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"Serious international payments imbalances will impact the international political and economic order."

"This Third Plenary Session of the 18th CPC Central Committee passed a very important resolution. We have seen that the central government has made very difficult but very brave decisions in some areas where interests are complicated and intertwined.

In the long run, it will have a very positive impact on increasing China's consumption rate, reducing its savings rate and restoring its international balance of payments."

“Since 2021, we have been facing a sharp increase in our trade surplus, accompanied byexchange rateThere are two basic factors behind the depreciation: one is the adjustment of real estate and the decline of the domestic economic cycle; the other is the outflow of a large amount of direct investment. "

Gao Shanwen, chief economist of SDIC Securities, shared his views at an online exchange themed "Getting Out of External Imbalances" hosted by the China Finance 40 Forum last night (July 23).

In recent years, my country's trade surplus has continued to expand and the pressure of foreign trade frictions has also increased.

In his commentary, Gao Shanwen mentioned that since the end of World War II, the international free trade system and relatively peaceful international environment in which we have been living have relied on many coordination and operation mechanisms.

Among them, appropriate and wise handling of serious international payments imbalances is a very important component of maintaining these coordination mechanisms.

From a trend perspective, the most important way to correct the imbalance is for Chinese people to expand consumption and Americans to increase savings.

Gao Shanwen found points of resonance in the very important resolutions passed at the Third Plenary Session of the 18th CPC Central Committee, and analyzed three policies in turn with examples.

He believes that "in the long run, it will have a very positive impact on increasing China's consumption rate, reducing its savings rate and restoring its international balance of payments."

From a cyclical perspective, this needs to be viewed from a comprehensive perspective, combining growth rate, inflationary pressure and exchange rate.

Taking into account several facts about the current trade imbalance, Gao Shanwen suggested that:

“China must attach great importance to maintaining the international free trade system, pay attention to the spillover effects of manufacturing fluctuations caused by China’s own large economic size, and must consider guiding the flow of capital and implement proactive trade management measures.”

Smart Investor (ID: Capital-nature) compiled the content of Gao Shanwen’s speech and shared it with everyone.

Since the beginning of this year, China's trade imbalance has attracted widespread attention.

In particular, China is believed to have overcapacity in some areas during its rapid development, which has caused serious concerns in some countries. (Trade imbalance) has also become a topic of great concern in the economic and political fields.

Just now, Dr. Zhang Bin made a very in-depth and complete analysis of the historical data of China's trade imbalance.

Dr. Guo Kai demonstrated from the perspective of the long-term evolution of global history that serious trade imbalances could potentially have a huge impact on the international economy and even political relations.

It also shows us that the international free trade system and the relatively peaceful international environment in which we have been living since the end of World War II rely on many coordination and operational mechanisms.

Among them, appropriate and wise handling of serious international payments imbalances is a very important component of maintaining these coordination mechanisms.

We cannot take for granted the generally free and peaceful international economic and trade order that has existed since World War II. In fact, it is facing increasing challenges.

As the world's second largest economy, the largest trading nation, and the largest manufacturing country, China has a huge self-interest in maintaining such an international economic system.

This is completely different from the time when China's reform and opening up just began, or in 1949, or even earlier, when the United Nations and the International Monetary Fund were founded.

Important ways to fix imbalances: Chinese people expand consumption, Americans increase savings

I would like to make a few technical additions to their discussion.

I think it is a very clever approach of Zhang Bin to decompose the trade imbalance into two parts: cyclical and trend.

First, from the perspective of trends (the main reason for trade imbalance), many people believe that:China's savings rate is too high and the United States' savings rate is too low.

Because to sum it up simply, trade imbalances always manifest themselves as excess savings. The reason for a persistent trade imbalance is because there is too much savings.

But the other side of the problem is that Americans save too little.

If we check the statistics related to savings, there is no doubt that, especially after the end of the epidemic, the savings rate of the US household sector has once again dropped significantly compared to the long period before the epidemic.

China's savings rate has increased to a certain extent after the epidemic.

However, if we look at many countries including Europe, the changes in savings rates are not so obvious.

Therefore, it is a very convenient angle to explain the trend changes from the perspective of savings.

What’s more, surprisingly, changes in China’s savings rate and changes in the U.S. savings rate often move in opposite directions.

The Chinese love to save, at least in the past 20 years or so, while the American savings rate has often been low or even declining.

This results in a very unique association, but there may be other more complex factors involved.

From this perspective, as many people have been saying for many years,The most important way to correct the imbalance is for Chinese people to expand consumption and Americans to increase savings.

This has been the standard advice for macroeconomic researchers for decades.

The reason I mentioned this suggestion is to echo the very important resolution passed at the Third Plenary Session of the 18th Central Committee of the Communist Party of China.

We see in this resolution that the central government has made very difficult but very brave decisions in some areas where complex interests are involved.

In the long run, it will have a very positive impact on increasing China's consumption rate, reducing the savings rate and restoring the balance of international payments.

The three policies of the conference will help correct the imbalance of international payments in the long run

Let me cite three relevant policies:

First, on the basis of preserving all the rights and interests of migrant workers in rural areas, we should encourage them to move to cities, provide them with the same public services as urban residents, and accelerate their urbanization.

And, to a certain extent, this (policy implementation) will be stimulated through central fiscal transfer payments.

There has been no clear policy proposed before that migrant workers should enjoy the same treatment as urban residents in terms of social security, medical care, children's education and housing after entering the city.

In the full text of the Third Plenary Session of the 18th CPC Central Committee, we saw powerful expressions.

If this policy can be implemented forcefully, it will undoubtedly help increase China's consumption rate and reduce systemic international payments imbalances.

Second, provide basic public services based on place of residence, gradually decouple basic public services from household registration, and provide them based on permanent population registration and link them to residence permits.

If this policy is fully implemented, it means that even if you do not have a Beijing hukou, but you meet a certain period of residence in Beijing, have a residence permit, and your children can go to school, take the college entrance examination, receive basic local medical and social security, enjoy low-rent housing, etc., just like local residents.

Of course, I know that it is difficult for Beijing to do this in the short term.

However, we understand that an important idea of ​​the Third Plenary Session of the 18th CPC Central Committee is that, except for a few megacities, most cities should promote the provision of basic public services based on residence permits and permanent registered population.

This means gradually abolishing the household registration system.

Because the problem China faces is not just the influx of migrant workers into cities, but also the large number of urban residents moving from small cities to big cities.

Although everyone has urban household registration, they still face very serious discrimination, which many people believe will suppress their consumption tendency.

After the end of the epidemic, the savings rate in the United States declined and the savings rate in China increased. I personally believe that this is closely related to the differences in social security systems.

The social security system is not about receiving a certain income after retirement, but that when you encounter systemic risks, you will find that the government stands behind you and is willing to provide you with strong support. This is the essential meaning of social security.

Third, we have seen that this time (the Third Plenary Session of the 18th CPC Central Committee) there are many measures in the field of social security that are clearer, more specific, have wider coverage, and provide greater protection.

If these measures are implemented, they will help correct the imbalance in the balance of payments in the long run.

The trade surplus has expanded dramatically in the past three years for three reasons.

Secondly, how to understand cyclical differences?

I think I have spent a lot of energy on the study of international social cycles and have gained some experience.

First, before 2015 or earlier, the RMB exchange rate was seriously undervalued.

After 2015, until August last year, China basically entered a relatively freely floating exchange rate system.

The impact of this difference in exchange rate systems on cyclical trade balances and flows cannot be ignored.

Second, on this basis, especially under the condition of relatively free flow of exchange rates, when we observe the imbalance in the balance of payments, we must closely link it with the changes in the exchange rate in order to see it more clearly. We cannot just look at the imbalance in the balance of payments.

Because the expansion of trade surplus may be accompanied by appreciation or depreciation of exchange rate.

The two different combinations require very different interpretation systems.

Under conditions where the exchange rate is controlled and systematically undervalued, we cannot observe exchange rate pressures very well;

When the exchange rate floats relatively freely, we can see the problem more clearly by observing the changes in the exchange rate together with the changes in the trade surplus.

The recent sharp expansion of the trade surplus can actually be divided into two periods: one is from 2018 to 2021, and the other is from 2021 to the present.

From 2018 to 2021, we are facing an appreciation of the exchange rate, accompanied by an expansion of the trade surplus. The fundamental factor behind this is the improvement of China's competitiveness.

Since 2021, we have been facing a sharp expansion of our trade surplus, accompanied by a depreciation of the exchange rate. There are two basic factors behind this:

One factor is undoubtedly the real estate adjustment and the decline of the domestic economic cycle;

Another factor is the outflow of a large amount of direct investment, which is closely related to the influence of international geopolitical factors.

The outflow of FDI (Foreign Direct Investment) can also be understood as another version of the outflow of ODI (Outward Direct Investment).

Since 2021, the scale of FDI outflow has been huge. Although there are factors such as the US dollar interest rate hike, geopolitics is definitely a very critical factor.

To look at cyclical trade imbalances, we need to consider three factors

2015 was the bottom, and the global economy improved significantly in 2016 and 2017.

At that time, both emerging and developed markets around the world experienced significant growth, and the global economic growth rate in 2016 and 2017 was unprecedented.

The vast majority of more than 190 countries are accelerating.

But at that time, China's trade surplus was declining.

It doesn't make sense to explain the important reason as the expansion of China's economy (China's economic growth rate was declining at the time) or as the decline in global trade demand (global demand was actually expanding).

Moreover, another very important point is that the round of depreciation of the RMB exchange rate basically ended around that time, and began to enter a period of appreciation.

A very important reason for this round of cyclical changes in trade balance is actually the "three cuts, one reduction and one supplement", that is, the strong capacity reduction policy promoted by the government, mainly targeting overcapacity in the fields of steel, coal, cement, chemicals, etc.

Coupled with the spontaneous de-capacity of the economy, China's overall supply capacity shrank significantly in those years, which ultimately led to an increase in the overall price and profit levels, but the overall economic growth rate was actually declining.

This also showsWhen we look at cyclical trade imbalances, we need to look not only at the perspective of demand and exchange rates, but also at the combination of prices and growth.

To observe at the same timeGrowth rates, inflationary pressures, and exchange rates, put these together to figure out:

Is it driven by capital flows or demand fluctuations?

Do fluctuations in demand come from the supply side or the demand side?

Only in this way can our analysis of its trends, including its impact on financial markets and the real economy, become more balanced.

In fact, I have the same view on the analysis before 2007. Most popular analyses cannot be said to be wrong, but they only explain a small part.

When we look at the cyclical trade balance, we need a more comprehensive perspective, which in my opinion combines three factors together.

How should we deal with the dispute over overcapacity?

The last addition, to put it simply, is that China is now the world's largest manufacturing country, with manufacturing accounting for one-third of the world's total, which is almost the same as the combined total of the seven major Western industrial countries.

Moreover, the growth rate of China's manufacturing output remains at 5% to 6%, which is much higher than the growth rate of the global economy. This is the first fact.

The second fact is that no matter how high China's level is, fluctuations in total demand or total supply are inevitable.

Fluctuations between supply and demand will create a gap, which will be reflected through changes or pressure in the trade surplus.

The third fact is that as an economy of such a large size, fluctuations in our trade surplus will inevitably have significant spillover effects on other countries.

Under such conditions, our trade balance will definitely have a very large spillover effect on other countries.

This spillover effect will trigger political backlash in other countries, which will affect the survival of the current international free trade system. At the very least, it will be impacted, disintegrated, or significantly weakened.

As the world's largest trading nation, this is not in our interest.

Under such conditions, we can try our best to smooth out fluctuations in total demand, but it is impossible to completely eliminate them. We can try to allow exchange rate fluctuations to be more free to achieve balance.

Therefore, we can use the IMF as a basis to strengthen the coordination of international economic policies and at least do a good job of explaining things. It may not be effective, but it is better than no explanation at all.

We can use the WTO to initiate lawsuits to safeguard the free trade system, but this will also put the WTO at great risk, because China is too big and many countries will face political pressure.

The fourth fact is that, on the one hand, we need some measures to guide capital flows, such as investing in the United States and producing cars in the United States, Turkey, and Hungary.

On the other hand, we need to consider some measures to manage trade. The difference between China managing trade itself and other trading partners managing trade is that if the latter impose import quotas and tariffs, it is difficult to reverse the policy.

If China voluntarily initiates trade management policies, the policies will be flexible enough. Once the policy pressure disappears, we can turn it into export subsidies.

This is the first advantage.

The second advantage is that if an auction similar to import quotas is implemented, the revenue generated will be owned by the government of the country. If others implement import quotas, the money from the import quotas will actually be taken away by them.

Therefore, China must attach great importance to maintaining the international free trade system, pay attention to the spillover effects of manufacturing fluctuations caused by China's own large economic size, consider guiding the flow of capital, and implement proactive trade management measures.

—— / Cong Ming Tou Zi Zhe / ——

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