Sun Liping on the Future of China's Economy

Sun Liping, “Rethinking Some of My Ideas in the Light of the Current Situation”[1]
 
Introduction and Translation by David Ownby
 
Introduction
 
Sun Liping (b. 1955) was a prominent professor of sociology at Tsinghua University for many years, as well as an important liberal public intellectual who pushed for market reforms, among other things, in his research and writing.  Now retired, Sun is an active and popular blogger who often adopts a posture of “saying what everyone knows but is not saying outloud” on subjects like covid and the war in Ukraine.   I have translated many of these posts.
 
One of his favorite topics is China’s economy, which he discusses in frequent posts, generally arguing for markets and entrepreneurship and jobs, and thus implicitly against policies that favor state-owned enterprises.  The post translated here continues in this vein, but he is writing just after the Chinese government’s massive intervention in the stock market on September 24, a gesture meant to be decisive.  Commentators such as Zhao Yanjing praised the intervention and urged China’s central bank to stay the course, no matter what, hoping that a surging stock market might jump-start China’s slumbering economy, but Sun seems largely unconvinced.  (See here for Zhao’s piece in English translation).
 
If I read him correctly, Sun is saying that there is no miracle cure for China’s economy, which has built the capacity to be the world’s factory, only to run up against important challenges to globalization, resulting in a fall in global demand for Chinese products.  Good times will not roll again, Sun argues, until this overcapacity problem is sorted out. 

Unlike Zhao Jingyan, he worries that too much government stimulus may result in stagflation, which is worse than deflation.  Sun notes that although Japan lost thirty years in a similar balance-book recession, the upside was that the price of a bowl of beef-rice actually went down.  He seems to be saying that as long as people can eat, China will be okay.  The government should focus on jobs and on rethinking the underlying logic behind prosperity in the past and in the future.  Market fundamentals are simply not on China’s side, and growth will probably be slow for the coming years, perhaps decades.
 
My impression is that many of those responsible for China’s economy at the central level also worry about market fundamentals, which is why the intervention of September 24 was so long in coming.  But good economics may make bad politics; China in 2024 is less rich than Japan was in 1990 in terms of per capita income, which translates into more hardship and suffering.  I was in China for the month of September, and everyone was worried about the economy.  Many people told me something like “life is great in China as long as you don’t talk about politics, but if the economy goes south, everything is political.” 
 
Translation
 
Over the last little while I have shared some of my thoughts, but I did so in a fragmentary way, which inevitably led to some misunderstandings. As luck would have it, I recently had a chance to chat with a few entrepreneurs and ran some of these ideas by them. In fact, I have written about these ideas in previous posts.  So in what follows today I am going to puteverything together and try to sort it out.  The problems we are currently facing are indeed rather complicated, and what I’m relating here are my personal opinions, some of which I may not have completely thought through. I welcome everyone’s criticisms and suggestions.
 
First things first:  The stock market
 
If you made 20,000 RMB on the market today, it might well have a direct effect your mood, and you might have a couple of more beers with dinner. But if the value of your house went up by 100,000 RMB today, you might not even notice.

This is an analogy I made a few days ago in a post entitled "The Stock Market, Ten Trillion RMB, and Some Random Thoughts," which highlighted the importance of saving the stock market. In fact, in a post from April of this year entitled "This is not the Time to Use Shock Therapy on the Stock Market,” I already said that while everyone was talking about saving the housing market and saving the stock market, in fact this had to be done in a certain order:  first the stock market, then the housing market.
 
And sure enough, the authorities suddenly made their big move, and within a week, the total market value of A-shares soared by 9.6 trillion RMB. It’s like I’ve always said:  even if you have to be cautious about turning the faucet all the way up, when it comes down to it, a direct approach is always best. 
 
In talking about this market development, some people said it was like “breaking a glass” because it was so sudden, and just because it was so sudden, people can't help but worry about how it can be sustained, or how it can avoid ups and downs. In particular, now that the market has risen by some 10%, won’t some people just sell and take their profits?
 
In an economic downturn, it can make sense to boost confidence with a market surge; breaking a glass can also be seen as a sign of determination. But generally speaking, I don't like dramatic ups and downs. In the market, high sentiments are worthless, and there are only risks. What we want is a steadily rising stock market.
 
If we can keep real estate stable, we’ll be okay
 
Governments can play with the money supply or they can put money in the markets.[2]  Richard Koo[3] 辜朝明 (b. 1954) has even said that when faced with a balance sheet recession, monetary policy will fail, and the only solution is intervention. One might say that this is what the market expects, and even more what local governments expect.
 
The question is:  where is the government heading on this front?
 
These days people are talking about their houses, and one of our current economic problems is indeed real estate. So some people ask, will real estate heat up again? I don't know whether it will or not, but I don’t think it should.
 
All along I have said to save the stock market first, and then the housing market, but this was only in the sense of comparing the importance of the two. It does not mean that we should save the real estate market after saving the stock market, nor does it mean that we should speculate in housing after speculating in stocks. We already have a surplus of housing, which is the most basic of fundamentals. The future will be shaped by the juncture of two trends:  one is population decline and the other is that there is a still a bit of room left in urbanization.   The future problem of real estate is structural.
 
My view is that if we can keep real estate stable then we’ll be okay.  By stabilization, I mean first to ensure that the houses that have been promised will be delivered, and second, to avoid real estate’s becoming a drag on fiscal policy. In fact, if a lot of money goes into housing market, consumption will be squeezed as the money is tied up in reinforced concrete.  The long-term consequences of sluggish consumption are easy to imagine.  (See my post on “Eight Views on Real Estate Issues").
 
Recovery starts with jobs; without jobs there can be no real recovery
 
Most of you know that jobs are what I have talked about the most over the past few years. In the first half of this year, I posted one piece simply called “Jobs, Jobs, Jobs, Jobs, Jobs, Jobs.”  When I posted about my opposition to driverless taxis, this was also written from the perspective of employment. Because jobs are related both to income and to confidence, they are the most solid basis for restoring confidence and changing expectations.
 
Where does the employment problem hit the hardest? With young people.
 
I remember when I was studying the reform of state-owned enterprises in Northeast China in the early 2000s, especially questions of unemployment and layoffs, I asked a question: Imagine a family of five, the parents older, their child married, one grandchild.  Let’s consider two situations.  In one situation, the older parents make a good salary and the young couple is unemployed. In the other scenario, the older parents are unemployed, and the young couple makes good money.  In terms of a sense of hope and expectations for the future, what would be the differences in the two scenarios? 
 
The answer is obvious.
 
Employment touches on many issues, not all of which can be discussed in detail here. What’s most important is what we consider to be our priority. Everyone knows the saying "5678", which means that private enterprises contribute more than 50% of taxes, more than 60% of GDP, more than 70% of technological innovation, and more than 80% of urban employment. But there are two completely different ways of understanding this saying, reflecting two completely different ways of thinking.
 
One is that since private enterprises create 80% of employment opportunities, they are extremely important. This way of thinking puts the finger on employment. Another way to look at it is to say that state-owned enterprises only employ 20% of the people but provide 50% of the tax revenue, which shows how important state-owned enterprises are. This way of thinking focuses on tax revenue. So what you value determines what you think is the most important and decides where you put your resources.
 
Confidence is of course important, but to get there we need to clear out certain things
 
There are always some people who think that as long as there is enough stimulus and the policies are correct then the storm will pass and the good times will come back.   I think this way of thinking is too simplistic.
 
As I have said many times:
 
There are two popular ways of looking at things. The first insists that enterprises are not taking out loans or investing because entrepreneurs lack confidence; the second argues instead that consumption is down because consumers lack confidence. In fact, we can dig a little deeper. 

From the perspective of investment, even imagining the entrepreneurs found their confidence once again, what are they going to invest in? The reality is that there is a surplus of houses, cars, household appliances, and daily necessities. And from the perspective of consumers, after decades of excessive, continued consumption, we have reached a situation where part of the population has nothing more to consume, while another part of the population does not have the means to consume.  What’s the relevance of confidence in this situation? (For details, see my post on supply side and overcapacity.)
 
We have to understand that we have left the era of shortages and entered an era of surpluses.  Moreover, this surplus is not just an ordinary surplus. As the world's factory, we produce for the entire world.
 
A few days ago, I wrote a post titled "The Real Turning Point Will Come Once We Clear Excess Capacity.”  A bit later, after discussions with some readers, I recast my idea as follows:   “A real reversal is possible once we clear overcapacity. The process of clearing this excess capacity will undoubtedly be painful, but from the perspective of economic history, it is inevitable. We often say that Japan experienced 30 years of stagnation, but it was actually a process of clearing.”
 
Inflation cannot save us, and stagflation is even worse
 
We often hear that deflation is worse than inflation. Some people praise inflation as a panacea for rebooting the economy. Steven N. S. Cheung (b. 1935) even suggested that China's central bank should push the annual inflation rate to around 6% as soon as possible.
 
It is generally true that moderate inflation is good for economic development, while deflation will lead to a downward spiral.  But there are two questions that people may not have considered.   First, what if – for whatever reason - inflation does not help the economy?  Then we have stagflation, which we know is worse. Keynesianism sometimes works and sometimes doesn’t. Second, will the economy necessarily go into recession without inflation?
 
For example, Japan enjoyed relatively stable prices during its so-called “30 lost years.”   One of the indicators used by Japan to measure inflation is the price of a bowl of gyūdon  (beef rice/牛肉饭). In 1990, a bowl of gyūdon at Yoshinoya, a well-known Japanese fast-food chain, cost 400 yen, while in 2020, the same bowl of beef rice costs only 352 yen (roughly 22 RMB = 3$USD). Of course, for economists, this is deflation, but in the eyes of ordinary people, prices are stable.
 
Some people say that Japan still lost 30 years.  But what did they lose?  During this period, Japan cleared its excess production capacity and upgraded its industry. No serious economic crisis occurred, everyone got by pretty well, and the social unrest that people worried about did not occur. What more can you want?
 
There’s a story here, which is that in Japan's central bank system, there is a tradition of extreme aversion to inflation. The reason for is that the first governor of the Bank of Japan, Naoto Ichimanda 一万田尚登 (1893–1984), was in Germany in the 1920s and experienced the Weimar hyperinflation and saw what it did to the country
 
I am not saying that the Bank of Japan’s approach is the only correct one, but it tells us that all dogmas have to be taken with a grain of salt.
 
Deep logic determines how far we will go
 
I’m aware that some readers will think I still haven’t gotten to the bottom of things. If so, you can have a look at another post for a few days ago - "Where Did that Growth Wave Come From?  An Explanation Based on Deep Logic."
 
In that post, I discussed the reasons for the rapid economic development over the past few decades from the perspective of underlying logic. The most important points I raised were: that our goal was to raise the living standards of the people; that we looked at the outside world with new eyes and strove for a peaceful international environment conducive to economic development; and that we loosened restrictions to stimulate the enthusiasm of various economic and social actors.
 
So how the economy will develop in the future depends on the underlying logic of our choices.
 
Some of my readers may want more details, but perhaps that’s their job…they can’t rely on me for everything.
 
Notes

[1]孙立平, “面对当前形势，整理一下我的一些想法,” published on Sun’s WeChat platform on September 29, 2024.
 
[2]Translator’s note:  What Sun actually says is 货币之后是财政 – “After monetary policy there’s fiscal policy [or finance],” which to me is quite cryptic, so I tried to tease out the logic a bit, as it seems clear that by “fiscal policy/finance” he means government stimulus.   

[3]Translator’s note:  Richard Koo is the chief economist at the Nomura Research Institute in Tokyo, and an expert in balance sheet recessions.