Recently, Caijing Annual Conference 2020: Forecasts and Strategies was held in Beijing to look into the economic development trend of China and the world in 2020. The Green Legal Global Alliance Research Institute presents the latest news for you. 

Alan Greenspan: China's social welfare expenditure is squeezing its saving space. 

Greenspan, former chairman of the FRB, said in the dialogue that, similar to most countries around the world, China's social welfare expenditure is growing and restricting the space for domestic savings. 

In his speech, Greenspan mentioned that the biggest global issue in the 21st century is the aging of population. According to data of the US, in the past five decades, the total amount of government social security expenditure in the US has always accounted for around 30% of the GDP and what has changed is the composition of the total amount. As the social security expenditure increases, the gross domestic savings have dropped to a similar extent. Thus, it can be concluded that the increase of the welfare expenditure keeps squeezing the space of the gross domestic savings. This phenomenon not only occurs in the US, but also in the UK, Germany, France, Italy, Spain, Portugal, Austria, Belgium and Finland according to data. 

In addition to domestic savings, the aging of population also exerts an impact on investment. According to Greenspan, since 1929, the total amount of domestic investment in the US has been in close line with that of domestic savings. However, in recent years, the former has outnumbered that of the latter and the difference between the two is filled by funds borrowed from foreign countries, i.e. the increased foreign savings. Funds borrowed from foreign countries are reflected in the amount of international investment of the US, which gets close to USD 10 trillion. 

Zhou Xiaochuan: Revitalizing the manufacturing industry in some areas is a discriminatory legacy from the planned economy. 

According to Zhou Xiaochuan, former governor of the PBC, Chinese industry has a tradition of discriminating against the tertiary industry. He believes that local development strategies should be formulated based on local conditions and that the slogan of "revitalizing the manufacturing industry" shows an industrial bias from the traditional economy. 

Zhou said that some regions have given great importance to "revitalizing the manufacturing industry". It is certain that different regions should make their development strategy based on the actual condition and that some regions have a sound foundation of the manufacturing industry and hold the opportunity of revitalization. However, after a second thought, we may find there is the so-called industrial bias from the traditional economy. At the same time, it is clear that as a global manufacturing power, China has a large and quickly rising trade service deficit. 

Zhou said that an important part of the current economic restructuring is to speed up the development of the service industry. According to statistics in 2018, China's service industry accounts for just over 52% of its GDP. Across the globe, this represents a relatively small digit and also indicates that there is a huge space for the development of the service industry. Besides, it also represents one of the most important content of China's structural reform and also a major direction for us to make efforts to cope with the downward pressure of economic growth. He believes that according to China's current GDP and national economic development, the service industry in China's GDP should go beyond 60% or even higher. 

Zhou said that as an economy transformed from the planned economy, there exists a historical discrimination against the service industry. This sort of industrial bias or discrimination was originated from the statistical methods in China's initial post-liberation period, as the "national income" instead of GDP was adopted. The national income is a remnant of the former Soviet system to demonstrate the economic development level and growth. However, the national income excludes the service industry as it is believed that the service industry does not produce value. 

To get the GDP, a range of conversions is needed and most of these conversions are actually unreliable. Therefore, the service industry is discriminated. Zhou said that this kind of historical legacy should not be ignored. Although China's reform and opening-up policy has been implemented for 40 years and many things have been corrected, there is still some legacy in this regard. It involves the ultimate goal people pursue, the goal of economic development, and also the choice of employment. 

Zhou said that the proportion of the financial industry in the GDP is largely associated with a country's savings rate. Specifically, the larger the saving rate is, the more financial services will be needed. Countries with no or very little savings would probably find it hard to provide a large number of loans. Therefore, to some extent, the development of China's financial industry has something to do with its savings rate. 

Zhou stated that the financial industry holds a symbiotic relationship with the real economy and that in-depth analysis needs to be done to judge whether it means bubbles and self-circulation when the financial industry accounts for 10% of the GDP. 

Huang Yiping: We should prevent new dormant financing channels created by ultra-lax monetary policies. 

"I have no objections to counter-cyclic regulation, but we should think whether a greatly relaxed monetary policy would lead to new dormant financing channels", Huang Yiping, vice dean of the National School of Development at Peking University. A professor of New York University and his collaborators get one conclusion that "an ultra-lax monetary policy may lead to a dormant financing channel and such a channel will eventually lead to a large number of dormant enterprises, further resulting in disinflation and even deflation pressure". 

Huang Yiping explained that the basic logic of this conclusion lies in that in the past, when a loose monetary policy is implemented, banks would find borrowers with greater risk to lend, which bears larger risks. However, as the current monetary policy is extremely loose and the financing cost is quite low, many enterprises with unsustainable business get financing, leading to a lot of excess capacity. As a consequence, though the economy and employment seem to be good, many products made by the financing are quite inefficient and brings the overall inflation rate down. Therefore, with severe quantitative easing, there is no inflationary pressure but deflationary pressure. 

"We don't have the least idea about when the US economy will decline and why there is a decline. But one thing is sure that in case of a decline in the US, there is no space for monetary policy and fiscal policy to cope with new recession." 

Huang Yiping believes that this holds great significance for China. The ultra-lax monetary policy of the US leads to dormant financing channels. In fact, China's marginal capital output ratio has increased significantly, while the efficiency of the monetary policy to stimulate growth has dropped. "I'm not against counter-cyclic regulation, but when our monetary policy is substantially eased, we must think about the risk of new dormant financing channel." 

Cao Yuanzheng: The global economy holds a possibility to decline and Europe may undergo a recession next year. 

Cao Yuanzheng, chairman of BOC International Research Company, said that against the good economic situation in the US at present, the economy of the Europe and Japan is going down substantially, and this differentiation also extends to developing countries. Therefore, the global economy has the possibility of recession as a whole. He predicts that Europe is expected to enter a descending stage. 

Cao believes that the 2008 global financial crisis marks a turning point of the global economic development and brings two unprecedented new phenomena as it changes the original running trend of the global economy. First, the global total factor productivity is going down in both developed countries and developing countries. This indicates that a new technological revolution is taking shape, but not reflected in the real economy. 

Second, as the total factor productivity declines, all countries adopted an extremely loose macroeconomic policy to maintain economic stability, especially the interest rate of monetary policy, which is even cut to zero. "This incurs a high leverage ratio to all economies". "It is reasonable to concern that a high leverage ratio heralds a recession risk. Once vulnerability breaks out, a financial crisis will follow." 

"Since the beginning of this year, the market's risk aversion has increased sharply. Gold prices have soared since May this year, heralding a sort of risk aversion. The risk aversion mood in the whole financial market keeps rising and all are concerned about the uncertainty in the future", he said. 

So, what should we do to cope with this? Cao mentioned that over the past decade, developed economies have adopted quantitative easing monetary policy. First, they reduce the interest rate, making it continue to decline. Second, money supply is adopted to support the issuance of treasury bonds. "If this sort of difficulty arises again, this policy will be sustained. Its logic is that as long as there is no inflation, money can be issued, treasury bonds expanded and leverage ratio increased without limitation. I think this is likely to be the only choice for many countries' macro policies if there are difficulties again, but it will produce a significant impact on the market and the economy." 

Cao is more concerned about that in the face of the above, the macroeconomic policies of all countries should be closely coordinated and harmonized. But at present, the world is in the process of divergence, and the basis of cooperation is disappearing. "It's quite likely that all countries go their own way in the monetary policy, which would aggravate market risks." Cao predicts that the global economy is expected not to be optimistic next year and risks will increase. 

S&P: The slowdown in global investment is not entirely attributed to trade, but to technology. 

Shaun ROACHE, managing director of S&P Global Ratings and chief economist of the Asia Pacific region, believes that the slowdown in global investment is not necessarily related to trade wars, but more to technology. 

Shaun ROACHE said that the uncertainty of 23 countries across the world has increased, the highest since the 1990s. Especially, Asia and China are undergoing the obvious problems brought about by the trade war. Uncertainty affects investment growth. The Asia Pacific region had an investment growth rate of 7% a year ago, but now it is only 2%. The investment growth of the US plummeted to 1% from 5% after tax cut. 

He believes that the slowdown in the global investment is undoubtedly attributed to the Sino-US relations, but also to other factors. It's not necessarily entirely related to trade, but more to technology, including intellectual property rights, admission of foreign capital and fairness. "If you go to Washington DC and talk to the US Congress, they will all talk about a core. What they are most concerned about is that all China's trading partners will mention their worry about technology when they come to the US. All these reasons were mentioned by the US trade representative in the tariff negotiations and most of them center on technology." 

Gao Peiyong: The counter-cyclic adjustment policy alone cannot address economic problems. 

Gao Peiyong, vice president and member of the Chinese Academy of Social Sciences, pointed out that the most important factor restricting China's economic transition to high-quality development is not the economic downturn pressure, but the "habitual thinking" to promote economic development. 

Gao said that the root of the habitual thinking lies in that we are accustomed to the current "context" to consider issues from the demand side. Gao pointed to an example that when it comes to economic development in the past, either party and political officials or entrepreneurs would immediately think of "investment promotion". It's hard for all of us to shed off such a habitual thinking. 

Gao stressed that if we don't abandon this sort of habitual thinking, once "high-quality development" encounters risks, we would unwrittingly go back to the original "high-speed growth" track. "We should keep highly vigilant about this, so we need to change this kind of habitual thinking". 

Gao also admitted that the transformation of habitual thinking is a quite painful process, "but in any case, we must realize that we have to move towards high-quality development, and there is no choice but to push ahead it." 

Bai Chong'En: The business environment needs to be improved and business vitality activated to achieve economic transformation. 

Bai Chong'en, dean of the Tsinghua University School of Economics and Management, said that "to transform from high-speed growth to high-quality development, enterprises should play an important role, while for this purpose, the business environment needs to be improved to motivate enterprises." 

He said that the data of the Doing Business released by the World Bank show that China's business environment has risen from 96th in 2014 to 31st in 2020. In this process, local governments have made arduous efforts, but "we should not be complacent because of this ranking." 

Specifically, among the 10 items in the report, China's ranking in building permit rose from 185th in 2014 to 33rd in 2020. However, China also seed drop in some sub-indicators. For instance, China's credit ranking dropped from 73rd in 2014 to 80th in 2020. 

"But the decline in the ranking does not mean that China's credit environment is getting worse. As the ranking is relative and the credit environment of other countries gets improved, China slows down its improvement speed and thus has a ranking drop", he said. 

As to the tax burden, he believes that some regions of China still have a higher nominal tax rate. In 2019, the government has done a lot in this regard, but the implementation result remains to be seen. 

Moreover, he believes that the market access barriers have not been accurately reflected and the market regulation has not been put in place. As a consequence, there are a large number of counterfeit products and bad money drives out good. Even worse, there is a dislocation and one thing is put under the regulation of several departments, making enterprises at loss. 

Source | finance.sina.com.cn