Chen Gong: Urbanization Is Destructive

Some excerpts from a long article by Chen Gong are below. He says urbanization is a bad development strategy that leads to currency debasement, and what he calls a "crisis triangle" of urbanization, excess capital and then economic crisis. He believes the only way forward may be to pursue the New Silk Road strategy. Chen Gong is chief researcher and founder of Anbound.

Chen Gong wrote a book on Urbanization which came out earlier this year. iFeng has a review of the book here: 《颠覆世界的城市化》：城市化如何成为人类痛苦的幕后黑手？

The gist of the argument is similar to some of the extreme bearish views on China (although he is not so bearish). Growth was mainly driven by artificial urbanization, which was in turn driven by currency debasement which created real estate bubbles. If you posit that government/central bank intervention causes malinvestment and that this distorts the real economy, if people don't really want to live in cities or invest in lots of property, but move there and invest because over a period of decades the government creates a false economy driven by construction and asset bubbles, then at the end of it all you have a whopper of a crisis and currency collapse.

Concerning China's Economic Policy Trust Problem

Many places now show, the problem is not too much or too little money, many places actually have money, many industries have money, but the money isn't spent, does not go out, does nothing. In 2015 the State Council announced the resumption of high-profile recapture of local funds in the amount of 250 billion, the number of cases proved that indeed it was commonplace. (See: China seizes up to $157 billion of unspent local government budgets For this phenomenon, there are many possible explanations, we thought, the money will do things, do things it is possible to make mistakes, it might as well put the money where it, at least do not make mistakes. General Secretary speech recently, officials not acting, is now a prominent issue!

It is said that anti-corruption is the source of officials "not acting", be that simple, I think this is only one bar, there is corruption officials have this fear is understandable. But now "really unable to see the circumstances" may be the crucial reason! Not now see the situation bureau-level cadres, cadres of provincial and ministerial level is also not clear the situation, which varied from around the slogan can be seen. To tell the truth, according to the traditional economic theory view of the present situation, indeed there's "uncertainty," according to the theory there's no excess capital, no negative interest rates, there is no socialism, no value and role of big government, urbanization is one-sided appreciation. "Development is the last word," made 24 years later, is still the "last word", did not develop the theory, the theory does not keep pace with economic progress, this level of understanding, of course, is not clear.

More after the break.

Frankly, behind the actual "uncertainty" is the issue of policy trust! We do not believe you will go down this road, we do not believe you said that stuff, this is the essence of the problem. I used to say, China is now facing a very complex and complicated situation, economic policy responses will be complex and take old reasoning to explain such a complex situation now, then it is really hard to understand. Economic gurus active past the idea that we have seen, just kept on going, just that a few Now, nothing more than stimulate, loosen, tighten, regulation, add liquidity, targeted liquidity, add more, left or Right, over time, they are all familiar with these old tricks. This policy generated based on the theory, is unconvincing, is also wavering. This situation actually requires economic theory to have a breakthrough, to get rid of a group of people to a new level from the point of view the problem, explain the problem, economic policy must be based on a new level, in order to win new support the new trust.

Economy is the economy, the economy is the last word! Only the direction is clear, not only to know "how to do" but also understand "why should" trust issues of economic policy in order to really solve. I also emphasized in the book which, "development" in this matter, in the final analysis is a philosophical question, not a full philosophical discussions, no summary and reflection, understand? I do understand that people are now installed, not really understand. Said the "philosophy" seemed to some profound, in fact, summary and reflection, can be considered the Enlightenment development economics, serious look past what is the way to go, so understand that more than one person, the policy will naturally increase confidence, at least policy psychological endurance improves. It is not enough to loudly jawbone.

Chen Gong thinks urbanization is not a good strategy and is actually driving the Chinese economic crisis:

In my "subversion of the world urbanization" the book speaks of a "crisis triangle", to promote urbanization leads to excess capital, excess capital lead to economic crisis, after breaking free of the economic crisis, throw oneself back into urbanization, since ancient times, the development of human society is basically this cycle. Only difference, in ancient times urbanization is relying on the construction for war, relying on the spoils of war, in modern times we use currency, money printing, money of little value, by controlling interest rates, with the growth of the prosperity of the city, the interest rate will malfunction, excess money like the ocean, it is becoming more and more uncontrollable, until one day the tide hit, all out of control.

For such an outcome, there is no good way to control this because of human nature. You see now we buy a house, how much is enough? There are two-bedroom, three-bedroom still want home improvement is more and more luxurious. This is human nature, even an instinct, humans in the jungle cave era began doing this. So it was thought to use real estate, with urbanization to stimulate economic growth, but do not know that this is the aftermath, it will fall into the "crisis triangle", fall into the abyss. Particularly China, greater problem, because we are more the pursuit of speed, rather than depth. Fast economic growth, the pace of urban construction quickly, but very shallow, superficial pursuit of glory, but the real economy, the problems in the city, many of which are yet to be resolved, there is a lack of depth. So what demolition, what jobs, what pollution, what urban disease, it has come. Relatively speaking, the United States and Europe better, who better country, we will see the kind of deep national economic pursuit. On the surface little slower pace of economic growth, but economic growth in depth, more balanced society, the problem is relatively less.

So, from the "crisis triangle" theory, the economic difficulties facing China today is inevitable, part of the problem sooner or later occur. As long as there is no fundamental change in the development of philosophy, then whatever should happen, will happen.

He goes on to discuss the reduction of housing inventory and how to go about it, discussing supply side reforms, and then goes on to say history will repeat:

Again, what should come will come. Real estate taxes will come, the housing slump will come, overcapacity will come, the RMB devaluation will come, rise and fall, not rise forever economy, there won't always be a beautiful city, but how do you handle it?

You only have to choose the right between the ebb and flow, to keep up with the punch may finally be able to go in front of the wave. and then? With luck, you are likely to see someone you fall behind, disappearing beneath the waves, and that this is fate, nothing else. What is survival of the fittest, what theory, what the master, while playing to go, this is the big law, which is more than a vision of the times, to rely on vision to survive, do not rely on anything else.

He goes on to discuss the stock market for a bit, and then moves on to negative interest rates:

I wrote a negative interest rates in Europe in the book, but now as the negative interest rate spread like an infectious disease in the world open to the. The so-called negative interest rates, the bank is to give you a loan, but also lose interest to you, you say it like that? Of course, you save money to the bank, then do not think the bank will give you interest, in turn, you pay interest to a bank. How is this going? This bank is not an option yet? Inside this world, and if the bank collapsed, what will become? Everyone cash, overnight, returned to the world of cash, no cash down, even the survival, even eating may be difficult. The problem here is that negative interest rates are difficult to deal with.

But the problem does not end there, the world's financial institutions have not thought of that negative interest rates, no matter how much he is the wrist, starting from the usury of the Jews, did not think all financial products to buy, sell, are based on the interest rate is positive as the assumed conditions. Now all of a sudden came negative interest rates, and that all financial products should be recalculated, what model, what theory, in short, just like live, how to calculate profit and loss, had to re wondering, again, the Bank for this busy enjoying themselves, which and what time to send you a loan, ah, all kinds of market transactions slowdown is inevitable. So, now the world's central banks to the financial community as the enemy, accusing the central bank is not authentic, is the reason.

In fact, I really do not authentic politician in the world, they will be the responsibility of economic growth will fall to push to the central bankers, and their pocket tool, it is not much, and this is the origin of negative interest rates.

As for these negative interest rates, the world financial sector turned out to be not concerned at all, we'll cross that bridge when we come to it, most people think that this is a temporary measure, to carry for a while and then end it.

Is it really like this? Not!

IMF's Lagarde old beauty has always been a European financial representative for the European defense, while Europe is the hardest hit of negative interest rates. Initially, the negative interest rates in Europe Lagarde indifference, always insisted that the negative interest rate "overall positive." Later, she probably also like to see, the tone became cautious, saying that negative interest rates "is not a happy event." Buffett pursuit of value investing, but this negative interest rates also make him feel threatened, he admitted, "This negative interest rates have me completely confused!"

a letter to Congress warning that the Fed does not rule out the future to engage in negative interest rates. I rely on you engage in negative interest rates, the United States, that China holds over one trillion dollars of US debt, does that mean you have to give back the money? ? What currency war, which is the melee, it is not out to grab it!

What will become of this world, no one really knows. Anyway, one thing is clear, the close relationship between China and globalization, China's trade volume ranked first in the world, so the world financial circles, once a major event, the impact is also bound to the maximum. So, I suggested that China should be prepared in case, to be a little "off" preparedness measures, it is not, well and good hard-isolation approach, calm days. This is not a little difficult to deal with a small disaster, this is an emergency measure to cope with sweeping across the world, a catastrophic disaster, there is no way to approach.

He then discusses investments before shifting into the New Silk Road:

New Silk Road common market is a common market system, like the World Trade Organization (WTO), as it is capable of leading a Chinese multinational common framework, unlike the current "along the way", all items on item On project, their own ways, each engage in a pool, a mess of a mess.

The "New Silk Road" Common Market would involve law, all trade, investment, finance-related, to comply with common law; there must be investment protection, a disadvantage, but also a place reasoning; there must be fair trade principles, technical cooperation in principle, safeguard security and cooperation, but also agreed to ecology, arbitration, employment and other aspects of the treaty, in violation will be punished. In this one, finance is a major aspect of China is certainly an investment, exporting products and technology, but in China's West Wing, this country can reach a common agreement with the Chinese market, mostly poor, no money ! How to do? Simple, ah, with China's reform and opening time had the same ah, to allow people to borrow ah. China to achieve through debt chain RMB currency area, which allows the internationalization of the RMB, the Chinese bond market and also open, allowing countries of the Common Market, also allow Western countries to issue RMB bonds in China. These countries have RMB yuan and then buy Chinese manufactured goods to buy Chinese technology, buy what they need, which gave the regional banks and the RMB bond market has created a big opportunity and development opportunities.

Then there would be a security problem? These countries also have opposition ah, who knows will not deny it came to power, ah, a problem how to do? This time it used pacifism which the flag pole, and you just sent troops to protect the interests, which is called "interference", many countries in the world against, no support, the result is like the Soviet Union sent troops to Afghanistan as humiliating. However, under the banner of pacifism, one kind of living in China can mediate position, even if the troops also "peacekeeping", which is much more active.

In my view, for China to escape the "crisis triangle", the only way is the "New Silk Road" Common Market...

He goes on to discuss Marxism and productivity. He concludes by saying the problems of urbanization, excess capital and economic crisis is not a chicken or an egg problem, and the development strategy must be reconsidered.

iFeng: 学者：中国经济必然面临“危机三角”困境 如何避免