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Yao Yang, Boya Distinguished Professor of Peking University and Director of the China Center for Economic Research, provided by the interviewee

How can we substantially boost confidence when market expectations are weak?

Recently, Yao Yang, a distinguished professor at Peking University and director of the China Center for Economic Research, said in an exclusive interview with The Paper in Shanghai that the downturn in the real estate industry and the contraction of local fiscal revenue are two major factors affecting social confidence. Previously, my country had reversed the trend of insufficient confidence through the "external force" of joining the WTO. Currently, such external forces are lacking, but market confidence can be boosted through internal adjustments such as establishing a housing reserve bank and establishing an overall debt reduction mechanism.

Regarding the decline in the number of new unicorn companies, Yao Yang said that in order to increase the number of new unicorn companies, local governments’ financial activities should be strictly restricted. At the same time, the threshold for companies to go public should be relaxed, and the rule of law should be used instead of administrative means to regulate the stock market.

"Funds need to be exported, but currently neither venture capital nor the stock market can absorb funds. As a result, funds have flowed into traditional industries, causing internal circulation in the industry," said Yao Yang.

Regarding the salary cut phenomenon in the financial industry that has attracted current market attention, Yao Yang said that appropriate salary cuts in the financial industry are acceptable, and that appropriate salary cuts will help attract talent to the high-tech industry.

Reversing the contraction trend of the real estate industry and local finances

The Paper: In recent years, market expectations have been weak, and the government has repeatedly spoken out to boost the confidence of entrepreneurs. How do you think we can substantially boost the confidence of entrepreneurs at present?

Yao Yang: In the past two years, government departments have repeatedly introduced policies to promote the development of private enterprises. The main reason is that the economy is relatively sluggish. Although according to statistics, our GDP growth rate remains at around 5%, there are two issues that affect confidence.

First, there is uneven growth. In recent years, sectors that are more closely related to new productivity, as well as import and export data, have grown relatively well, but traditional industries such as real estate are in poor condition, and industrial development differentiation is intensifying. Entrepreneurs in poor industries will pass on their pessimism to society.

Secondly, the price index is falling. Although it is not appropriate to use deflation to describe the current state of China's economy, my country's Producer Price Index (PPI) has been negative for more than 20 consecutive months, and the Consumer Price Index (CPI) has also fluctuated around 0. This shows that most companies are facing a situation of falling prices. For example, the price of cars is now falling sharply. When the PPI is negative, the whole society will feel worse, which is also a factor that hits confidence.

Therefore, if we want to boost confidence, we should take appropriate measures and start from the above two aspects. In particular, we should find ways to increase PPI. A long-term price decline environment is impossible to give people confidence. Between 1997 and 2001, my country also faced the problem of insufficient confidence. During this period, we made many adjustments. For example, after joining the WTO, China's economy took off. This was the effect of external forces. At present, my country lacks this kind of "external force" and can only start adjustments from the inside. The society needs a relatively large action, such as fiscal policy, monetary policy, and some structural adjustments.

At present, my country's real estate industry and local finances are both in a state of contraction. Without reversing the downward trend of these two sectors, it will be difficult to increase social demand.

The Paper: How to reverse?

Yao Yang: I think that issuing 2 trillion yuan in national debt for local governments to use may be a better approach. At the same time, I strongly suggest establishing a housing reserve bank. The direction of real estate transformation is that the government purchases it as affordable housing. This is a long-term mechanism that requires the establishment of a special guarantee system.

For example, where does the money for purchasing affordable housing come from? We cannot ask local governments not to borrow money while asking them to buy back houses. This is impossible. Therefore, a financial mechanism needs to be established, such as a housing reserve bank, and a perpetual bond issued from this bank to lend to local governments at a lower interest rate and a longer term. After the local government buys the houses, it can reserve them for a period of time and then sell them as affordable housing.

Affordable housing is a non-profitable public welfare goal that needs to be implemented through public means. It is incorrect to implement it through refinancing. After the government acquires affordable housing, there is uncertainty as to whether it can be sold. In order to prevent accountability, local governments will not make such a move by borrowing from commercial banks to acquire it.

To implement policies, we must first think about the financial mechanism. If the central government does not build a financial mechanism that can be implemented, local governments will not know how to implement policies.

The same is true for local government debt resolution. Discipline at local governments needs to be strengthened, but it is unrealistic to collect existing debts.

The Paper: Can the special refinancing bonds issued since October last year be regarded as a better means of debt reduction?

Yao Yang: Local debt reduction needs an overall plan, not piecemeal. The central government needs to build a real mechanism. At the same time, I do not agree with the mechanism of turning short-term debt into long-term debt, which is equivalent to exempting financial institutions from the responsibility of local debt and making local governments bear all debts. A real package debt reduction plan should be jointly participated by the central government, local governments, and financial institutions.

I think that local debt reduction requires central support first. During the epidemic, local government fiscal deficits have expanded. The central government needs to support local governments to operate first, and then think about how to reduce debts and how to prevent local governments from borrowing indiscriminately in the future.

The Paper: Can the recent rumors of consumption tax reform that have attracted market attention be seen as a means of supporting local governments?

Yao Yang：This is just a small reform, which may be beneficial to places like Yunnan and Hunan where tobacco and alcohol consumption is high, but generally speaking, it will have little impact on other places. If you want to save local governments, you can let them issue long-term government bonds and solve the existing debts first. This is also one of the ways to boost the confidence of private enterprises.

At present, local governments’ creditors are basically local private enterprises, and local governments must pay back this part of the money first. Last September, the State Council mentioned that it was necessary to solve the problem of local governments and state-owned enterprises owing money to private enterprises and small and medium-sized enterprises, but the government itself was in a difficult situation, so how could it be able to pay back the money? Therefore, it is necessary to build a mechanism to allow local governments to issue bonds. When private enterprises receive the money owed, their confidence will be boosted, and local governments will also be able to get out of the predicament.

After the local private enterprise debts are resolved, the central government, local governments and financial institutions can sit down and discuss the issue of local debt. After offsetting triangular debts and other debts, financial institutions can package and divest the real net debts, thus solving the debt problem.

How to increase the number of new unicorn companies

The Paper: In recent times, the sharp decline in the number of new unicorn companies in China has attracted market attention. According to the "2024Q1 Global Unicorn Enterprise Observation Report", in the first quarter of 2024, there were 8 new unicorns in China, a year-on-year decrease of 33.3% and a month-on-month increase of 14.3%. What caused the decline in the number of unicorn companies in China? What suggestions do you have for cultivating unicorns?

Yao Yang：There are two main reasons for the decline in the number of unicorn companies: the decline of private capital in the venture capital industry and the inability of the stock market to create wealth.

At present, 80% of venture capital funds come from local government guidance funds, because venture capital companies’ financing channels are basically blocked. If they do not cooperate with local government guidance funds, venture capital funds will have no money at all.

For example, a large part of venture capital funds used to come from bank financial management, but now bank financial management requires equity penetration, which means that this financing channel is basically blocked. In addition, strict supervision of large state-owned enterprises has also made it impossible for state-owned enterprises to finance venture capital funds, and ordinary private entrepreneurs do not have the courage to invest in venture capital.

Based on the above background, the guidance fund of the local government has become the only source of funds for venture capital funds, but the first priority of the local government is to protect the principal. If there is a loss, the local government must bear the responsibility. Therefore, the local government may sign a bet agreement with the entrepreneur, requiring the entrepreneur to repay the money and guarantee the profit. It is normal for a business to fail. The bet agreement with the local government has caused many entrepreneurs to become dishonest persons subject to enforcement. This strict mechanism restricts the inflow of innovative capital.

The second is the problem of wealth creation in the stock market. Currently, the reform of the IPO registration system has stalled, making it difficult for companies to go public and investors unable to exit, which means that it is difficult for the stock market to create wealth. Even if companies can go public, the waiting time is too long, which affects investors' investment interest.

The Paper: Can relaxing the above restrictions increase the number of unicorn companies?

Yao Yang: This is not just a question of whether to open it up, but rather that the equity finance of local governments should be restricted. Now, many local governments are trying to replace land finance with equity finance, but I think this is impossible. In the era of land finance, local governments earned 400 billion to 500 billion yuan a year from selling land, but it is difficult for equity finance to achieve this goal. Regarding the equity finance of local governments, I think we should cut it off across the board and stop the guidance funds of local governments.

Venture capital should be left to the private sector. First, finance should be revitalized, such as by allowing banks’ financial products to flow out to solve the problem of private funding sources. The financial industry needs to be rectified, but we should not throw the baby out with the bathwater. Financial innovation is of great help to venture capital.

In 2018, we had many venture capital funds, easy exits, and more unicorns than the United States. Some financial innovations at that time were worthy of recognition. We don't want to go back to that time, but while strengthening supervision, we should allow large-scale funds to flow into venture capital and the stock market.

Second, financial management funds should be encouraged to flow into venture capital. The current financial management rules and regulations were promulgated in 2018, and I think they should be changed.

Third, the direction of stock market regulation is open to discussion. The so-called "strict regulation" of the stock market now refers to pre-emptive regulation, which puts every company that wants to go public under the spotlight and examines it carefully. But if the water is too clear, there will be no fish. If the water is too clear, there will be no fish either.

The direction of stock market reform should be to allow easy entry and strict exit. Mistakes should be severely punished. This is post-event supervision that reflects the spirit of the rule of law. We should use the rule of law instead of administrative means. For fraudulent companies, those that should be delisted should be delisted, and those that should be sentenced should be sentenced. Everyone can go public, but severely punishing fraudulent companies is obviously a better way. This is a problem of thinking. We should use the rule of law instead of administrative means to solve the problem.

This is also the reason why some industries are “involuted”. Currently, venture capital and the stock market are unable to absorb funds, but funds always need to be exported, so they all flow into traditional industries, resulting in “price wars” and other phenomena.

The Paper: Currently, both the government and the market are talking about new quality productivity. You once mentioned that new quality productivity is not only about "high-end" things, and innovation anxiety will lead to waste. What suggestions do you have for innovative enterprises and traditional industries in developing new quality productivity?

Yao Yang: Regarding new quality productivity, I think companies should stop doing speculative innovation, which is not real innovation, but just a way for companies to make profits. Companies should find ways to improve total factor productivity. For example, in the textile and apparel industry, SHEIN's flexible innovation enables it to quickly produce a large number of clothing styles. This is the new quality productivity of traditional industries, and we should encourage such innovation.

Appropriate salary cuts in the financial industry will help guide talent to other industries

The Paper: Recently, salary cuts in the financial industry have attracted attention. In your opinion, can salary cuts in the financial industry enhance the attraction of high-tech industries to talents? Can it promote the development of my country's high-tech industries?

Yao Yang：The financial sector has indeed attracted too many talents, so a moderate salary cut is acceptable, but the current salary cut is a bit too much. The financial industry has certain special characteristics, and has high requirements for the education level and human capital of practitioners, so it is reasonable to pay appropriately high salaries. It is necessary to adjust the salaries of the financial industry, especially those with particularly high salaries, but after the adjustment is in place, this round of salary cuts should basically end.

Appropriate salary cuts in the financial industry are indeed conducive to attracting talent to other industries. For example, if the salaries of people working in the financial industry and those working in the high-tech industry are comparable, more college students may choose artificial intelligence as their major.

However, in four years, there may be a surplus of talent in the field of artificial intelligence, and people may go to study finance again. Ultimately, except for some positions that require very high skills, the salary difference between various industries will not be too big, but now it is in an adjustment period, and people are confused.

The Paper: Giving benefits to the real economy and promoting inclusive finance are becoming one of the tasks of financial institutions. How do you view this phenomenon? Can financial institutions giving benefits to the real economy make the market healthier and promote industrial development?

Yao Yang：Serving small and medium-sized enterprises and other real economy entities requires relying on financial technology. Small and medium-sized enterprises are at higher risk. If banks promote inclusive finance on a large scale, they are likely to suffer losses. Therefore, the development of financial technology is crucial. For example, Internet finance can rely on big data to obtain accurate portraits of customers, thereby controlling risks, which banks generally cannot do. At the same time, the loan interest rates of Internet finance are also higher than those of banks. Therefore, from a practical point of view, it is impossible for banks to promote inclusive finance on a large scale, and they may only do a little to complete the task.

On the other hand, companies are often reluctant to take out loans when the economy is in trouble because they have no orders and no motivation to purchase goods. Therefore, it is logically unreasonable for financial institutions to give up profits to the real economy.