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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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don't fight the market   

2008-08-05 21:49:25|  分类: 言论 |  标签: |举报 |字号 订阅

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Don't fight the market / 謝國忠


What's occurring to China's economy is not just another cyclicaldownturn. For the first time in three decades, the low-cost expansionstrategy is encountering fundamental barriers in availability ofnatural resources like energy and labor. The challenge is largely dueto China's success. China has become the largest trading economy andthird largest economy. Its sheer size has made its low-cost strategynot sustainable.



However, there is plenty of room togrow beyond. China's per capita income is only $3,000 and urbanizationis only half done. China needs to retool its supply side to become moreefficient in using resources and labor. On the demand side, it needs toshift export focus to developing economies that export resources and tobuilding mega-cities to anchor its internal demand. While governmentcan play a critical role in guiding the economic transition, most ofthe work must be done by the market. The only right way forward is todepend on market forces to reshape the economy.



This article is in the current issue of Caijing Magazine. The Chinese version is in the attachment. Andy





Don't fight the market



Theworld economy has entered a phase of rising inflation, falling assetprices, and slowing growth rates. This is the worst combination forpolicymakers. Many complain that the combination cannot last, and abetter situation would arise soon and miraculously. Unfortunately, itwill not. What are occurring now is the mirror image of what occurredbetween 2003-06-low inflation, rising asset prices, and strongeconomies. How bad today is reflects how much excess yesterday had.During the boom, policymakers around world ignored its unsustainablenature and bad consequences for the future. The seeds for today'sstagflationary scenario were laid years ago. Complaining or wishfulthinking would not change the reality. Policies that try to reverse thesituation may make it worse and lead to a bigger crisis down the road.The best approach forward is to accept the facts and deal withinflation on one hand and improve structural inefficiency on other. Theworst approach is to cover the symptoms through administrative measuresand waiting for a miracle.



The world economy hasexperienced its first synchronized global asset cycle in the pastdecade. At the heart was the global property bubble that was fueled byeasy monetary policy and financial innovations. Globalizationtemporarily kept down inflation despite low interest rates. The mostimportant factors were the excess labor supply in emerging economiesand declining energy demand in the former Soviet block economies. Themonetary growth went into asset markets. 'Financial innovations' likeexotic mortgage products, securitization, and global arbitrage made themoney easier to flow into property and across the world. Mosteconomists believe that property market depends on local conditions,and it is difficult to have nationwide property bubble in a bigcountry. Mr. Greenspan, the former Fed Chairman, testified before theUS Congress that, citing the local nature of property market, he didn'tthink that there was a national property bubble in the US. It would beeven more difficult to believe in a global property bubble.Unfortunately for the conventional wisdom, globalization has been sucha powerful force that has made the impossible possible.



Asthe factors that kept inflation down have been reversed, the currentstock of money becomes inflationary. This development coincides withthe bursting of the property-cum-credit bubble. Indeed, risinginflation may well be the trigger for the bubble bursting. As the moneybegan to turn into CPI inflation under the new conditions, there wasless money for asset inflation. Despite rising inflationary trendcentral banks still keep monetary policy loose because they areconcerned about the financial stability of the credit burst and thenegative growth impact of the bubble bursting. This growth priority,while easing the downturn now, leads to a bigger downturn later, as itboosts inflation in an already inflationary environment. One dayinflation would be high enough to cause central banks to panic. Whenthey do and raise interest rates quickly, it could cause a globalrecession.



China's cyclical problems are similar tothat of other economies. The loose monetary condition in the worldpushed a great amount of money into China via trade surplus or capitalinflow as reflected in China's skyrocketing foreign exchange reserves.Despite the best sterilizing efforts by China's central bank, theliquidity inspired a stock and property bubble. China's experiencemirrors what occurred to other developing countries before. When adeveloping country's foreign exchange reserves rise quickly and bigrelative to its economic size, it develops an asset bubble. I cannotthink of one exception to this observation.



The stockmarket bubble has largely deflated. The property bubble is justbeginning to deflate. Like other economies, China is facing decliningasset prices. Of course, declining asset prices would depress economicactivities, in particular, the property sector. China's propertyinvestment has exceeded 10% of GDP. The property industry bought amassive amount of land last year at peak price and is now facingdeclining, in some cities, collapsing sales. Banks are unwilling tolend for land acquisitions at last year's high prices. Squeezed betweenpayment pressures for land purchases and declining sales developers areborrowing in the gray market, often at extraordinarily high interestrates. Its impact on the credit cost in the gray market is negativelyimpacting small and medium-sized enterprises in general. Also, as landsales slow down, local governments have to adjust their infrastructureinvestments. Obviously, the liquidity problem in the property sectorwill impact economic growth in the second half.



China'sexport sector has suffered a cost shock due to currency appreciation,wage increase, and rising prices of raw materials. It has beensuffering a profit crisis for two years already. The negative demandshock from the global credit crisis is sending China's export sectorinto a deep winter. Shenzhen's Yantian Port reported traffic decline inthe first half of 2008 for the first time in its existence. This is animportant signal on the difficulties that China's export sector faces.China is an export-led economy. Domestic demand could be a cushionduring an export downturn but could not fuel growth on its own. Themain reason is that Chinese households and governments strongly preferwealth accumulation to current consumption. An export slowdown willspill over in corporate capex with a lag. Export production is aboveone fifth of the economy on value added basis. Plus its spillovereffect on capex, its impact on economic growth should be considerable.



Theproblems in the export and property sector represent considerableheadwinds in China's economy over the next two years. 2009 would bemore difficult than 2008. With the property downturn gets worse in theUS, UK, Spain, Ireland, etc., global trade may slow further.Inflationary pressure, on the other hand, could force China to raiseinterest rate, like other developing countries (e.g., India, Indonesia,Philippines, Vietnam, etc.) have. The property downturn may get worseon rising rates. Possibly one third of the economy may not have growthin 2009.



The cyclical downturn cannot be reversed bystimulus. The property sector may be short of Yuan 2 trillion in funds.The target for credit growth in 2008 is Yuan 3.6 trillion. Increasingcredit growth by so much could derail monetary policy and causeinflation to accelerate. Further, the property construction is probablyoverextended. The vacant properties are already vast. It seems that thecurrent level of supply and price are not a sustainable combination.Speculative demand has held up this equilibrium. As interest rates haveto rise in China like elsewhere, speculative demand is drying up. Theproperty market needs to shift to non-bubble equilibrium. In a bubblerising price boosts demand as speculators chase. In the non-bubbleequilibrium, rising price depresses demand as it cuts buyers'purchasing power. The transition from bubble to non-bubble equilibriumrequires massive price reduction to sustain the same sales volume. Thistransition cannot be reversed by policy support for the propertysector. Many argue that bank lending should be increased to keep theproperty sector afloat. But, it merely increases the industry's holdingpower and won't increase demand and merely postpone the day ofreckoning a bit while wasting a lot of money.



Inaddition to the financing problem in the property sector, a relatedproblem is debt pyramids being exposed in a receding tide. It is astandard practice in China's private sector for an entrepreneur to holdnumerous companies. The structure is to create liquidity among thecompanies through mutual guarantees and, sometimes, illegal cashtransfers. They are often debt pyramids, i.e., they are cash-negativeentities that sustain themselves through ever more debts. In ZhejiangProvince underground financing compounds problems. Without transparencylenders in this gray market have no ideas about their borrowers'financial health. This is a fertile ground for debt pyramids. The highinterest rate, usually above 20%, in the gray market suggests that mostdebts will go bad. In the current environment, it is difficult to seehow many businesses can bear such high costs of capital. It is morelikely that the borrowers have no intention to pay back and, hence,don't care about interest rates.



Some argue that theformal financial sector should support such business empires that arecollapsing in order to support economic growth and employment. This isa very wrong idea and could severely damage China's fundamentals. Suchdebt pyramids, while boosting economic growth and employment in theshort term, are value-destroying. The bigger they become, the moreharms they cause. Supporting them now only creates a bigger problem forthe country later. The government cannot use bank loans to keep afloatsuch businesses that are merely scams. The sooner they collapse, thebetter. Moreover, the government should keep an eye on businessmen,especially famous ones, who carry heavy debts. Like ten years ago, theymay vanish with cash and leave debts behind. Ultimately, Chinesetaxpayers could bear the burden through another NPL bailout. Thegovernment has a responsibility to protect taxpayers.



Theproblem in the export sector cannot be solved with policy supporteither. China's manufacturing model is through price competition togain share in the OEM market. The model thrived because the SoE reformand rural-urban migration led to surplus labor and low and stagnantwages and the collapsing energy demand in Russia and Eastern Europekept oil price low. In addition, industrial land was cheap and localgovernments ignored environmental costs. All of these factors havereversed. China's labor market is roughly in balance, i.e., demandgrowth leads to higher wages, which makes Chinese labor market normal.While the oil market is a bubble fueled by negative real interestrates, the era of cheap energy is gone. When the bubble bursts, energyprice will remain high and will rise with demand growth.



WhatChina's manufacturing sector is encountering is quite similar to whatJapan did in early 1970s during the first oil shock. The low-pricemodel ceased to work due to rising oil price and a US slump. Japanmoved aggressively (1) to move up the value chain by increasingtechnology content, quality, and branding power and (2) to improvegrowth efficiency to decrease energy demand. This process takes timeand needs market force to work efficiently. Artificially maintaininglow production costs through price control can only postpone theadjustment. It creates shortage and may lead to economic instability.China's manufacturing sector has to go through a significant overhaul.It is not a matter of choice.



The restructuring processis certainly painful. Many businesses will close. Many exportbusinesses are family-owned. Such families may not have the capacity toupgrade. Their survival depends on finding another low-cost location.If they can't, they have to close. Such closures, while decreasingemployment in the short term, create room for more efficient businessesto emerge. This is how market works.



The triangulardebts among manufacturing businesses may create a financial crisis.Many export companies have been continuing by not paying theirsuppliers that in term don't pay their suppliers or obtain bank loansagainst the receivables. As China's exports may total $1.5 trillion in2009 and the working capital that funds receivables may be comparableto this amount, the financial fallout from the sector's restructuringmay be significant. The government needs to monitor the situationcarefully.



In addition to the supply side, China'sexport sector needs to change its demand targets. The OEM model hasmainly targeted at western consumers, especially Americans. This modelwas sustained by consumer debts in the West. As the debt bubble bursts,this source of demand will remain weak for years. It is no use to hopefor a quick turnaround in the US economy. China must build analternative demand platform. The key is to trade with other developingcountries, especially ones with natural resources. For example, oilexporters are earning $5 billion per day. Their buying power will bestronger than the US, Japan, or Europe's for the foreseeable future. Totrade with them, China needs to change its product mix and controldistribution channels.



Huawei Technologies and ChinaCommunications Construction Corporation (1800:hk) are showing how itmight work. Developing countries don't have strong local capability fordigesting technologies. By providing turnkey projects they meet theirspecial requirements. This is why their international businesses arerising so strongly.



Property and stock market bubbleshave played important roles in domestic demand growth. But, bubblesdon't last. Economic development cannot rely on creating bubbles. Topromote domestic demand, China must make two policy changes. First, theshare of labor income in GDP has declined substantially and the trendmust be reversed to support consumption. The mirror image of the laborincome trend is the rising trend of the government revenue plus SoEprofits. The savings rate of the government revenue and SoE profits isabout twice as high as household savings rate. The government needs tocut taxes and lower monopoly prices that the SoEs charge to rebalancethe economy.



Second, China should determine anurbanization strategy to anchor domestic asset demand. Even thoughthere are ways to decrease savings rate, China's domestic demandultimately depends on asset accumulation. There is nothing wrong aboutit. China is still a poor country; wealth accumulation should bepriority number one. The effectiveness of wealth accumulation is fromefficiency. Only mega-cities hold the promise of such efficiency.Infrastructure and property in large cities hold higher value than insmall cities because their economies of scale decrease employment cost.



Thesubstance of a megacity strategy is to concentrate resources forurbanization among a small number of cities. The current urbanizationspreads out everywhere. Most small cities survive on investment demandfrom urbanization. When they are built, they don't have the efficiencyto provide employment. Hence, a significant share of the currentinvestment boom is waste. Urbanization is China's driver for domesticdemand. Until its strategy is fixed, domestic demand will not drive theeconomy.



China is entering both cyclical and structuraladjustment. Government policies cannot stop the process. In the longrun, the adjustment can lay the ground work for the next boom. Thegovernment should not fight it. It is ok to cushion the downturn.Fiscal support for infrastructure construction is a good policy to capthe downside. Slowing down currency appreciation can provide morebreathing room for the export sector to adjust. It would be very wrongto increase lending to ease the pain. The inflationary pressure isalready strong. Boosting lending only adds fuel to fire.



Thegood macro policy combination should be (1) tight monetary policy, (2)loosening fiscal policy, and (3) stable exchange rate.



Interms of structural adjustment, China should (1) upgrade manufacturingtechnology, quality and brands, (2) focus on demand in developingcountries, and (3) boost the share of household income in GDP, and (4)adopt the megacity strategy.




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