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OctRecently, the Chinese economy is facing certain downward pressure. In addition to the trade war provoked by US and other factors, the whole society has generally paid more attention to the future development prospects of the Chinese economy.
There is a view that the Chinese economy may face a "stagflation state", that is, stagnant economic growth and rising inflation. The basic logic of this view mainly includes two aspects: First, the growth rates of “troika” of overall demand are in a general decline, which led to the decline in economic growth. This is the main basis for the “stagnation” of economic growth. Second, recently, the rising price of oil and other major commodity has caused China's industrial production to face rising costs. The African swine fever epidemic has led to a decline in the number of live pigs, which will affect pork supply in the future, and consumer prices are also facing upward pressure. Based on the above two aspects, the view is that the Chinese economy will face a state of “stagflation”.
The original concept of “stagflation” is the stagnation of economic growth and the rise in inflation rate will last for a long period of time, rather than a temporary decline in economic growth rate and a temporary increase in inflation rate. Objectively speaking, the recent trade frictions launched by the United States have caused enormous uncertainty in the global economic recovery. The US interest rate hike and the normalization of US monetary policy have also exerted tremendous pressure on the stability of the global financial market. The decline in China's total demand growth rate and the upward pressure on commodity prices do exist, but whether it is serious enough to appear in a "stagflation" is a question that needs to be discussed.
First of all, although the trade war initiated by the United States has adversely affected China's exports, there is still much room for China to stabilize domestic demand. The growth of overall demand is a variable factor which is highly relevant to macroeconomic policy, so the goal of stabilizing domestic demand can be achieved through the expansive monetary and fiscal policies,. There is a misconception that the ratio of China's broad money (M2) to GDP has more than doubled, so there is a currency excess and a tight monetary policy should be implemented. In fact, the ratio of M2 to GDP is not a reasonable indicator of the amount of money. Japan’s ratio of M2 to GDP is higher than that of China, but it has been mired in deflation for many years. Therefore, from the perspective of stabilizing overall demand, inflation rate is a better indicator than M2 and GDP to judge whether the growth rate of money is reasonable.
In 2017, China's M2 growth rate was 8.2%, which was 3 percentage points lower than the nominal GDP growth rate of 11.2%. This shows that the stability of China's aggregate demand in 2017 is largely achieved by the increase in the speed of money circulation. Since the reform and opening up, the growth rate of M2 is in a downward, and the growth rate of nominal GDP is more than 2 percentage points. There are three times in total, namely 1988, 1994 and 2017. The first two times when the M2 growth rate was significantly lower than the nominal GDP growth rate, the total demand growth rate further declined. Therefore, from the perspective of stabilizing aggregate demand, we should rationalize the channel of monetary policy transmission and moderately increase the supply rate of broad money.
Second, the issue of China's high leverage should be highly valued, but it should not overstate the impact of "high leverage" on the Chinese economy and exacerbate negative market sentiment. Taking the leverage ratio problem of the Chinese family sector as an example, although the leverage ratio of the Chinese household sector measured by the ratio of debt to disposable income exceeds that of the United States, it is unreasonable to used it as a basis to determine that the debt problem of the Chinese family sector is more serious than that of the United States, even lead to debt crisis and economic decline. According to data released by the National Bureau of Statistics, China’s household sector’s savings accounted for 23.1% of GDP in 2015; and the Bank for International Settlements’ data shows that at the end of 2017, China’s household sector debt accounted for 48.4% of GDP. Assuming that the proportion of China's household sector's savings to GDP remains stable, Chinese households can repay all their debts through their own savings in less than three years without reducing household consumption. This is not possible in the US family sector. As we all know, the low savings rate in the US family sector is famous all over the world. Before the financial crisis broke out at the end of 2007, the debt ratio of the US household sector to GDP was 97.9%, and the savings of households and non-profit organizations accounted for less than 5% of GDP. That is to say, American families will spend 20 years to pay off the debt without cutting the consumption. The severity of debt in the family sector in China and the United States is not the same. The Chinese family sector is much more capable of dealing with debt problems than the United States.
Third, as of August 2018, the growth rate of China's Producer Price Index (PPI) and Consumer Price Index was 4.1% and 2.3% respectively, which means the inflation rate was generally in a moderate range, and there was no real inflationary pressure in the near future. And the moderate inflation rate is in fact relatively favorable for the economic recovery. The concern of all sectors of society is that the recent rise in global oil prices and the expected rise in pork prices caused by the African swine fever epidemic in China may put some pressure on future price stability. We believe that through the positive response of macroeconomic policies and “plan ahead to take precautions”, these factors’ pressure on future inflation is limited. From the perspective of macroeconomic policies, moderate expansionary monetary policy can, to a certain extent, mitigate the impact of oil price shocks on the production costs of enterprises. Tax cuts and fees can also increase the impact of companies' response to oil prices. For stable food prices, expanding imports of agricultural products such as pork will stabilize the price expectation.
In the face of the recent downward pressure on the economy, China’s macroeconomic policies also have some room for adjustment. The first is to coordinate the relationship between “de-leverage” and the stability of total demand. There is a dilemma between “de-leverage” and steady growth in the short term, and the relationship between the two should be systematically balanced. Second, coordinate the conflict between the objectives of the economic policy department and the overall goal of the macro economy. For example, the short-term contradiction between active fiscal policy and control of government leverage also needs to be coordinated. Third, monetary policy should be based on domestic economic goals and play a more important role in maintaining economic stability.
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