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The Politburo meeting to deploy economic work in July was held in advance. This shows a sense of urgency about the renewed economic downturn since the second quarter of this year. But an already heavily overcrowded third- and fourth-tier real estate market means China is unlikely to be able to stabilize its economy in the short term by stimulating property. In fact, first-tier cities are still very cautious about easing controls, and while the meeting did not repeat the phrase "housing without speculation", we may not be willing to accept a significant rise in prices as a price to drive real estate investment either.
Since 2009, China's economic cycles have been largely dominated by fluctuations in the short real estate cycle. Along with China's long real estate cycle inflection point, what factors will drive the next round of economic recovery? The author believes that only by promoting the clearing out of "people, property and goods" in the upstream and downstream sectors of real estate, including local governments and financing platforms, can China's economy return to the level of full employment.
The aftermath of a long real estate cycle inflection point
The International Monetary Fund has reviewed 122 recessions in advanced economies from the post-World War II period until the global financial crisis of 2008. The study showed that the recessions associated with the financial crisis of the housing bubble lasted longer and the economies recovered more slowly, as was the case in Japan after 1991 and in the United States after 2008.
I think, whether it was the United States of Japan, or today's China, are in the stage of economic transition, the potential economic growth rate and the real economy during the decline in returns of the real estate boom was very unusual. And in the real estate market after a deep adjustment, for the real estate super-boom masked by the problems exposed, but also left a series of sequelae. The investment dilemma, deflationary dilemma and liquidation dilemma created by these problems are intertwined and reinforcing each other, making economic recovery challenging.
The primary challenge facing the economy after the inflection point in the long real estate cycle is the investment dilemma. In the context of a marked correction in house prices, there is pressure to deleverage in both the residential and corporate sectors. Debt repayment means increased savings for both the residential and corporate sectors, which, at the macro level, means that the government sector has to spend money - usually on investment - in order to maintain the balance of aggregate demand. However, at the time of the real estate bubble, the real returns of the real economy had already declined; the excessive boom in real estate triggered further overinvestment, including in real estate and industrial capacity, resulting in a surplus of stock capital in the real sector. If investment is increased again in this situation, it will only continue to depress the return on investment in the real economy, crowding out private investment, and the fiscal stimulus will thus achieve half the result with twice the effort.
Another challenge to economic recovery is the deflationary dilemma. Against the backdrop of deleveraging and declining returns in the real economy, aggregate demand is insufficient and lower real interest rates are needed to stimulate demand. But the illusory boom caused by the bubble has resulted in overvaluation of factor prices of all kinds, from wages to interest rates and rents, and factor repricing after the end of the bubble will bring about deflationary pressures. Once deflation sets in real interest rates will rise passively, leading to further economic weakness and increased deflationary pressures, which in turn will lead to further depression. As a result, economies that have seen the end of a real estate bubble can easily fall into a deflationary trap from which it is difficult to extricate themselves.
Finally, getting out of the dilemma is also a major challenge for economic recovery. Overvalued real estate prices during the bubble boom led to significant resource mismatches. When these resource mismatches are corrected, the process of loss sharing can easily trigger risk exposure and financial crises; but if mishandled and over-bailed out, zombie firms may be created. Both would have a negative impact on economic growth.
The Road to Recovery: The Japanese and American Experiences
From the history of the United States and Japan, excluding purely relying on fiscal stimulus to pull aggregate demand, the economy's repair is divided into two stages: after financial stabilization and a greater degree of market clearing, the output gap and the employment situation is expected to improve; if the deleveraging comes to an end or even through the reforms and innovations to promote the real return of the real economy to further enhance the economy's endogenous momentum is expected to be further strengthened.
Japan experienced five rounds of economic recovery after the bursting of the bubble in 1991 and before the outbreak in 2020; the first two recoveries, before deleveraging and clearing failed to be completed, had weak endogenous momentum, and the first recovery in 1994-1997 relied mainly on large-scale fiscal stimulus. However, the problem of bad bank loans and zombie companies in Japan intensified as a result of the continued decline in housing prices and problems in the financial system. By 1997, the bankruptcy of Sanyo Securities, coupled with the Asian financial crisis, Japan's economy fell back into recession. Since then, the Japanese government to the financial system of large-scale capital injection, the central bank also relaxed monetary stimulus economy, finally in 1999 to promote economic stabilization - the so-called second recovery. But the Japanese economists themselves also admitted that "the economy is still stagnant", "the effect of monetary easing stimulus is limited", "zombie enterprises is still a serious problem". After the bursting of the NASDAQ bubble in the United States, the Japanese economy also followed into recession.
Japan's economy gradually took off after progress was made in clearing and deleveraging.
(a) The third economic recovery in 2003-2007 saw Japan's economy grow at an average rate of more than 1.7%, the highest average growth rate of the Japanese economy in the past three decades. The most important reason for the better economic growth is that on the one hand, the Japanese government gradually solved the problem of zombie enterprises before and after 2001, the labor market clearing led to the unemployment rate finally peaked, the real estate market clearing also led to the housing prices finally fell in place; on the other hand, residents, enterprises deleveraging also gradually come to an end. 2008 after the outbreak of the global financial crisis, Japan's economy receded and then recovered. Although this recovery was also weak, it was mainly related to Japan's passive deflationary predicament. Due to the Bank of Japan in the financial crisis after the easing is not as strong as Europe and the United States central bank, the yen exchange rate appreciated sharply, superimposed on the long-term deflationary expectations, Japan's exports suffered a setback, the real interest rate passive rise, economic growth and employment improvement is relatively limited. 2013 "Abe's Economics" ultimately through the famous "three arrows" to help the Japanese economy first recession and then recovery. In 2013, Abe's economics finally helped Japan end the "lost two decades" and realize the fifth economic recovery through the famous "three arrows". Although Japan's economic growth rate is still low after 2013, I think it is mainly related to the low potential growth rate caused by its own shrinking labor supply and other factors, and its inflation and employment are normalized.
The process of economic recovery in the United States after 2008 has been relatively concise. Due to the United States of America's faster clearance, the unemployment rate peaked in 2009, and the economy began to recover in the second half of 2009. Of course, the strength of the recovery has been less than expected, the Federal Reserve conducted three consecutive rounds of "quantitative easing" to promote economic recovery. The then Federal Reserve Chairman Ben Bernanke's explanation is that the economy has "headwinds" - residents and businesses are "repaying debt" rather than borrowing and spending. To 2014, along with enterprises to start leveraging again and residents to slow down the intensity of leverage, the Federal Reserve finally have the bottom of interest rate hikes and tapering. The experience of the United States further shows that clearing determines the direction of economic recovery, while the process of deleveraging determines the strength of economic recovery.
If a comparison is made between the experience of the United States and Japan in coming out of the inflection point of the long property cycle, the United States is certainly in a better position than Japan. It is true that the United States is in a better position than Japan in terms of long-term fundamentals such as the age structure of its population and its capacity for innovation; however, the policy choices and institutional arrangements in the United States are also more desirable.
First, the fiscal stimulus in the United States was more consumption-oriented, thus easing the pressure from investment woes; for example, government consumption as a share of GDP rose more than government investment in U.S. fiscal spending in 2009. Japan's fiscal stimulus in 1993-1996, on the other hand, focused mainly on infrastructure investment, and Japanese academics themselves later complained about the underutilization of infrastructure. This situation was only gradually corrected after 2000.
Second, U.S. monetary policy was quicker to bring the policy rate down to zero, while the early adoption of non-traditional policy tools was more conducive to dealing with the deflationary dilemma - of course, fundamentally the U.S. cleared out faster, with employment and deflationary pressures arriving earlier, and naturally needing to loosen money earlier.
In the end, the U.S. clean-out was much more thorough than Japan's.
Increase China's clearing efforts
After China's real estate market has been deeply adjusted, the economy is also facing the challenge of three major difficulties. If we want to learn some experience from the history of the United States and Japan, on the one hand, of course, fiscal policy and monetary policy should be more reference to the United States, especially fiscal policy should pay attention to the consumer side of the stimulus; but on the other hand, I thought it is more important to realize the labor market and asset market clearance, which is China to avoid repeating the same mistake as Japan's key.
From a micro perspective, liquidation is the process of liquidating and restructuring projects and organizations that are insolvent (i.e., inefficient in their use of resources), which usually means that the related labor, land, and other assets are flowing from inefficient sectors to efficient sectors. In the process of China's real estate market, where sales have clearly stepped down and real estate prices have been deeply adjusted, there is a need to release labor, land, and other resources from the real estate-related industry chain, which is already in excess; on the other hand, projects that have been implemented based on the expectation of inflated property and land prices - including many infrastructure projects of urban investment companies - may also have to be liquidated and restructured. projects - may also have liquidation requirements. Of course, residential and commercial properties themselves should also be allowed to trade at fair market prices.
At present, as the real estate upstream and downstream enterprises to private enterprises, the labor market clearance may be better than the 90's by the "zombie enterprise" drag Japan, conducive to economic recovery. However, the local government for private enterprises to sell houses at reduced prices there are still more restrictions, debt default private real estate developers related to asset clearance in the existence of "guarantee delivery of buildings" and other factors, whether in accordance with the principles of marketization and the rule of law to quickly clear is still unclear. Therefore, although the price adjustment of the secondary housing market in many cities in China has been relatively rapid, and the degree of clearance may be better than that of the Japanese real estate market, which took more than a decade to clear, it may not have fully absorbed the impact of the clearance of the primary housing market and the land market.
The bigger trouble is the problem of liquidation of local state-owned asset sectors related to local financing platforms. The debt of a large number of urban investment companies is essentially the debt of local governments, which should be systematically liquidated, and all kinds of assets, including local state-owned enterprises, should be disposed of in a market-oriented manner to repay the debt, even with reference to the case of debt restructuring of the United States municipal government of Detroit, and some of the local governments themselves should be downsized and slimmed down. After creditors have fully exercised their power of debt restructuring and bankruptcy liquidation, debt write-downs can be made if repayment is really impossible. In the process of market-based disposal of assets, the highest bidder who is also the most efficient buyer gets the right to use the resources, which of course brings about an increase in the productivity of society as a whole.
However, some cases of debt restructuring that have emerged in reality carry the risk of creating zombie enterprises. For example, under local intervention, the real sector with urban investment companies and local state-owned capital did not make any adjustments, but simply asked financial institutions to lengthen the term of the loan, reduce the interest rate on the loan, and realize the debt roll-over. The essence of this is to implement subsidies for inefficient sectors. The income before interest and taxes can not repay the interest, the need for subsidies to survive the enterprise is the basic definition of "zombie enterprises".
I think, in the real estate market has experienced a deep adjustment and the old reliance on real estate-driven economic growth model has been irretrievable after the policymakers need to break the resolve of a strong man, the courage to break the boat, break the barriers of thought, to overcome the obstruction of the interest groups, to promote China's economy to fully clear. Do not make Japan's lessons for China to become "the Qin people do not have time to mourn themselves, and the next person to mourn; the next person to mourn and not learn from it, but also to make the next person and the next person to mourn the next person also" situation.