Macro-Finance Salon (No. 62): Real Economy and Money
2017-05-14 IMI
Mr. Wu Ge first raised and answered two questions: what is money and where does money come from. Based on life experiences, he pointed out that money is a variable that is closely related to our lives but is very complicated.
He pointed out that in China's economy, growth is decoupled from employment. Although China's economic growth is slowing down, the labor market remains booming. The reason is that China has major structural changes: First, since the two-child policy, the population structure has changed; second, China's economic and industrial structure has changed. The tertiary industry’s share in GDP has sharply risen; new jobs in service industry are created much quicker than the new jobs in total. By comparing the statistics of Japan, South Korea, Taiwan and other economies, he found that when these economies turned from being dominated by the manufacturing sector to the service industry, all economies tended to grow slower. The main reason is that labor productivity in service industry is lower than that in manufacturing.
Mr. Wu pointed out that since last year, China's PPI has been rising, but business inventories are declining. By comparing last year's statistics with that in 1998, he pointed out that the necessary and sufficient condition for economic recovery is to cut inventory and the sufficient condition is that there is demand. China's supply-side reform has completed the mission of cutting inventory, yet if there is no demand, the economic recovery will not last long.
Mr. Wu analyzed China's real estate market and expected the turning point of the growth rate of real estate investment is not far away. Wu said that based on forecast data, China's real estate market has a three-year cycle. Statistics show that real estate market in the first quarter of 2016 has seen a stable rebound, and now is still high. In the past, the estate investment growth has also hit the bottom when the growth of the real estate prices year on year hit the bottom. Yet this time, when the growth rate of the real estate prices year on year hit the bottom, the turning point of the estate investment growth hasn’t appeared or came later. The first reason is that the real interest rate rise more slowly this year; second, the profitability of housing prices is better than that in the previous cycle; third, the high base point in this cycle is different from that in the last cycle. Taking all these into consideration, the turning point of a sharp drop of real estate investment might occur in the second quarter, but the decline in real estate investment growth rate may be limited. This judgment still has some uncertainties, such as changes in urban land supply, changes in urban real estate investment in 3rd and 4th tier cities, the extent of the tightening of financing policy and changes in the monetary policy, etc.
Next, Mr. Wu expressed his own understanding of the future monetary policy. He pointed out that we now have a wide base currency gap. Central bank’s supply of base currency into the market is fragmented, which led to intensified inter-bank market interest rate volatility. Fragmented operation has many problems: first, the targets to adjust are inconsistent. Both the amount and price are controlled and intermediate goals of monetary policy are confused; second, the liquidity tools are controlled in the short, mediate and long channels with mismatched period; third, the market expectation is confused, which will influence the transmission efficiency of monetary policy.
Finally, Wu compared China with Japan and briefly explained his views on the “Off Real to Virtual” of capital. According to statistics, now China's general credit’s share in GDP has been very close to the level of Japan in 1990 when the Japanese real estate bubbles went bust. Japan’s overall CPI remained stable when its stock market bubble and real estate bubble materialized, which was similar to the situation of today’s China. Yet when Japanese real estate bubble went bust, the credit in manufacturing sector did not grow as expected and the capitals did not go into real economy. After several recent regulations in China, the capitals still flow into the real estate industry rather than manufacturing sector, which is similar to Japan’s situation the past. On the “Off Real to Virtual” of capital, Wu’s explained that the reason is that land supply becomes less and rate of return of the real estate industry is significantly higher than that of the manufacturing industry.
In the Q&A session, Wu and other participants discussed thoroughly on the relationship between the interest rate and the real economy, and the influence of the hollow economy, etc.
