Xie Guozhong: Last Chance

　 For China, Government spending out of control The danger is obvious and realistic. 2011 yes Handle This is a good time for this problem.

　 Crisis lurks everywhere

The Obama administration has just passed a massive tax cut bill. The background of the passage of the bill is that the United States already has huge fiscal deficits, and at the same time, the national debt has risen to the highest level since World War II. The Federal Reserve recently stressed once again that the second round of quantitative easing policy should be carried out to the end. Its intentions are very clear: as long as the unemployment rate is high and the inflation rate is low, it will continue to adopt quantitative easing policy.

In the past, I have stated several times why the stimulus policy in the United States can not bring about lasting growth.

I am not sure whether the supporters of American stimulus believe what they say. Obama implemented the new tax reduction policy, whose real intention was to promote his re-election in 2012.

This year's mid-term elections show that unless the US unemployment rate drops significantly, then his re-election will fail.

I think the Fed's intention is to solve the US debt problem by inflation.

The family sector in the US needs to halve its leverage measures to bring it back to normal. If the family sector of the United States increases savings, the US economy will be weak for a long time, and its revenues will continue to slump, and the government deficit will be out of control. The US may be in a vicious circle. If the Fed reduces its leverage through inflation, the US economy can get rid of this fate.

Inflation is good for the US because foreign creditors hold nearly 100% of the financial assets of the US GDP. For foreign creditors, the opposite is true. China will suffer even more losses due to its huge holdings of US Treasury bonds. In fact, if the value of foreign exchange reserves evaporate, China will become very fragile unless its structural problems are solved.

No matter how people look at the intentions and effectiveness of US policies, these policies will create a good environment for China to solve its inflation problem in 2011 without worrying about a slowdown in growth.

In 2010, China's nominal GDP will probably reach $6 trillion. If it increases by 5% every year in the next 10 years, that is to say, it will keep half the increase in the first 10 years. In 2020, China's nominal GDP will reach 15 trillion and 600 billion dollars, which is comparable to the current GDP in the United States. Steady growth, rather than risk-taking maximum growth, is in the best interest of China.

Some analysts believe that developing countries have to go through extremely dangerous and unbalanced growth periods before they can shake off poverty. I agree with this view. For most developing countries, they need to invest as much as possible in infrastructure and in improving their manufacturing capabilities. The traditional view of investment efficiency does not apply to developing countries. However, China has achieved leapfrog growth. If China goes straight ahead, it will be among the developed countries in the foreseeable future.

But this is not the time for China to take risks and sustain growth. For China, even an increase of 5% is enough. Between growth and stability, China would rather focus on conservatism.

The large-scale financial crisis is not caused by careless mistakes. It is often due to the policy of prolonging the economic cycle, but also to avoid structural reforms necessary.

The fundamental problem of the developed countries is that the high cost society built after its "World War II" can not be sustained in the era of globalization, because globalization has lowered its labor income and reduced the financial revenue for supporting the welfare society. Greenspan adopts a liquidity policy which is easy to generate bubbles, which induces the family departments of the United States to increase their debts and maintain their existing lifestyles, thus concealment potential structural problems for ten years. The European sovereign debt crisis is also triggered by the same force.

The United States is relying on the government to issue bonds to deal with the consequences of the financial crisis. Some European countries have been doing this for a while. Of course, the Federal Reserve can monetize government debt, that is, the US will not have to beg for external assistance to deal with its public debt in the future. But printing money on such a large scale is likely to result in a total collapse of the dollar. After 1998, Russia's ruble would cause a vicious inflation.

Although hyperinflation is good for the us to eliminate foreign debt, the US dollar will always lose its status as reserve currency. Such a solution may not be good for the United States.

Developing economies are facing inflation and asset bubbles. Because multinational companies want to use the cost difference between developed and developing countries to arbitrage, globalization brings unprecedented capital volume to developing countries. In addition, the low interest rate of the former also caused hot money to flow into the latter. Large and small inflation is inevitable in developing countries.

Asset bubbles in developing countries are more serious. Globalization has brought prosperity to them, but it has not been shared equally by their population.

Those who do jobs in developed countries still enjoy wages in developed countries. Those who compete with each other in developing countries can only earn third of the world's wages. The former has lower cost of living than peers in developed countries, so there is a large amount of savings to buy assets. This leads to rising asset prices. Governments are attracted and regarded as a simple source of income. As a result, they make bubbles bigger and bigger.

Inflation and bubbles have not yet caused turbulence in the developing world, because the dollar is still weak, and the influx of hot money keeps its currency value. Historically, once the dollar rebounded and began to appreciate, inflation would become a crisis in developing countries. But even without a currency crisis, inflation can also create a crisis. It will erode the purchasing power of the bottom population. Social unrest will lead to political crisis. {page_break}

　 China must eliminate property bubbles

The problem of inflation in China stems from the rapid expansion of money in the past 10 years to finance the huge housing market. As a result, the local government's revenue has been increasing and it has been able to finance its huge expenditure. Unless measures are taken to limit local government spending, inflation in China may be out of control.

The government now recognizes the main challenge facing inflation. China has increased interest rates and raised reserve requirements several times. It also announced plans to introduce price controls. China has taken heavy measures and adopted extraordinary measures because China believes that its conventional economy, unlike other countries, may not be effective or necessarily necessary to raise interest rates. China is reluctant to change the value of the yuan, but is willing to adjust prices of goods and services, but this attitude has not produced good results.

Many people in China believe that money should be controlled, not prices. Price and quantity are two aspects of a problem. If quantitative measures work, it will sharply reduce inflation. Any powerful government can restrict the expansion of credit and lower the prices of goods and services, so that quantitative policies can play a role. That's exactly what the Chinese government is doing.

This policy has little effect at present. The government controlled credit expansion last year. However, credit expansion outside the system has eliminated the credit crunch in the system. For example, banks can sell their corporate loans directly to their depositors and contract their balance sheets to achieve the government's goal. But in fact, nothing changed.

In recent years, the public has expressed doubts about the sincerity of the government in controlling inflation. This view may cause widespread panic, causing family departments to hoard rice and cooking oil. If people no longer hold money, the overall crisis will start.

I have always advocated raising interest rates. But that will not solve the inflation problem. The purpose of raising interest rates is to provide compensation for depositors to maintain their wealth value. Raising interest rates can prevent social unrest. However, in order to control inflation, China must solve the problem of government expenditure. Unless government spending is curbed, inflation will continue to rise.

There are two ways to limit local government spending. First, reduce the source of its funds. The main source of income of local governments is to sell land, levy property tax and bank loans. The last source is tightening slightly because banks are already heavily saddled with government loans and are struggling to shrink. But this change has not hurt the local governments because they haven't spent their money.

The elimination of property bubbles has greater impact on local government financing. Last year, new property sales reached 14% of GDP. The money was eventually included in the government treasury. Considering the rapid development of the real estate market, the expectations of the local government are higher. They even thought about how to spend the money long ago.

The contraction of the housing market may be half that of China's GDP in 2010. Land reserves held by real estate developers and local governments can build more expensive properties. If all of these properties are sold at current prices, the demand for money supply will expand rapidly, at least 20% per year in the past eight years, that is, money supply will double every four years. Under such circumstances, inflation is out of control.

If we limit the amount of money under the general definition and leave the loopholes of credit expansion through other channels, it is just playing games with the statistics of money supply. It will not change reality. Inflation will continue to rise, even though the government claims monetary growth has slowed.

Only when house prices drop sharply can we believe that the government's fight against inflation is true. The level of housing prices determines the expenditure of local governments. To control inflation, we must first squeeze out the housing bubble. If house prices continue to rise, inflation can only be done.

Cutting off the allocation of funds to local governments can solve the problem. I am not sure. China's local governments are very powerful enough to have a decisive impact on national policies and to find new ways to raise revenue. Without reforming local governments, China's solution to inflation is a dead end.

China is a great country and is well liked by multinational companies. It has many advantages in the world today. The international environment is very favorable for China. It is only China's own big mistake that will trigger a crisis.

China has a strong government. China's family and business sectors live in the shadow of the government. Only the failure of the government system can lead to crisis and impede economic growth.

For China, the risk of runaway government spending is both obvious and realistic. 2011 is a good time for China to deal with this problem. However, if China passes the similar opportunities as before and chooses to enlarge the real estate bubble, China's economy will have a hard landing in 2012. This will make China deviate from the road of development just like what happened in the last century.