Xie Guozhong: A Big Rebound In The Dollar Has Made China's Property Market Crash.

China's economy is slowing down. There may even be a big slowdown in the second half. This is gratifying for China's economy as a whole.

Andy Xie

The rapid growth in the past is unsustainable. bubble economy 。 The longer the growth lasts, the more pain the economic downturn will bring. China's choice is either to take medicine now or to operate in the future.

Economic slowdown does not mean that monetary tightening is enough. China's interest rate over the past five years is relative to the average. Inflation rate It's really too low. If this situation is not reversed, inflation will continue to rise even if economic growth slows down. China should increase the deposit interest rate by three percentage points as soon as possible in order to prevent inflation expectations from deteriorating.

The slowdown will not become a hard landing. Exports, consumption and infrastructure will continue to grow. Because of the weakness of the US dollar, China has the advantage of breaking the real estate bubble without causing recession.

If China is soft again in the name of protecting growth, the real estate bubble will revive. This will increase the extent of future adjustment. The collapse of the real estate bubble is likely to be due to the Fed's monetary tightening rather than China's choice. Hard landing will be inevitable.

Now is a good time to adjust.

The current economy is slowing down from a very high base. In 1990s, electricity consumption was below 8% on average. If economic efficiency can be raised, even 8% will bring 10% GDP growth rate. Over the past eight years, electricity consumption has grown at a rate of 13%. Further slowdown from the current level should not be regarded as worrisome.

In the third quarter, the slowdown is likely to accelerate because local governments and developers have abandoned the central government again. Relax policy The hope is to accept a lower level of liquidity and to cut costs accordingly. When this happens, the growth rate of electricity consumption may be less than 10%, or even 8%.

Despite the convergence of local governments, spending will continue to grow, but at a much slower pace. This will be very useful for improving efficiency. Obviously, image engineering accounts for a large proportion of local government expenditure. If liquidity constraints force them to cancel these projects, they will help improve efficiency.

Although exports will not grow as much as they used to, the price increase would be good news. This will help increase wages and stimulate consumption. China is fortunate in this regard. No country can compete with China in manufacturing. Therefore, this can help to transfer cost growth through price growth to global consumers. This gave China time to deal with inflation. If exports are down due to rising prices, China must be forced to rapidly lower inflation, which is likely to cause a hard landing for the economy.

Inflation hurts consumption. But consumption is still growing at a good rate. The new generation of consumers seems to have a high consumption preference. As long as wages continue to grow, it is expected to be higher than inflation and the consumer sector will continue to grow.

Although the real estate industry is in poor condition, the growth of local government expenditure is slow, and consumption, infrastructure and exports will continue to grow. Now for the central government, it is a good time to tighten up the real estate market. The risk of hard landing is relatively low. Although the growth rate next year may be low, it is a good thing from a future standard.

China is experiencing a huge housing bubble. The adjustment is only a matter of time. Now the adjustment is better than later adjustment, because China can now solve this problem without worrying about external pressure.

Whether inflation or economic recovery, the Fed will raise interest rates to more than 5%. The specific time is not yet sure. It may start in the second half of 2012. When all this happens, the dollar may rebound. A lot of hot money in China will be evacuated. The real estate crash will follow. Such a sudden adjustment will be a very bad thing for China. Choosing the present adjustment is most in line with China's interests.

15 years ago, there was no adjustment in Southeast Asia, because the weak dollar continued to inject liquidity, thus maintaining the real estate bubble. When the dollar situation reversed, the whole region collapsed. The economic crisis quickly turned into a political crisis. The whole region is still struggling with this legacy. China should learn from its neighbors.

Slowing down does not mean tightening.

One of the most popular theories of austerity is that China must solve its present problems through development. If growth slows down, many problems will be exposed. This argument is completely wrong. These problems stem from speculation. After the tightening of monetary policy, the interest relationship behind the problem will also be exposed. However, if the problem is not adjusted, the problem will only get bigger and bigger. Speculators will never waste good time. If China followed this view, it would be like pushing itself into a desperate situation.

Another argument is that tightening policies will hurt SMEs. They can not get the financing needed for development. In the credit downlink cycle, SMEs are more vulnerable because banks tend to tend to big companies for safety reasons. However, the liquidity problem of SMEs is closely related to speculation. If there is no ongoing capital account, SMEs can solve the problem of liquidity shortage by limiting investment and reinvesting only operating profits. This is not the case for many small and medium-sized enterprises. Instead, they are trapped in some kind of speculation and need new funds to continue the game.

When the slowdown becomes more apparent, many people will think that tightening policy should at least end if it does not turn 180 degrees. This view is wrong. {page_break}

The economy is getting rid of the imbalance. Liquidity crunch has led to major adjustments in the local government and real estate industry. The problem of inflation in China can be largely attributed to overspending in these two sectors. But without the over expenditure of these two sectors, China's inflation will be higher than before, because the balance of labor and energy market has shifted to inflation.

However, the past has not passed. China's M2 has doubled in the past four years. Its inflation power has not yet fully emerged in the economy. The current M2 target of 16% is much higher than the potential growth rate of the economy. So inflation is still increasing.

China is entering a ten year wage growth of two figures. This is a good thing for economic rebalancing. But its inflationary impact should not be underestimated. If it is not handled well, it may lead to instability.

The energy market is also similar. As production costs increase and production growth slows, the price of coal, China's main energy, may rise sharply. It is likely that the inflation rate of 5% will be a long-term phenomenon. To solve this problem, the deposit interest rate should be raised to more than 5% as soon as possible. Otherwise, inflation expectations will not stabilize. Stabilizing inflation expectations should be seen as a long-term battle and should be separated from the adjustment of local governments and real estate industries.

"Slow" growth is necessary.

The era of labor, land, resources and environment has not yet been fully utilized. Trying to maintain rapid growth in the past will be very dangerous in the next ten years.

30 years ago, when China opened its door to foreign capital and trade, China was still an economy that had not yet been fully utilized. The labor force of state-owned enterprises is very small. Natural resources, mainly the energy sector, have not yet been developed. China underestimated the price of these elements in real terms to increase its share in the international market. The process of filling the water cup is the reason for the rapid growth.

Now the cup is full. In many areas, China is borrowing resources from the future to subsidize today's production. For example, the environment will need to spend or even exceed the huge amount of China's foreign exchange reserves to protect. Not protecting the environment is for GDP to sacrifice the health of the people. But a huge health crisis may be just a matter of time.

When this happens, political forces may need to shift their focus from development to security. It is better to start this process now, rather than suddenly face it one day.

China's labour market is facing a shortage of blue collar workers and a surplus of university graduates. Promoting growth can not solve this problem, but will only increase demand for blue collar workers, which is the essence of growth. Only by breaking the economic balance of construction and turning to service can we solve the employment problem of university graduates.

Future growth will mainly depend on productivity (TFP), followed by capital deepening. China's annual total factor productivity is about 4% to 5%. Maintaining this pace will be very difficult, because simple learning is over. However, due to various structural problems, China's economic efficiency is still relatively low. Reform can improve efficiency. Combining these two points, the speed of 4% to 5% is still possible.

China's infrastructure construction is still huge, but it is drawing to a close. The expressway, railway and subway will be completed in a short time. Like Japan, future growth may be inefficient. China's capital deepening mainly takes place in infrastructure sectors and in recent heavy industry sectors. The next ten years will be far less than the last ten years.

Therefore, by 2020, China's growth rate may be reduced from 10% to 5%. If the quality is high, 5% is also an ideal growth rate.

Although China's nominal GDP has doubled in the past eight years, people have little sense of it. China is no longer as fast as it used to be. The problem of employment has been basically solved. The goal of economic development should be transferred to the quality of life. If the system is reasonable, the growth rate of 5% can improve the quality of life.

Finally, the slowdown will still enable China to grow to the world's largest economy between 2020 and 2022. If the inflation rate is 5%, the nominal GDP in China will still be three times the current level in 2020, reaching 18 trillion US dollars, which is basically equivalent to the total GDP in the US. If China does not have a hard landing and currency depreciation, this possibility is still great.

Therefore, China can be more conservative in balancing development and stability. Sustainability is more important than speed.