Investment Led Growth Is Dead

China doesn't want another investment bubble. This has been the case since the beginning of the Xi and Li regime, but the recent credit spike left people wondering. According to the PBoC, and a prominent article by a Chinese economist, there's no need to wonder: the credit boomlet is over. The message is: policymakers are creating a glide path for the Chinese economy in order to avoid a crisis, but no reversal in growth is coming.

Bloomberg: PBOC Signals Less Appetite for Stimulus as Outlook Improves
Late Tuesday, PBOC research bureau chief economist Ma Jun said in a briefing with local media that future policy operations, while observing the need to continue supporting growth, will also pay attention to heading off macroeconomic risks -- especially an over-expansion of corporate leverage.

The apparent shift follows data Friday that showed a pick-up in activity ranging from industrial production to fixed-asset investment in March, adding evidence that monetary and fiscal easing are having an impact. The standout data point was a surge in credit growth last month that exceeded projections of all economists surveyed by Bloomberg.

This article by Xu Shanda, who is:
The current Chinese Economists 50 Forum Academic Committee, served as Deputy Director of Research at the Ministry of Taxation, the State Taxation Science Research Institute IRD Research Director, Deputy Director, Division of tax reform, deputy director of the State Administration of Taxation.
explains the changing in thinking. The header to the first section of his article sums it up:
Future economy will have long-term volatility, the overall downward trend is irreversible, investment-led growth unsustainable
The big change is that growth is expected to slow and all the government can do is ease the volatility. As in, China is turning Japanese:
I put some of the more important I think the current views to share with you. First of all, I believe that in 2016 and in previous years, a number of significant changes occurred as compared to the macro decision-making. The first is the economic trend judgments. For now, economic trends there are three versions: a cyclical downward called, it was felt the economic downturn to a certain period, say three months or eight months later, there will be the turning point , will continue upward. There are a lot of people think that after the uplink, may have to return to a so-called high-speed growth, it is more than 8%. The second type is called cliff down, there are many domestic and foreign scholars believe that China's economy is in crisis, eve, may suddenly downwards to a very low growth rate. But last year's economic work conference on China's economic trends at the judge, did not accept the first two claims, but proposed a third judge: volatility down. That economic trends over a long period of time, there may be growth also declined, but the overall trend is that within a relatively long period of time down. This is a very new decision-making judgment, we are compromising on all aspects of macro-policy decision-making. Because if the decision-makers that long-term economic volatility, and the general trend is to go down, then a lot because of this policy will make some judgments is not the same as before the adjustment.
He admits all the 2008 stimulus did (and all the work by the central bankers over the past 8 years I would add) is delay the beginning of the slowdown:
In fact, in the 2008 2009 world financial crisis, it has been proposed such a view: the economy will face a downward trend, when the decision-makers had taken a four-trillion investment represented by a series of macro decision-making. So from 2009 to 2011, China's economy is still going up, to maintain a relatively high growth trend. But this trend to 2011, in 2012 it has been difficult to sustain, so the macro decision-making, in fact delayed the start of the downward trend. However, a few years later we find that the world economic downward trend is irreversible, with this policy to maintain the trend of economic development is not sustainable. Therefore, "there will be an inflection point after a period of time, then the economy can be restored to more than 8%" Such a prospect at least during the period now under consideration, such as "Thirteen Five" period, is unlikely to happen.
The policy response is to reduce volatility:
Because the economic downturn is irreversible, we can ease the downward velocity, it is not possible in a very short time to restore the uplink, especially to return to relatively high growth rates, the government in the grasp of macroeconomic direction made a very big adjustment, where it relates to our often mentioned in the "supply side." Some economists do not agree now engaged in the supply-side reforms, they believe supply and demand can not be separated, not to mention that the emphasis engage in the supply side, of course, there are various views on academia.
One solution is to launch a "Marshall Plan" for emerging markets:
In fact to October, plans to invest 4 trillion on the implementation of: Development and Reform Commission project approval, commercial bank loans, a substantial currency trafficking, this makes 2008 avoided a more intense economic downturn. In fact, at that time there are other proposals, such as the Chinese version of the so-called "Marshall Plan." From an economic point of view, the Marshall Plan was the Americans to lend money, so someone else to buy American goods, thus promoting US exports. Because after World War II, the US gold reserves at the time, the twenty billion dollars in the country is of no use, will only lead to serious excess capacity, there will probably be a severe economic crisis. European countries because of war, the recovery of domestic demand is very strong, so Marshall suggested that the United States took 65% of the gold reserves to lend to other countries, but only used to buy American products. So 1947 to 1951, the US economy is the fastest growing for several years.

So when a group of people, including me, wants to make a Chinese version of the "Marshall Plan." At that time China's foreign exchange reserves have quite a reserve are used to buy US Treasury bonds, US Treasuries only a few tenths of return, we should take the money lent some countries. These countries, although no real purchasing power, but there are mineral resources, geographical resources, if we can put our money with them to integrate resources to enable them to enter our production capacity, it is possible to solve China's new external demand. We lend money to them, and then help them to mining, building roads, it can also create new wealth, so we give it the name of "Harmonious World Plan." But this opinion was not adopted, because these countries may be a coup, or the other issues, to lend and risky, or 4 trillion domestic investment risk is minimized.
The two options today are reduce the government and state sector's share of national income, or reduce overcapacity:
Another solution is to increase income to stimulate domestic demand, which means that the government and businesses to reduce the proportion of income, but difficult. Finally grabbed the economy by investment result increased overcapacity.

China's consumption was also a problem, reform and opening up three decades of our economic growth rate is relatively fast, but the residents consumption rate has been declining, so at that time it was suggested that the expansion of household consumption to drive economic growth, but it relates to the two need to be addressed questions: the first question, more important than the increase in income. We have a written document, to increase the income share of national income. But the proportion does not fall from the sky, has been improved there should be reduced, as the government is to reduce, or reduce, or government, enterprises have reduced this question no one answered. Because the return on investment is difficult to answer this question, if reduce the proportion of enterprises, all entrepreneurs will feel in the future will be substantially reduced. If reduce the proportion of the government, it is not a tax cut have?

...But this strategy to implement speed is not fast, but there are still many differences in understanding. For example, should China raise the minimum wage? Our labor cost, what is the status? Some experts said that to reduce the wages of labor to increase income investments. High labor costs there are three factors: wages, redundancies, social security contributions. First, redundancy, companies should not cut retrenched workers, the social security system could not undertake, we can only maintained by companies. This solution is to reduce the hours of work, eight people wait five people work, so redundancy wages accounted for a large part of it. Then social security, China's social security contributions in accordance with the statutory standard rate is 45%, the proportion of the world are high, compared with the United States, Chinese enterprises have to bear the higher pension contribution rate is doubled. But this is unreasonable exists, mainly because we have a continuation from a planned economy to a market economy in the future, before the establishment of the social security system, do not pay social security for all workers, not companies pay social security. Results after the retirement of these people receive money on a problem. So we in the late 1990s, when the development of social security, on the set of the two principles: first, the provincial social security co-ordination, no central co-ordination, because the central government had no money. Second, increase the contribution rate, not only put their own hand after I get the money, you have to assume not previously pay social security, and now the cost of essentials money people. Our high labor costs, social security contribution rate is an important reason. Because the contribution rate is calculated according to the standard wage, and the economic downturn led to many companies to reduce labor hours, wages also reduced, but the proportion of social security contribution rates unchanged.

So the supply-side to do anything? Simply put, the so-called "three to a meeting of a down": to capacity, deleveraging, to inventory, reduce costs, make up the short board. Make short board most likely explanation, for example, many Chinese people do not want to buy a toilet lid on the Chinese market, but to buy Chinese-made Japanese toilet lid from the Japanese market. Because the Japanese toilet lid is extremely strict quality inspection, quality must pass, and the toilet lid Chinese market indicators failed. This is a corporate culture. It is to make up the short board Chinese demand and had to buy something more implementation of "import substitution."

Destocking mainly involves two areas: one area is real estate, a field of agro. Now real estate stocks tier cities greatly, some second-tier cities in the house is sold, to digest the surplus real estate, the government will invest resources. Because the government has been recovered from the real estate developers in the middle of the land use right transfer fee, but only to sell the house in order to receive taxes. If the local government can come up from the inside part of the taxes, with a variety of ways to make housing prices decline, it will expand sales in many fields, such as televisions, refrigerators, bedding and so on, this time the government will withdraw some taxes. So I think the destocking, the core is the government to provide a variety of resources.

The second area is that of agricultural products [ -6.70% funding research report ] , we now see a very agricultural damage pattern of social wealth. The most typical is corn , corn acquisition of subsidized prices, much higher than the price of imported maize, so the production of corn last year, farmers sold to the national reserve, after those two years become stale rice corn, stale rice would only do alcohol and the like. Central Asian countries cotton than cotton in Xinjiang is much cheaper, but we do not import, because if imported cotton in Central Asia, Xinjiang's cotton planting will be destroyed. Agriculture and agricultural products to the inventory is very closely linked, because going to stock necessary to reduce subsidies for agricultural products, but this way farmers 'income will drop, and we now have to increase farmers' income. So now is a way, the state gave money to cut farm subsidies by half, then used the farmers' social security. Such a restructuring, not only improve the level of social security, increase farmers' income, but also reduce this loss of social wealth excess of the acquisition of agricultural products.

Next is deleveraging, and now the whole of China is relatively high leverage, including the country's balance sheet, corporate balance sheets, residents of the balance sheet, the latter have a lot to discuss. The current discussion is more hot debt, because leverage is reduced, into a stock investment, debt is reduced, and that the balance sheet, we can immediately improved. When the commercial bank debt to solve the problem of joint-stock reform, when the Ministry of Finance and the central bank took the bad assets of 1.4 trillion commercial banks bought four companies set up to deal with these bad loans, banks' balance sheets improved and stock market, money. The iron and steel industry representatives, the steel sector and commercial banks, is an important national economic sectors. Since commercial banks debt, debt that the steel industry may be, this view was supported by a considerable number of enterprises. But debt is a commercial activity on the international financial markets. In principle, only after those promising enterprises, implementation of judgment debt, financing costs can be reduced, so that the balance sheet improvement, the rapid growth can debt. If the future of this business is not a judgment on the introduction of such debenture stock, future assets shrink, debt may be even worse than bad. So that is market-based debt, a judgment creditor unsuccessful depending on the business outlook. So this issue of deleveraging, the most controversial is the current debt, we must look at the size and whereabouts of the resolution of several major banks. And in accordance with the law, China's commercial banks are not allowed to do the investment, or debt into equity, which is a violation of the Law on Commercial Banks. So deleveraging problem, not the short term can be completed.

But now, to capacity is the biggest problem in "three to go" in the first row. Overcapacity situation is now very common, iron and steel industry production capacity of 12.5 million tons, the production of 700 million tons last year, exports of 100 million tons, while exports dropped significantly this year. More serious coal, coal statistics capacity was 57 million tons, the actual production of 3.6 billion tons last year, there are 2 billion tons of excess capacity. However, one is two billion tons of excess capacity, while China is still digging coal mines. Therefore, the capacity utilization rate is very low in these two sectors. The two countries have developed out of this industry to the production capacity index, given the steel industry is a billion tons of the coal industry given is 500 million tons. Recently, an expert on these two indicators did three evaluations, I very much agree: First, this indicator is not high; second, this indicator is not very high, but it is also very difficult to achieve; Third, even if it is to achieve the overcapacity that trend has not changed much. So now difficult to capacity from the three of you can understand the words, the task is very heavy. And there is also faced with a problem: the current institutional environment also can not undertake to capacity. One reason is that you have the capacity to mine clearance, mine clearance have laid-off workers, laid-off workers will give an unemployment insurance, but not any IESS so much money to the commercial banks for bad loans would cause, the consequences can not bear . The second reason relates to the state-owned assets, if you really want to shut mine a few, then it will certainly shrink assets, state-owned enterprise assets shrink this thing okay in the end is also a problem. So if we really want to put in place the capacity, the enterprise itself alone can not solve, requiring some institutional policies and other areas of society to support. But now, many systems and policies can not also supported, so is our capacity to reform the supply side of the core, the most important and the most difficult one.

Financing costs, logistics costs, labor costs, taxes and costs to be reduced in order to cope with economic downturn

There is also a lower cost. Our business is to adjust the cost structure of the problem, on the one hand to reduce costs, on the other hand a lot of costs to increase coordination, which has two major costs to increase: the first is the depreciation rate. States should strive to improve the rate of depreciation of assets to accelerate the update rate, this will enable us to better business development. The second is the development, such as Huawei now corporate R & D spending accounted for 10% of total revenue, while the international multinational companies do not have a less than 10%, the national average to count only about 2%. No R & D would not be able to talk about development, but not on the pace of technical progress. While there are four high cost: the cost of financing, logistics costs, labor costs, tax costs.

On financing costs, China has a strange phenomenon: the national currencies of the world, if loose, interest rates will fall, we Chinese have enough money loose, but the interest rate is not reduced to the level of people imagine.

Logistics costs have already been introduced, arguably China's railway fares should be reduced to make money, but that the Ministry of Railways can not be reduced, but also because of the construction of the new railway, while the state does not give money, it would have to collect the money from these places construction. Highway toll originally called "road loans, debt charges," if you want the loan repaid no longer charges, but now closed in accordance with this principle, so our logistics costs remain high, this is the problem of so-called transportation system.

Which involves wage labor costs, redundancies and social security contributions, but three prominent labor costs in real wages is not, but the redundancy and social security contributions.

Tax rate is an important issue, but I am optimistic attitude on this issue. Because the original plan was to be completed during the second five camp changed to increase, the camp changed to increase the tax cuts are hundreds of billions, but twice decided that the two did not materialize. Once announced the two sessions in 2014 to achieve the camp changed to increase in three areas, including railways, electricity, construction, completed at the end of the results of the railway, electricity postponed for five months, the construction industry is gone. Later, during the second five decisions and strive to fully complete the camp changed to increase, the results of 2015 did not finish. In fact the end of last year, our country is still determined to strive to be completed in 2016, but by January 2016, the State Council decided to "strive" to remove the word, said fully open, announced that from March May 1 start, can not be postponed a day. This determination until the last two months was finalized, and has announced plans to tax cuts five thousand one hundred million.

But this concept is now 500 billion three caliber: a year in the camp changed to increase a total of 500 billion tax cut on the other; one is the camp changed to increase 500 billion; this is a full-year tax cut 500 billion, accounted for after May 1 two-thirds of the year, so 500 billion is multiplied by 2/3. But now there is no explicit provision in the end is what kind of caliber 500 billion concept. But one thing, according to the minimum tax calculation, they have to reduce 300 billion, it should be said that this is the largest tax cuts in recent years.

The second measure is the social security contribution rate, we had estimated that if the social security contribution rate reduced by half, to about the same level with the United States, it is necessary to reduce the entire social security contributions from 1200 to 1300 billion per year. A few days ago the State Department estimated that lowering social security contribution rate can be reduced 100 billion, and I think that within the scope of current charge of, to achieve with the United States about the same pay level, then 100 billion is not enough to give 1200 to 1300 billion, while such a scale rely on existing budgetary finish. Our advice is to use the state capital, we are now a total of more than one hundred state capital trillion, more than a hundred trillion inside part to shrink, such as some bad business insolvent, there are some not yet fully market of, once the market but also its capital appreciation. Therefore, according to more than 100 trillion to count, to come up with estimates of the scale of 15 trillion to address the gap in social security funds. But more reform is necessary to postpone the larger scale, if we postpone for some time, you may need a 20 trillion.

Suppose really put the camp changed to increase the 500 billion reduction in place, the social security contribution rate from 1200 to 1300 billion are in place to reduce the burden on enterprises can be reduced 1700-1800 billion yuan, this level exceeded 10% of total budget revenues. If these two reforms in place, and that the economic downward trend can be greatly alleviated, downlink speed will slow down, will increase the vitality of enterprises, can have a better ability to cope with downward pressure on the overall economy. But here also involves a question of debate for many years: China's macro tax burden really high? Because the macro tax burden in the academic caliber of the big differences, if would not be able to discuss different caliber. My attitude now is not to discuss the level of macro tax burden, just say you want to implement the decision to reduce taxes. Wait until the camp changed to increase the rate of social security contributions and these two reforms in place, and then for the high macro tax burden is not high, it may be easier to discuss.

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