For any economy, there exist various types of risks, much like the human body, which faces a constant barrage of viruses and bacteria throughout its life, while also experiencing the natural aging process.
Generally speaking, during periods of robust economic growth, the ability to withstand risks is stronger, akin to a person in their prime; when economic growth slows down, the economy's inherent "resistance" weakens, making it particularly necessary to guard against risks in a reasonable and prudent manner.
Measuring risks and analyzing their causes is crucial.
Every month, official economic data is released, and many experts propose policy recommendations based on these figures.
For instance, when GDP growth continues to decline, many suggest expanding domestic demand to achieve stable growth.
This seems logical, but why is stable growth necessary?
Most would answer that stable growth ensures stable employment, and development is the hard truth.
A rise in unemployment is indeed an economic risk.
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To reduce unemployment, job opportunities must be increased, and expanding investment is a way to create jobs.
In fact, China has traditionally used an investment-driven model to develop its economy and solve employment issues.
However, excessive investment has become the main cause of rising local government debt.
According to statistics, since 2019, the combined balance of general and special bonds issued by local governments has been growing at a rate about three times that of China's GDP growth.
For example, in 2023, the balance was 40.82 trillion yuan, a year-on-year increase of 16.96%.
This means that the investment-driven model adopted to avoid the risk of economic slowdown has led to local debt risks.
At the same time, the increasing debt service costs for local governments have weakened their fiscal net expenditure capacity for the public sector, which has not alleviated domestic employment pressure due to the investment-driven growth model.
Therefore, it is necessary to measure the various risks faced by China's economy, using "through-the-surface supervision" methods to distinguish between superficial and fundamental risks, and to understand the interconnections between different types of risks.
For example, in 2023, the U.S. GDP growth rate was 2.5%, while China's was 5.2%, but the U.S. unemployment rate has reached new lows.
Why does the U.S. have a GDP growth rate less than half of China's, yet the unemployment pressure is much smaller?
Against the backdrop of labor shortages, a large influx of illegal immigrants has entered the U.S. From this, one might speculate whether China's employment pressure is related to the economic structure or the economic growth model?
For instance, looking at the economic structure, the service industry in the U.S. accounts for 80% of GDP, and 84% of the employed population works in the service sector.
In contrast, less than 50% of China's employed population works in the service industry, which contributes about 54% to GDP.
Looking at the growth model, the U.S. is a typical consumption-driven economy, with a contribution rate of around 80%.
Not only the U.S., but most countries globally are consumption-driven economies.
Among the three engines of growth, China's final consumption contribution to GDP has long hovered between 52%-56%, significantly lower than the global average.
In 2023, the U.S. final consumption contribution to GDP was 81%.
Looking at the contribution of investment (capital formation) to GDP, China has long maintained a rate above 40%.
Even after 2021, when real estate investment saw a continuous annual decline of about 10%, the contribution rate of investment remained above 42%, double the global average.
This means that China's economic development model is significantly different from both developed and developing countries.
This difference can explain the rapid rise of China during periods of high investment returns, but when investment returns significantly decrease, could it become a reason for increased local debt risks and employment pressure?
Therefore, one should not destroy one risk only to create another.
This requires assessing risks or potential risks, identifying their origins, and taking targeted measures.
Instead of repeatedly using counter-cyclical policies of stable growth and stable investment to respond simply.
For example, if the service industry's contribution to GDP increases by 1 percentage point, it can create employment for 2 million people, while the manufacturing industry can only create employment for 400,000 people with the same increase.
Therefore, the service industry should be vigorously developed, lifting various controls on it and encouraging and expanding investment in the service sector.
If we follow the U.S. statistical approach (including the construction industry), in 2022, the proportion of China's employed population in the service industry reached 54%, narrowing the gap with the service industry's GDP share, indicating that the contribution of the service industry to employment is growing larger.
The number of people employed in the secondary industry is continuously declining, from 230 million in 2013 to 210 million in 2022, a reduction of more than 21 million people.
This means that in recent years, China's manufacturing investment growth has been around 10%, contributing significantly to GDP, but its contribution to employment may be negative.
As mechanization and automation levels improve and artificial intelligence technology is widely applied, the number of laborers needed in the secondary industry will decrease.
Therefore, it is not the case that as long as GDP growth increases, the unemployment issue will be solved, nor should investment be considered a panacea to be used to deal with risks.
This requires improving the precision of policies.
For example, it is widely believed that the difficulty faced by China's economy is insufficient effective demand, but effective demand includes both effective investment demand and effective consumption demand.
From January to August this year, private investment was zero, and the total retail sales of consumer goods grew by 3.4%.
Should we stimulate investment demand or consumption demand more?
Some argue that zero private investment has dragged down the entire fixed asset investment, so we should expand the fiscal deficit and increase the scale of government investment in infrastructure.
The problem is that investment is not final demand; investment increases supply, becoming railways, highways, ports, industrial parks, machine tools, and production lines, further exacerbating the problem of overcapacity in transportation and production capacity.
Therefore, the correct approach to dealing with insufficient effective demand should be to increase consumer spending by raising residents' income, not by expanding investment.
When dealing with superficial risks, one cannot avoid fundamental risks.
A common saying is "treat the symptom, not the cause," which means only treating the surface pain without thoroughly investigating the root cause.
For example, the long-term low levels of PPI and CPI are due to both oversupply and insufficient demand, but the main cause must be identified.
At the end of last year, the Central Economic Work Conference placed insufficient effective demand at the top of the six major difficulties, does this mean that insufficient demand has become the main problem facing the current economy?
Logically, demand is related to income distribution.
In the three major sectors of the national economy, the higher the proportion of income distribution in the household sector, the stronger the consumption demand will be.
According to the sample survey data published by the National Bureau of Statistics, in 2023, the per capita disposable income of residents nationwide reached 39,218 yuan.
Multiplying this by the population number in 2023 and dividing by the GDP total in 2023 gives 43.9%.
Since this data is the result of a sample survey, there is a possibility that the actual income of high-income groups is underestimated (see related articles by the author), but it does not change the conclusion that the proportion of residents' disposable income in GDP is low.
According to data from the National Bureau of Statistics, since last year, the growth rate of residents' disposable income has been faster than the nominal GDP growth rate, indicating that the proportion of residents' income in national income distribution has increased, but the possibility of a significant increase in the proportion in the short term is not great.
The second challenge faced by expanding consumption or increasing the contribution of consumption to economic growth is the low proportion of income for the middle and low-income strata.
According to the sample survey data published by the National Bureau of Statistics, in 2023, the population of China's middle-income households, lower-middle-income households, and low-income households accounted for 60% of the total population, but the proportion of disposable income was only 30%, having risen by only 1% compared to 10 years ago.
Only by expanding the middle-income group can consumption be expanded or a path to common prosperity be achieved.
However, looking at the past 10 years, the population of high-income, middle-income, and lower-middle-income groups, which account for 60% of the total population, has an income share of 50%.
In 2023, it only increased by 1% compared to 2013, while the income share of the low-income group did not rise.
This group accounts for 20% of the total population, and its income share has always been maintained at 4%.
Does this indicate that the issue of social stratification needs attention?
Therefore, it is not difficult to find from long-term practical cases that superficial risks are easy to resolve, but it is necessary to assess the costs paid to resolve superficial risks, and whether there will be an increase in fundamental risks in order to resolve superficial risks?
For example, the trend of China's GDP growth is almost the most stable globally, steadily rising, with no negative growth in the past 40 years, and the withdrawal of growth rate is minimal.
This is mainly due to investment as a counter-cyclical regulatory tool.
In the past three years, against the backdrop of a significant decline in real estate investment growth, manufacturing investment and infrastructure investment have grown against the trend, making the contribution of investment to GDP not decrease, which is a very rare phenomenon.
However, the cost is that the growth rate of local government debt has accelerated in recent years, and the risk of local debt has become one of the three major risks facing China today.
According to data from the National Institute of Finance and Development, in 2023, China's macro leverage ratio reached 287.8%, comparable to the debt levels of Western countries, but China's per capita GDP level is only a quarter of the average level of high-income economies.
Therefore, it is necessary to assess the costs of maintaining stable GDP growth.
How to deal with risks in the financial contraction cycle?
China's financial volume is very large, and what has been criticized in the past is "flood irrigation," that is, for a long time, the growth rate of money supply (M2) has far exceeded the GDP growth rate.
Now, the growth rate of M2 has been reduced to about 6%, and M1 has fallen continuously and significantly to about -7%.
Since the real estate industry has entered a long-term downward cycle, it is natural for financial contraction to occur.Here is the translation of the provided text into English: Looking at the mid-year reports of listed companies in 2024, net operating cash flow has decreased by 79% compared to the same period last year.
Excluding banks, the growth rate of net operating cash flow is -17%.
This first reflects a significant contraction in banking operations, with a 2% decline in total operating income of listed banks in the first half of the year.
Along with cyclical factors such as a decrease in net interest margins, a slowdown in loan growth, and a decline in non-interest income, cash flow has correspondingly decreased.
However, the practice of inflating profits by reducing provisions seems to be a way of postponing risks, which is not wise.
Looking ahead, an increase in the non-performing loan ratio of banks may be an inevitable trend.
For non-financial listed companies, the decline in net operating cash flow actually reflects the risks in the cash flow statement.
On one hand, shrinking demand and declining sales lead to a reduction in the inflow of cash into enterprises.
On the other hand, the inability to promptly recover accounts receivable and the accumulation of inventory make it difficult for the business chain to cash out.
The main reason for cash flow risk is still the long-term downward cycle of the real estate market, so the construction industry is the first to be affected, and even many state-owned enterprises have experienced a significant cash flow crisis.
Secondly, the long-standing issues of overcapacity and excess transportation capacity become more prominent when economic growth slows down and consumer confidence is insufficient.
Currently, both PPI and CPI have been in a contraction range for a long time.
If the main feature after the collapse of Japan's real estate bubble in the early 1990s was a balance sheet crisis, then what China may have to deal with in the future is likely to be a cash flow statement crisis.
The reason is that the collapse of Japan's stock and real estate bubbles in 1990-91 was a case of overreach, which means it started to decline after reaching the peak of prosperity; China, on the other hand, may be due to "defensive failure," as China's GDP growth has been declining since 2011, and during this period, counter-cyclical policies (including increasing the fiscal deficit ratio, lowering reserve requirements, and cutting interest rates, etc.)
have been continuously implemented to achieve the goal of stable growth.
Due to historical reasons, China's economic volume and level of technological development have long been lagging behind Western countries, so after the reform and opening up, China has long adopted an investment-driven "catch-up" model.
The advantage of this model is the rapid development of infrastructure construction and industry, and high savings, low labor costs have a great advantage in the early and middle stages of industrialization.
However, in the later stage, due to the slowdown in labor productivity growth and the drag of debt growth, the input-output ratio has obviously decreased.
Since 2011, China has had the problem of overcapacity.
Due to the long-term nature of supply and demand imbalance, that is, insufficient demand and excessive supply, this has led to a lack of willingness on both the investment and consumption ends, which has been fully stated in the previous text.
This can explain why the Central Economic Work Conference from 2021 to 2023 has mentioned "weakened expectations" and "biased weak expectations" for three consecutive years.
To change expectations, efforts should be focused on the (final) demand side, rather than repeatedly using the name of expanding domestic demand to drive investment, because investment is not the final demand, and investment will inevitably form supply.
The Politburo meeting on July 30 has clearly made increasing residents' income and expanding consumption as the focus of the next stage, which requires doing so according to the "macro policy trend consistency" proposed by the Third Plenary Session.
It is hoped that various ministries and commissions of the country will form a consensus and not deal with and dispose of risks related to their own departments from a parochial standpoint, while neglecting the response to long-term risks or deep-level risks.
What needs more attention is that the increase in some public finances and some corporate profits in the first three quarters of this year has been achieved through "subtraction."
For example, from January to July, the country's non-tax revenue increased by 12%, and part of it may have been achieved through fines and confiscations; the increase in corporate profits may be partly achieved through layoffs or pay cuts, coupled with the reduction of fiscal expenditure such as "the government living a tight life," which has led to a decline in final demand.
Therefore, using excessive issuance of government bonds to subsidize residents' income, improve the level of social security, and stimulate consumption should be the most effective means to deal with the current biased weak expectations and economic contraction.
Although the underlying risk of structural imbalance needs to be implemented through reform, the premise is to first curb the multiplier effect of the current economic contraction to alleviate deflationary pressure.
Then, through unremitting reforms in the future, the optimization of the national income distribution structure should be promoted.