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Lu Ting attended the New Economist Think Tank seminar. On August 1-2, 2024, the "China Chief Economist Forum and the 3rd Greater Bay Area (Huangpu) Economic Summit" was held in Guangzhou. This article was compiled by the New Economist Think Tank from the speech of Lu Ting, Chief China Economist of Nomura Securities, at the summit. It has been edited and has not been confirmed by the author.

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My main job is to study the People's Bank of China, not the Federal Reserve, so it is a bit too difficult for me to talk about this topic. But since it is the Secretary-General's order, I will bite the bullet and talk about the Federal Reserve, but in the end I will also talk about its relationship with the Chinese economy.

According to our Eastern custom, we still focus on achievements and talk about faults as a supplement. Let me first talk about what we have observed and what the Fed has done over the past decade, and where it has made some mistakes. First, let's talk about its achievements.

As for the results, let's first look at the graph on the left, which shows the GDP of the United States starting from the 1930s. You can see that during the Great Depression in the United States, the GDP growth rate was negative, and it was between -5% and 13% for four consecutive years.

In the past decade or so, the United States has not seen such a situation. We all know that the global financial crisis broke out in the United States in 2008. Many people were particularly worried that the global economy and the US economy would continue to decline for many years. However, in the end, the US economy shrank for only one year, and only shrank by 3%. What was the reason behind this? I think it has a lot to do with the very strong monetary stimulus and monetary easing in the United States at that time.

The U.S. stock market has performed well over the past decade. Compared with before 2008 and before the Lehman crisis, the U.S. stock market has more than quadrupled. So from the perspective of GDP, asset prices, and housing prices, it should be said that the Federal Reserve, from the perspective of a central bank, has made an obvious contribution to the U.S. economy. So what are the reasons behind this?

First, the US Federal Reserve cut interest rates twice in 2008 and 2020, and the magnitude and intensity of the rate cuts were particularly large, which can be seen at a glance in this chart. Second, rate cuts alone are not enough, there is also monetary easing and QE, which has been implemented three times since 2009. After the outbreak of the epidemic in 2020, the Federal Reserve's balance sheet doubled in just one month.

Third, the Federal Reserve, at a certain time, especially in the years after 2010, has been calling on the US federal government to maintain an active fiscal policy. It can be said that from the perspective of fiscal policy, the Federal Reserve actually helped the United States achieve impressive economic growth at that time, especially when Europe was in the midst of the euro crisis.

Fourth, raise interest rates and shrink the balance sheet in a timely manner at the appropriate time, especially in 2015.

Fifth, macro-prudential management has been strengthened, and stress testing has been conducted every year. Such a stress test has actually greatly improved the overall regulatory level of the United States. This is the performance of the Federal Reserve.

We also saw that in 2023, the level of these emergency management measures was fully demonstrated in the United States.Silicon Valley BankWhen other banks had problems, the Fed acted very quickly and decisively, and it can be said that an unnecessary crisis was avoided. What is the basis of this theory? When the Lehman crisis occurred in 2008, I was at Merrill Lynch. At that time, two banks had big problems. One was Merrill Lynch, where I worked at the time, and the other was Lehman, where I work now. At that time, we had to quickly look up a book about the Great Depression in the United States, because we know that Bernanke is actually one of the best experts in the United States on the Great Depression. At that time, Bernanke happened to be the chairman of the Federal Reserve. What did the Great Depression tell the Federal Reserve and Bernanke to do?

We must rescue financial intermediaries, prevent large-scale bank failures, and ensure the supply of credit and money. This is what I think we learned from the Great Depression. We were very lucky at that time, as the Federal Reserve was in the hands of Bernanke.

The second is drawn from a series of lessons and experiences in Japan after the 1990s, which is that not only should QE be implemented, but the central government’s fiscal spending should also be increased.

Thirdly, if we talk about the performance in 2020, especially if it is relatively good, then we also learned from the Lehman crisis how to respond quickly, how to be the last borrower, and how to cooperate with the US Treasury to expand fiscal spending in this process and rescue institutions and individuals that must be rescued. This is the achievement of the Federal Reserve.

If we talk about the fault of the Federal Reserve, the first is that before 2008, the Lehman crisis was not an external shock but endogenous. It can be said that even though Bernanke himself is an expert in studying the Great Depression in the United States, after he took office as Chairman of the Federal Reserve in 2006, the Federal Reserve actually did not perform well in preventing such a bubble in the United States, which we call the real estate bubble and financial crisis, from 2006 to 2008. This is the first story.

The second story is the inflation that began in the second half of 2021. There are many reasons behind the high inflation. Some of them may be exogenous, such as the Russia-Ukraine war in 2022, but a considerable part of the reasons are endogenous. In my opinion, there are three aspects here that show that the Federal Reserve is actually flawed in many aspects.

First, he forgot that under a new situation, under the background of a special supply-side shock, the various macroeconomic problems caused by insufficient demand in the past are different.

After 2009, whether it was the United States, Europe, or Japan, which had been in deflation or close to deflation for a long time, many people thought that printing money, QE, and increasing fiscal spending would not lead to high inflation. Such a long period of low inflation has made many of our central banks, including the Federal Reserve, a little numb, I think. This is the first reason.

The second reason is that he did not persuade the U.S. federal government to reduce the fiscal deficit in 2022, when GDP growth had already recovered rapidly after the pandemic-hit 2020. In fact, the U.S. fiscal deficit in 2021 reached 13% of GDP, which now seems completely unnecessary.

The third aspect is that they were not timely. After the earliest signs of inflation appeared, they failed to adjust their forecasting and analysis framework in a timely manner, and did not raise interest rates in a timely manner.

This is a mistake. I think this mistake will cause many problems in the future, including the current high housing prices and mortgage rates in the United States. The high inflation in the United States has actually made the domestic manufacturing industry in the United States face a further hollowing out, despite the efforts of the US federal government to carry out re-industrialization.

The second problem is actually the other side of the problem we just talked about, which is that it caused the excessive fiscal deficit in the United States. I just said that the Federal Reserve has made contributions in this process. One of its contributions is that after 2008, in those years, it should be said that it even persuaded the US federal government to implement a relatively high and active fiscal stimulus policy.

In fact, compared with Europe and other countries, the US fiscal deficit was relatively high at that time, always between 5% and 7%. We can see the part I circled, which was very necessary at that time, but in 2021 and the following years, I think excessive fiscal stimulus is unnecessary. In this process, the Federal Reserve did not play the role it should have played. In this process, the US public debt also rose rapidly. In 2014, the US public debt began to exceed its GDP, and now its $35 trillion public debt has far exceeded its GDP.

If we compare the deficits of the United States and Europe, we can see this very clearly. Europe has an internal mechanism in the euro zone that makes it impossible for its deficit to be too high. In this process, the United States, in my opinion, has been somewhat inappropriate in its excessive use of its special dollar as an international reserve currency, and has overused the dollar's hegemony.

Why the US fiscal stimulus is so strong after 2020? The Federal Reserve has some responsibility. Of course, the greater responsibility may lie with the US domestic politics, especially the rising domestic conflicts and the widening gap between the rich and the poor. Both parties hope to increase the deficit or win the support of the people by reducing taxes. In this process, the deficit will inevitably increase, especially after the end of the Trump era and Biden took office. In fact, they are racing against time on fiscal stimulus. Of course, there is also a certain theoretical support behind it. Of course, this theory is bankrupt now in my opinion, but it was once very popular in our country. This is the modern monetary theory MMT. Of course, almost no one in the United States mentions this theory anymore.

Finally, the Fed caused this problem because of the serious external imbalance. We can see from this chart that the US trade deficit has obviously risen in the past four or five years. In the past, the trade deficit was about 60 billion US dollars per month, and now it is nearly 100 billion US dollars. If we look at the relationship between the trade deficit and GDP, it may be relatively stable, both around 4%, but the US is due to itsQualcommInflation has an inflated nominal GDP, so we have to look at the imbalance and imbalance between countries, and we also have to look at the absolute trade deficit. It is obvious that the trade deficit is rising.

Such a rise will also bring many problems to the US economy, especially as we see that under the current background of globalization, capital can flow, and capital inflows into the United States push up US housing prices, stock prices, and various asset prices. In this process, such a money-making effect attracts more capital to flow into the United States, and the US dollar is high, which actually further increases domestic manufacturing costs in the United States, hindering its self-regulation mechanism. In this way, some trade imbalances may become more and more serious over a period of time, but in the end such imbalances will inevitably be corrected, but sometimes the correction will lead to various problems, including our international trade conflicts and problems in the US domestic economy and capital markets.

After talking about the United States, let's talk about China next, because the problem I just mentioned in the past few years of the Federal Reserve is that it has caused imbalances in the United States and the world. As for the other side of the global imbalance, we can see it clearly from the figure on the left. The United States now has a trade deficit of about 100 billion US dollars every month, making it the world's largest trade deficit country. So which country has the largest trade surplus in the world? It happens to be China, the world's second largest economy. If we adjust it according to PPP, China's total economic output may be similar to that of the United States, or even comparable to them. What is our current trade surplus every month? It is exactly the reverse of its figure. Our current trade surplus is about 100 billion US dollars.

China's export growth has been positive in the past few years except for a few years, and it has been rapidly increasing during the epidemic. In the first half of this year, our exports grew by 6%, and in June last year, our exports grew by 8.6%. Behind such growth, we actually see the other side of the trade imbalance. We are a country with a strong trade surplus, and our currency is depreciating. Our dollar appreciates against the RMB, and our RMB depreciates against the dollar. Our RMB has actually depreciated against a basket of currencies in the past two years. From the most basic economics of international trade that we have learned, this should not happen. On the other hand, we are a country with a huge trade surplus, and our CPI is now close to 0, while the US CPI was more than 9% at its highest in the past two years, and is still around 3% now.

If we look at the price data from the U.S. Customs, the price of imports from China has fallen by 3% on average each year in the past two years, while imports from other countries have increased by 2%-3% on average each year. So we are seeing a very strange phenomenon. We now have a trade imbalance, but we do not have a mechanism to solve this imbalance. Countries with trade profits are under pressure to depreciate their currencies, while countries with huge trade deficits seem to have room for appreciation, at least their currencies remain high. This is a rather strange phenomenon we are seeing now.

The reason behind this, if we look at China, we just mentioned that China's domestic demand is insufficient. Although we have a huge trade surplus, as we all know, China's economy is not particularly ideal. What is behind this? Real estate, which used to account for 1/4 of China's GDP, has shrunk in the past few years. Such an extremely important sector has shrunk on such a large scale in such a short period of time, and even shrunk to a greater extent than Japan, which will inevitably have a very important impact on a country's domestic demand.

What will it affect? ​​It will affect a country's finances. Before the real estate bubble burst, 38% of our fiscal revenue came from the real estate industry, especially from land sales. It will also have a great impact on our consumption. Because our consumption depends on income, and income is largely related to domestic demand and our local fiscal expenditure.

On the other hand, consumption is related to wealth, and China's real estate prices have fallen by about 30% in the past few years. On the other hand, after the real estate downturn, local governments invested heavily in the new three things. On the one hand, it greatly promoted our country's technological level and productivity in the new energy industry, but on the other hand, it inevitably caused a sharp drop in prices. In fact, in this process, our imbalance has become more serious because it has pushed up exports.

But on the other hand, what will happen to the large-scale investment in the past few years? Negative investment growth will also have an adverse impact on our domestic demand.

After talking about these issues, I will finally talk about a few points. What are our responses? First of all, I want to say that we must seriously deal with this imbalance. Why?

First, the high growth in exports is unsustainable, whether due to the international economic cycle or some international industrial cycles. Such high growth is unsustainable, especially by the end of this year or next year. I estimate that our export growth rate may return to below 5%, or even return to around 0%.

Second, our high-speed exports and low-price exports will inevitably be blocked by other countries as prices fall.

Third, during the US election campaign, the Democratic and Republican parties will inevitably compete with each other. The Republicans have proposed that if they are elected, they will increase tariffs by 50%, cancel the most-favored-nation treatment for China, and gradually reduce imports of key products from China. So for us, I think our central government is very clear in this regard, that is, we cannot rely too much on foreign investment, and we cannot rely entirely on maintaining high-speed exports for the stable growth of China's economy. So what should we do?

First, in my opinion, we should maintain the stability of the RMB and avoid a large depreciation. In the past period of time, on many occasions, we have heard some policy suggestions, even a very popular policy suggestion, to allow the RMB to depreciate. In my opinion, under the current situation where the imbalance is already very serious, allowing the RMB to depreciate too quickly and too much is actually not conducive to resolving such an imbalance and maintaining good relations with other countries.

On the other hand, our domestic demand is actually declining because our domestic capital market and real estate market are unstable, and the further depreciation of the RMB is not conducive to the stability of domestic demand. So from our analysis point of view, I think we should not encourage the depreciation of the RMB, but should maintain the stability of the RMB. This is the first point.

Second, if we look at the experience and lessons of the Federal Reserve over the past decade, we should indeed cut interest rates moderately. Of course, there may not be room for a large-scale interest rate cut, but we should cut interest rates moderately, especially because of various historical reasons.The interest rates on existing mortgage loans are relatively high, which in my opinion should be the first problem that needs to be solved.

Response three,We need to stabilize the real estate market. It has fallen so much. In my opinion, the bubble is gone.In fact, China is still in the process of urbanization and the population will continue to gather. In this process, real estate still has room for development. In fact, an important lesson or experience of the Federal Reserve in stabilizing the US economy over the past decade is, in my opinion, how to stabilize the real estate industry in their country.

In my opinion, we should now focus on securing the delivery of houses to stabilize our real estate industry. Why? This involves another experience and lesson of the Federal Reserve.The guarantee of house delivery is actually about protecting the subject, which is to maintain the confidence of the entire market. Because the core system of the entire Chinese real estate market is the pre-sale system, if there is no such guarantee when the house is delivered, it will inevitably make everyone lose confidence in the real estate developers.

If we regard China's real estate companies as American banks, then in fact China's home buyers are depositors. In this process, we should actually learn from the Federal Reserve how to carry out necessary macro-prudential management.

The last one is that in terms of fiscal policy, we should maintain a proactive fiscal policy on the one hand, but on the other hand, we also need to link fiscal policy with our necessary reforms.

Let me quickly say a few things in this regard. The first is what do we hope to achieve through our reform?In the short term, the total expenditure of the central and local governments should not slow down or even shrink. Normal expenditure should be maintained or even accelerated.

In this process, if we want to stimulate domestic demand, in my opinion, we should reasonably reform the social security system, improve the basic pension insurance and basic medical insurance for urban and rural residents, we should encourage childbirth in this process, and we should provide subsidies to the poorest people, the lowest-income group in our society in the entire process. In this way, we can maintain fiscal spending, and in this way, we can learn some experience from the practices of the Federal Reserve and the U.S. federal government in the past decade, especially after 2020, and avoid some of their lessons.

On the other hand, we should make better arrangements for transfer payments across China to adapt to population mobility. This will allow us to increase fiscal spending on the one hand, and prevent fiscal spending in some places from rising too quickly, which would lead to an unreasonable decline in the rate of return on investment on the other hand.

In short, we have come to the conclusion that the Federal Reserve has had gains and losses in the past decade or so, and there were many problems in the middle. In the end, an international imbalance was exported to us. Some of their experiences and lessons are worth learning from and worthy of our attention. Thank you everyone.■