% of their regulatory capital. At present, inflation has fallen from the peak of 9.5% to the level between 3% and 4%, and there is preliminary room for interest rate reduction.
The rise in the default rate of real estate loans does not necessarily lead to systemic financial risks, but may exert pressure on the Federal Reserve to cut interest rates.
European block
Look to Europe.
Inflation in the United States is mainly demand driven, while inflation in Europe is mainly cost driven. The impact of commodity prices brought about by the Russia Ukraine war in 2022 has significantly affected inflation and economic activities. In addition, financial subsidies to deal with the impact of epidemic and energy shocks also contribute to inflation.
The European Commission predicts that the EU's economic growth will be 0.6% in 2023 and 1.2% in 2024. The EU's economy is centered on Germany, but Germany's economic growth rate will be only about 0.5% in 2023, and it is expected to rise to about 1.5% in 2024. It will continue to play the role of the European economic locomotive to drive the surrounding economies, but the European economy will face at least three problems.
First, inflation in the euro area may be more sensitive to the monetary policy of the European Central Bank than inflation in the United States to the monetary policy of the Federal Reserve.
The United States is the largest economy in the world, and the dollar is the most important reserve currency in the world, which determines that the U.S. economic trend and macroeconomic policies will have spillovers to other regions in the world, and will also have an impact on Europe. For example, in the past two years, the European Central Bank has continuously raised interest rates, both to curb inflation and, to some extent, to offset the impact of the Federal Reserve's interest rate hike.
The high inflation in Europe and the United States has significantly affected the cost of living of ordinary residents. In particular, the economies that rely heavily on Russian energy have experienced a greater rise in energy prices and a sharper slowdown in economic growth.
The next question is, if the Federal Reserve cuts interest rates in 2024, will the European Central Bank follow?
The inflation rate of the euro area dropped from a peak of more than 10% in 2022 to 2.9% in October. Although the inflation trends of the 20 member countries of the euro area are different and may temporarily rise in the coming months due to the base effect, the dominant direction is probably downward.
Then, if the Federal Reserve cuts interest rates, the European Central Bank is likely to cut interest rates due to the negative effect of the continuous interest rate increases on the domestic economy. The problem is that inflation in the EU is mainly cost driven. Although Germany and other countries with strong energy dependence in Russia have reduced their energy dependence on Russia to nearly zero at a faster than expected speed through diversified imports, the prices of natural gas and liquefied natural gas from the United States, Canada, Norway and other countries are higher than Russia, It raises the price center of imported energy, making the inflation level in Europe more sensitive to the interest rate cut of the European Central Bank, which will restrict the monetary policy choice of the European Central Bank and bring uncertainty to the economic recovery of Europe.
Second, inflation, employment and debt within the euro area are differentiated, and slowing employment and wages pose a downside risk to consumption.
First, there is differentiation in employment. The labor market in the euro area is repaired faster than that in the United States, but there are significant differences between countries. For example, in the first half of 2023, Germany and France have higher employment booms. However, in the second half of 2023, the unemployment rate of more than 10 countries, including Italy, the Netherlands, Luxembourg, Cyprus, Latvia, Finland, Austria and Estonia, will start to rise in addition to that of France, which seems to mean that the momentum of economic recovery in the euro area is weakening or even fading, and this trend is expected to continue in 2024.
Second, inflation is also diverging. The inflation level of Germany, France, Italy and Spain and other core countries will gradually fall back to 2% - 4%. In September 2023, the core inflation of the Netherlands will even be - 0.3% year on year, but the inflation rate of Slovakia, Slovenia and Croatia and other countries is still above 6%. This has increased the difficulty of monetary policy operation of the European Central Bank to some extent.
Like the United States, the increase of residents' disposable income brought about by the resilience of the job market and the decline of inflation is an important driving force to support the economic recovery of the euro area. However, if the growth of employment and wages slows down, or the government withdraws from energy subsidies to residents, residents' consumption capacity will slow down, which will drag down the economic growth of the euro area.
Of course, in addition to the differentiation of employment and inflation, the debt burden of countries with differentiation in the past still exists and tends to increase.
Another feature that may be ignored in the euro area is that, in addition to external energy dependence, in terms of trade, the euro area is actually an export-oriented economy. In 2022, the proportion of exports in GDP will be 42%. After excluding intra regional trade, the proportion of exports will be 21.4%, higher than that of the United States (8.1%) and China (19.6%). This means that the global market demand in 2024 will also have a greater impact on the euro area.
Third, the Russia Ukraine war and the Palestine Israel conflict cast a shadow on the sustained recovery of the euro zone economy.
How long the Russia Ukraine war will last, and the impact on Central and Eastern Europe, the euro area and the entire Europe are uncertain. European and American sanctions against Russia have forced Europe to seek new sources of natural gas and oil, and the importance of oil and gas in the Middle East in reshaping the global energy landscape has become more prominent.
Since the outbreak of the new round of Palestinian Israeli conflict, the hostilities have been mainly confined to Gaza and Israel. Although the oil supply has not been interrupted, if the conflict spreads to other parts of the Middle East, including Iran, it will have a negative impact on the global trade network, including oil, and the bulk commodity market. Therefore, it is still necessary to be alert to the uncertain impact of the expansion of the Palestinian Israeli conflict.
However, in view of the declining energy production intensity in recent decades, the increasingly diversified oil supply outside the Middle East, and the strategic reserves of energy, compared with the OPEC oil embargo from 1973 to 1974, the Iran Revolution from 1978 to 1979, the Iran Iraq War in 1980, and the first Gulf War from 1990 to 1991, The impact should be much smaller.
In the long run, if there is another important trend worth noting, that is, extreme right-wing parties are constantly gaining power. For example, extreme right-wing parties in Hungary, Italy, Slovakia, and even the Netherlands, Germany, and France are also increasingly influential in the political arena, which may affect the euro area economy and the EU integration process.
Asia Block
With China's economy as the core, the Asian block radiates and drives surrounding Southeast Asian and East Asian countries.
In 2018, the Sino US trade conflict made the discussion of industrial chain transfer more and more popular. But I also said in other articles that the industrial chain transfer did not originate from the Sino US trade conflict, and the Sino US trade conflict was not the only reason for the reconstruction of the global industrial chain. The trade conflict superimposed on the new epidemic and the Russia Ukraine war only accelerated the reconstruction of the global industrial chain.
The fundamental reason for the restructuring of the global industrial chain is the marginal change of cost driven and comparative advantage plus geopolitical disturbance.
The three industrial chain transfers in 2001, 2008 and 2012 were mainly cost driven.
In 2001, China joined the WTO, providing the global manufacturing industry with high-quality low-cost labor and a broad market. The labor-intensive low-end manufacturing industry in developed countries shifted to China. The year 2008 was hit by the financial crisis. The middle and low-end manufacturing industries in developed countries were further transferred to China and Southeast Asian countries. At the same time, some middle and high-end manufacturing industries were transferred to China.
In 2012, China reached the Lewis turning point, and some forward-looking international enterprises and Chinese enterprises began to layout in Southeast Asia prospectively.
China is the beneficiary of the first industrial transfer; The second industrial transfer was in a global financial crisis, and China's economy stood out because of the stimulus of four trillion yuan; The scale of the third industrial transfer is small. Therefore, the feelings of the above-mentioned three industrial transfers to China are not very deep.
Until 2019 and later, the reconstruction of the global industrial chain is due to geopolitical disturbances such as the Sino US trade conflict, the impact of the COVID-19 epidemic and the Russia Ukraine war. Moreover, China is the direct protagonist of this industrial chain transfer, and the shift of China's economic growth is superimposed, so everyone's feeling is so profound.
Therefore, this leads to two questions:
First, what are the advantages of the receiver of this round of industrial chain transfer? In fact, answering this question can indirectly answer whether China will face net outflow pressure of foreign investment in the future.
Second, what is China's role in the world economy?
To answer this question is to indirectly answer what is China's advantage, and the depth and breadth of the impact of this round of industrial transfer on China's economy.
At present, no country in the world can replace China, but India, Vietnam and other Southeast Asian countries as well as Mexico may have an impact on China in some industrial fields Partial wheel replacement 。 At present, Mexico is the most popular emerging market to attract investment and capital, followed by Brazil and India.
In order to enhance the resilience of the United States supply chain, the Trump administration has been touting the so-called Indo Pacific strategy. In 2022, the Biden government explicitly proposed to build the "Indo Pacific Economic Framework" (IPEF), aiming at restructuring the global supply chain system to curb China's rise.
On May 27, 2023, 14 member countries of IPEF, including India, reached an agreement on supply chain coordination - a substantial step forward in the de sinicization of the supply chain. On June 22, 2023, after Modi's visit to the United States, the United States and India issued a joint statement, and the two sides carried out unprecedented all-round cooperation in science and technology, defense, strategic integration, clean energy transformation, promoting global economic growth, public health and other fields.
Due to the quality of labor, infrastructure, cultural factors and other reasons, India's global manufacturing position is difficult to become China today, but it is necessary to be vigilant that India's development trend is constantly approaching that of China around 2000.
Influenced by the industrial structure, Vietnam, a promising emerging market in 2022, will perform poorly in 2023. One reason is that Vietnam's exports of consumer electronics and other scientific and technological products account for a large proportion, while the global scientific and technological cycle is at the bottom. As the economic growth was lower than expected, the Central Bank of Vietnam had to cut interest rates in the first half of 2023, which led to the widening gap between the yields of Vietnamese and American government bonds and the outflow of funds. However, as the global science and technology cycle is gradually moving from a downward cycle to an upward cycle, the situation of economies with a high proportion of consumer electronics exports, such as Vietnam, may improve.
In addition, it is worth noting that the Biden government has constantly introduced new industrial policies, increased investment in infrastructure, chips and new energy industries, and boosted a lot of private sector investment. The growth of U.S. manufacturing investment has significantly improved. The reason why the U.S. economy is stronger than expected in 2023 is also closely related to the return of manufacturing to the United States.
The manufacturing industry returning to the United States includes not only some Asian production capacity, but also some European production capacity. After the conflict between Russia and Ukraine, Europe suffered from high energy prices and high inflation. In order to cope with this high inflation, European enterprises have to move part of their production capacity out, and a large part of it has been transferred to the United States.
The impact of the Japanese economy on the Asian blockchain mainly depends on when the Bank of Japan starts to change its monetary policy.
After major developed countries have raised their policy interest rates to a new 40 year high, Japan still maintains a negative interest rate, and its inflation is also rising rapidly, and it has shifted from energy import inflation to wage driven inflation caused by labor shortage. Japan, which has not seen inflation for a generation, will start to raise interest rates in 2024, becoming the focus of the market.
Due to the global influence of South Korea and Taiwan in the semiconductor field, the uncertainty impact of South Korea Korea relations, Japan South Korea relations and the situation in the South China Sea on the global economy may also increase periodically. In fact, the Russia Ukraine war and the Palestine Israel conflict will also affect the energy invested by the United States in the Asia Pacific region, and thus affect the rhythm of the layout of the U.S. industrial chain in Southeast Asia.
Of course, the most important thing is China's own economic development.
Whether China's economy has improved
Whether it is the triple pressure of shrinking demand, supply shock and weakening expectations, or specific issues such as real estate and local debt, there is a myriad of things that seem to matter.
real estate
Now, it seems that the economic growth rate of 5% in 2023 is not a big problem. Some people believe that whether China's economic growth can reach 4.8% or more in 2024 depends on whether the real estate can stabilize.
The real estate and related industries account for nearly 1/4 of the GDP, and the real estate market has really affected the whole body.
Due to changes in the fundamentals of China's economy, such as demographic changes, slowing urbanization, and changes in the basic logic of real estate, people's expectations of the real estate market have also changed fundamentally. In addition, there are problems such as excessive construction in many places. Now investors and consumers are very sensitive. If the real estate market further deteriorates, Including a sharp decline in house prices or further expansion of developers' defaults, the balance sheets of banks and households will deteriorate, which may further inhibit manufacturing investment and local government spending, hit consumer confidence, and thus drag down economic growth in 2024.
In 2023, the sales area of commercial housing and real estate development investment are expected to decline by 8% and 10% respectively year on year. Fortunately, a series of policies have been introduced recently, including the demand side's "house recognition not loan recognition" and the reduction of housing loan interest rate. Recently, the regulatory authorities are drafting a "white list" of real estate enterprises, emphasizing that the normal financing needs of enterprises on the list should be met. The Central Bank and other three departments jointly held a forum for financial institutions on the 17th, saying that they should continue to do a good job in reasonable financing support and financing supervision of real estate enterprises, and once again make efforts from the financing side. This means that the government has begun to face the liquidity problem of private developers in the real estate market.
It is estimated that the sales and investment of commercial housing will continue to decline year on year in 2024, and the decline should narrow.
Local debt
The debt pressure of local governments is rising.
From 2015 to 2018 and 2020 to 2022, China has carried out two rounds of local debt conversion. The first round of 2015 was to incorporate stock bonds into budget management, and make implicit bonds explicit through replacement bonds. The second round of 2020 was mainly to issue special refinancing bonds, turning short bonds into long bonds, and reducing costs. 2023 should be regarded as the third round of debt.
Both the meeting of the Political Bureau of the Central Committee in July and the central financial work meeting in October emphasized the prevention and resolution of local debt risks. At the meeting of the Political Bureau in July, it was required to "develop and implement a package of debt programs". The main idea of the work is to continue the way of issuing "special refinancing bonds" in 2020, to reduce the pressure on local governments to pay interest and mitigate liquidity risks by replacing the stock of non-standard, high interest debt or repaying outstanding corporate accounts.
The financial work conference in October emphasized the establishment of a long-term mechanism to prevent and resolve local debt risks, the establishment of a government debt management mechanism compatible with high-quality development, and the optimization of the central and local government debt structure. In fact, it focuses more on "debt management" 。 The two meetings in 2023 are actually to clarify the framework basis of "debt transformation+debt management".
In any case, due to China's institutional advantages, local debt has always been a visible but locked "grey rhinoceros". If there is no special impact, it is unlikely to lead to systemic financial risks.
However, the local debt problem has seriously restricted the spending space of local governments.
fiscal policy
China's local debt is highly complex.
However, in general, the debt structure is characterized by "three more and three less": less central debt, more local debt, less general debt, more special debt, less explicit debt and more implicit debt.
On October 24, the Standing Committee of the National People's Congress voted to approve the resolution of the State Council to issue an additional 1 trillion national debt and the central budget adjustment plan for 2023. Then on October 30, the financial work meeting proposed to optimize the debt structure of the central and local governments, which seems to indicate that China's fiscal policy has changed somewhat.
After the 1 trillion national debt is included, the national fiscal deficit will increase from 3880 billion yuan to 4880 billion yuan in 2023, and the deficit ratio is expected to increase from 3% to about 3.8%.
It is expected that the fiscal deficit rate in 2024 will also break the previous 3% warning line constraint, set at 3.5% - 3.8%, and the probability of new local government special debt will exceed 4 trillion.
However, as I have said in other articles, China's actual deficit rate is not the proportion of the balance of revenue and expenditure in the general public budget account to GDP, but a comprehensive consideration of such factors as the use of budget stability adjustment funds, the transfer of funds from government fund budgets and state-owned capital operation budgets, and the use of carry over surplus funds.
The actual fiscal deficit is calculated by——
*Fiscal budget deficit=(national general public budget revenue+transferred budget stability adjustment fund and other budget funds+used carry over balance funds) - (national general public budget expenditure+supplementary budget stability adjustment fund+funds carried forward to next year's expenditure).
In 2022, for example, the official deficit rate is 2.8%, but the actual deficit rate is 4.7%. If the budget deficit rate in 2024 is set at 3.5%, the actual deficit rate may exceed 5% after considering the fund allocation.
Debt risk depends on the growth rate of numerator and denominator.
If the increase of financial strength can make the denominator grow faster than the numerator, the debt risk is still reduced, and the increase of fiscal deficit arrangement will reduce the risk. In addition, it is worthwhile to ease and reduce the expenditure pressure of local finance by increasing the central fiscal expenditure, which will also help to dismantle the debt risk of local governments and release more financial resources and policy space for stable growth for local governments.
monetary policy
2024 is different from 2019.
Before 2019, the double track interest rate system, the difficulty and high cost of financing of private enterprises and small, medium-sized and micro enterprises are important reasons for restricting economic growth. However, in the economic downturn cycle expected to weaken in 2020 and beyond, high interest rates and financing difficulties still exist, which still hamper economic growth, but it seems that they are no longer the main factors restricting economic growth.
In addition, over the past few years, the Central Bank has been emphasizing that monetary policy is self dominated, which is actually what it has done. However, the policy choice of the Federal Reserve will still have some spillover effects on the monetary policy choice of the central bank.
The Federal Reserve keeps raising interest rates, and it is expected that the probability of the Federal Reserve cutting interest rates in the first half of 2024 is also small. The US dollar interest rate remains at a high level, which makes the RMB face depreciation pressure, which limits the space for the central bank to cut interest rates.
Therefore, it is expected that China's monetary policy will remain at the level of marginal easing (10-30 basis points) in 2024, and various liquidity tools such as MLF will be used to protect the liquidity of the financial market, without significantly reducing interest rates.
Stimulus intensity
Active finance will continue, but without other exogenous shocks, it is expected that no new major stimulus measures will be introduced in 2024. There are two reasons:
First, the economy is too large, the policy space is limited, and the marginal role is limited.
In 2008, China's GDP was 30.06 trillion yuan, so the 4 trillion yuan stimulus measures can immediately boost economic growth. However, the next year from 2011 to 2015 was the consumption period of unconventional stimulus policies. Of course, the policy of 4 trillion yuan has both advantages and disadvantages, and it is still controversial.
But what I want to say is that in 2022, China's GDP will have reached 121 trillion yuan, and the corresponding demand for stimulus measures will be 16 trillion yuan. Correspondingly, the balance of local government debt in 2008 will be only 5.5 trillion yuan, and in October 2023, the balance of local government debt will be 40.1 trillion yuan. In 2022, the fiscal revenue of local governments will be 28.16 trillion yuan. In terms of economic volume, China has no conditions to implement a major stimulus.
The continuous decline of real estate also limits the revenue from land sales and the overall financial situation of local governments. Although the central government supports overweight, the policy space is still limited.
Second, the real economic growth is lower than the potential economic growth and overcapacity.
I don't know how reliable the potential economic growth rate we calculated is, but most economists believe that China's economic growth rate is lower than the potential growth rate. However, the premise of potential growth is that the capacity utilization rate is close to 100% and full employment. The market will automatically adjust the capacity utilization rate. However, in China, is the low capacity utilization rate the reason for the reduction of economic growth or the result of the reduction of economic growth?
We continue to take economic growth as a policy goal, assuming that economic growth can better reflect capacity utilization, employment and income. However, in fact, if we do not straighten out the structural causes of insufficient capacity utilization and expand the financial sector with the goal of economic growth, we may have two consequences:
First, further increase overcapacity;
Second, crowding out private investment and worsening investment efficiency and employment level.
In fact, local government special debt faces this problem.
On the one hand, according to the requirements of financial discipline, the issuance of special bonds requires that the project's own income can repay the principal and interest in principle. However, in fact, since most projects still support infrastructure construction and industrial park construction with low or no yield, the current interest payment of special debt still depends on the financial funds of the project location or the credit funds of the platform company;
On the other hand, if special bonds are invested in projects that can repay the principal and interest with their own income, this actually means crowding out private investment. However, the construction of special bonds mostly depends on state-owned enterprises, which may not be as efficient as private enterprises in promoting employment and residents' income. Therefore, it is necessary to balance the pulling effect and crowding out effect of special debt on the economy.
From the perspective of government financial resources, policy space and capacity utilization rate, it seems that 2024 neither meets the conditions for large-scale stimulus nor, in a sense, requires major stimulus.
Where is the new driving force of the economy?
Excluding the geopolitical uncertainty risks faced by the world economy in 2024, the common problem facing the world economy is: where is the new driving force of growth?
In the past two centuries since the beginning of the industrial revolution, the pursuit of material wealth has remained the primary goal of mankind. With the progress of productivity and the rotation of manufacturing industry in the global scope, despite the problem of income distribution, the material wealth created by human beings and the income of residents are growing. Therefore, low-income countries, developing countries and developed countries have formed an "income consumption" wild goose model.
However, in the United States, 80% of people's purchasing power has not increased in the past three decades. In France, the per capita annual growth rate has steadily declined from 3% in the 1970s to 2%, dropped to 1% in the following decade, and dropped to almost zero in the past five years.
At present, developed countries are facing high debt, high interest rates and low growth, while developing countries are facing the middle-income trap and debt crisis. This brings us back to the key question: Will the economic growth benefiting more people recover? If not, what will happen in the future?
Land, labor, capital and technology are the four most important production factors in the theory of economic growth. Since the 21st century, the technological prospect predicted by the development of the Internet has never been so bright, but the marginal contribution of the new industrial revolution based on silicon-based innovation to economic growth seems to be less than that of the industrial revolution.
Will the emergence of AI technology bring new growth?
Finally, return to China. If infrastructure construction and real estate slow down, where is the new momentum?
The advantage of China's economy lies in its complete industrial chain and large potential market space. As long as the economic growth rate in the next ten years remains above 4%, China will still be the second largest economy in the world, and probably the economy that contributes the most to world economic growth.
In this case, the new momentum of China's economic growth may come from three aspects:
First, industrial upgrading and economic transformation. It includes the upgrading of traditional manufacturing industries, as well as the green transformation launched in response to climate change, such as new energy, new infrastructure, new economy, scientific and technological innovation, high-tech industries, etc. Some experts estimate that the investment in new energy will be 200 trillion yuan in the next 20 years, with an average annual investment of 10 trillion yuan. All these can improve productivity and industrial and economic structure. However, we must do a good job in connecting the old and new drivers of energy. The development of new drivers of energy does not completely abandon traditional industries.
Second, adjust the direction of government expenditure. In the past, our economic growth relied too much on government investment, which distorted the allocation of resources and indirectly led to the binding of local finance and real estate. With the deepening of the aging process and the transformation of the population structure, the future government expenditure should consider increasing the expenditure on social security and public services, including education, medical care, and old-age care, which can improve the long-term confidence of residents, reduce the savings rate of the residential sector, and also help to boost consumption.
Third, on the basis of stabilizing short-term economic growth, we should actively respond to structural adjustment and vigorously promote institutional reform and opening up.
In terms of opening up, there have been various references in terms of institutions and standards recently. Although foreign investment will decline significantly in 2023, there are some structural factors, including industrial chain transfer, rising labor costs, and cyclical factors, such as the rise in U.S. dollar interest rates. In general, China, as the world's second largest market, and in the foreseeable future, There is almost no other single market to replace.
Then, as long as there are no major problems in our system reform and opening up, we will certainly remain attractive to foreign investment. Openness is the keynote, and the essence is that China and the world need each other. Therefore, China needs to consider, what does China need from the world? What does the world need from China? What can China provide to the world?
In the long run, only by comprehensively deepening reform can we build institutional guarantees to maintain social stability and economic growth. Sometimes, the success or failure of macroeconomic policies lies not only in the design, but also in the institutional environment and social ecology of the implementation of macroeconomic policies. Do not impose the tasks that should have been undertaken by reform on the policies.
There may be unpredictable risks in 2024, but I believe the world will be better.
No.5526 Original First Article | Author Jia Ming
About the author: Young economist. The research field is behavioral and experimental economics, focusing on macroeconomic, political economy and international relations.
White list duanyu_H | Picture Vision China
