Nine Lectures on China's Macroeconomy

这是一篇关于Nine Lectures on China's Macroeconomy的思维导图，《中国宏观经济九讲》从制度、土地、全球化、杠杆、房地产、金融、货币政策、高质量发展和共同富裕九个方面，深入剖析了中国经济发展的历程和内在逻辑。该书不仅还原和再现了中国经济发展的现实，还为未来中国经济的发展提出了有益的启示。

Nine Lectures on China's Macroeconomy

• Lecture One: System
  • 1.1 Realities about economic growth
    • · Since Reform and Opening up, China's economy has achieved remarkable success, what created this miracle?
    • · China's economic development model has strong characteristics of government leadership and top-down driven.
      • Market-oriented reform? The failure of Eastern Europe.
      • Globalization? Emerging economies would get locked in at the low end (低端锁定）
      • Mainstream Western economic theory frameworks cannot explain the miracle created by China's economic growth
        • Neoliberal theoretical system, a response plan to the 1970s stagflation
          • · SOE privatization.
          • · Weakening government intervention, economic system "liberalization"
          • · Opening up financial markets and achieving "financial liberalization"
  • 1.2 Competing for growth
    • Assessment model centered on economic construction, with GDP at the core
      • 1.2.1 Compounding demands （层层加码）
        • Progressively setting increasingly higher growth targets layer by layer
      • 1.2.2 Decentralized Competitive Landscape
        • Local decentralization, localities initiate homogeneous competition
      • 1.2.3 Clear Assessment Mechanism
    • The particularity of China's economic growth lies in introducing a competition-for-growth incentive mechanism, making official behavior "entrepreneurial"
  • 1.3 Problems and reforms
    • In the early stages of Reform and Opening up, the main contradiction was under-rreleased productive forces. The single goal system with GDP at core could well solve the problem of shortage of daily goods.
    • With continuous development of China's economy, the single goal system with GDP as KPI can no longer meet all the needs of the people
    • Summary
      • 1.3.1 The fiscal construction that prioritize infrastructure
        • Insfastructure projects have significant effect on boosting economy and are more favored by local authorities
        • In contrast, livelihood expenditures such as healthcare are insufficient. With the gradual improvement of public living standards, public demends are also rising gradually, which led to the emergence of new contradictions.
          • The 19th CPC National Congress report pointed out: Socialism with Chinese Characteristics has entered a new era, and the principal contradiction facing Chinese society has evolved into the contradiction between unbalanced and inadequate development and the people's ever-growing needs for a better life.
        • Introduce an assessment system that includes public services, establish a more comprehensive assessment mechanism
      • 1.3.2 Market Segmentation and Overcapacity
        • Break local protectionism and build a unified national market
          • Market segmentation directly hinders the high-end development of manufacturing
          • Disorderly competition will cause overcapacity
          • Introduce diversified performance assessment mechanism, formulate local assessment standards based on local conditions （因地制宜）； accelerate promoting coordinated regional economic development; continue advancing supply-side reform to drive high-quality development
      • 1.3.3 Scale Orientation and High Debt Leverage
        • The enterprise sector is large in size but weak in strength.
        • The local implicit debts have rapidly increased.
        • Strengthen the constraints on assets and liabilities, implement accountability for implicit debts, and develop the capital market.
      • 1.3.4 Reliance on External Demand
        • China's intergratio into the world trade system provided an outlet for excess capacity
        • With the advent of de-globalization, external demand declines, it is necessary to rely more on domestic demand to drive economic growth, but issues like uneven income distribution exist
        • Activate domestic demand, increase income for the urban bottom and migrant workers, improve social security mechanism to resolve their worries.
      • 1.3.5 Environmental Issues
        • In early stages of modern economic development, the model of sacrificing environment for economic growth is common
        • The assessment method with GDP as sole KPI also easily ignores environmental impact
        • As economy gradually develops, environmental issues gradually gain more attention
          • Lucid waters and lush mountains are invaluable assets
        • Eliminate excess capacity but prevent one-size -fits-all approach（一刀切）；reshape energy structure and develop green economy; multi-faceted layout (多方面布局） and strengthen supporting facilities construction to gradually achieve low-carbon transformation.
      • 1.3.6 Regional Divergence
        • Eastern coastal regions stand out
          • · Undertook overseas industrial chain transfer with absolute geographical advantages
          • · Formed "industry + talent agglomeration" effect （集聚效应）
        • New Concept of Regional Development，“Belt and Road”Initiative、Sea-Land Coordinated Development
• Lecture Two: Land
  • 2.1 The transition from the fiscal contract system （财政包干制）to the tax-sharing system（分税制）
    • The period of Planned Economy：
      • All economic activities are uniformly managed by the state.
        • Unified purchase and marketing of products.
        • Unified revenue and expenditure.
        • Unified import and export.
        • The state concentrated all surplus and redistributed surplus products through planning directives.
      • Advantages: Concentrate all human, financial, material resources to rapidly achieve industrialization.
      • Disadvantages: Slow response speed to the material needs of the masses.
        • The main contradiction in the primary stage of socialism: The growing material and cultural needs of the people versus the backward social production.
          • Insufficient enthusiasm from local authorities and enterprises
    • Reform focus: Stimulate the enthusiasm of local governments and enterprises to meet the material life needs of the masses.
      • On one hand: Decentralize power and concede profits to mobilize enterprise enthusiasm.
        • The key is tax reform
          • · Replacing profit delivery with taxes （利改税）: Change from handing over profits to paying income tax.
          • · Price reform: Price breakthrough （价格闯关 ）combined with different tax rates for different products to control prices.
          • · The tax-sharing reform in 1994
            • Price breakthrough completed, gradually abolished product tax, returned to tax neutrality.
            • · Better institutional provisions, with foreign enterprises and private enterprises being the main players.
            • Unification of three taxes （三税合一）： unified enterprise income tax rate
      • On the other hand, the local and central governments "operate separately"（分灶吃饭）, granting local governments the autonomy in fiscal expenditure.
        • Combined with the GDP-oriented assessment,mobilize（调动 ） the enthusiasm of local economic development
          • Original unified revenue and expenditure fiscal management model: Local governments handed over all fiscal surpluses to the central government at year-end, which was allocated uniformly by the central government.
            • The drawbacks are obvious: it is too rigid and inflexible, and there is a lack of local motivation for generating revenue.
          • Switching from unified revenue and expenditure to the contract system (包干制)
            • Local governments hand over fiscal revenue based on the contract ratio, which was generally fixed for five years.
            • Local fiscal expenditure were no longer directed by the central government, local authorities can decide expenditure purposes themselves.
            • Localities balance the fiscal revenue and expenditure themselves
            • Advantages and disadvantages are both significant
              • Advantages: Strong incentives, encouraging localities to generate revenue , expand the tax base and develop the economy.
              • Disadvantages: The central government's fiscal proportion declined, the central government's ability to regulate local governments was weakened.
                • Rigid expenditure pressures, such as large subsidies for agricultural product prices.
                • The economy was growing rapidly, the purchasing power of the central government's fixed share income declines with increasing inflation
                • Taxation is based on territorial principles, with local governments obtaining majority. The local authorities avoid paying the taxes by means such as "accumulating wealth within enterprises".
                • The central government's ability to adjust regional disparities through transfer payments weakened.
          • Tax-sharing reform
            • · Divide taxes into central taxes, local taxes, and central-local shared taxes: Central government takes the majority.
            • · Local governments concede profits to the central government.
            • · After centralizing financial resources, the central government establishes an effective and fair transfer payment system.
            • The financial resources are gradually concentrating at the central level, while the financial expenditure pressure of local governments is constantly increasing.
              • Forced local governments to generate revenue through other channels: The emergence of land finance.
                • The existence of the GDP assessment mechanism has compelled local authorities to find various ways to develop the economy and generate income through other means.
  • 2.2 Transferable land use rights
    • The historical evolution of land use rights
      • In ancient and modern times, for the most part, land was privately owned by farmers, and the economy was characterized by small-scale farming with self-sufficient farmers and tenant farmers.
      • After the founding of the PRC, in order to rapidly achieve industrialization and accumulate surplus for industrialization, a model of the price gap between industrial products and agricultural products was adopted. Agricultural products were uniformly purchased and sold by the state. To reduce transaction costs, the following measures were taken:
        • · The land changed from private ownership to collective ownership, and was used for the requisition of grain by the People's Commune.
        • · The production of agricultural products was based on fulfilling national tasks.
        • · Farmers' migration was restricted, and rural surplus resources were utilized in line with the national industrialization strategy.
      • After the reform and opening up, urban land ownership belongs to the state, while rural land ownership belongs to the collective.
        • China remained a socialist country with public ownership as the mainstay.
    • Changes of land use rights.
      • · Changes in the usage rights of rural collective land
        • The ownership remained with the collective, but the usage rights were given to the families. The families took the place of the former production teams to manage the land.
          • Household responsibility system （包产到户）, enhancing farmers' enthusiasm, the greatest institutional innovation in 1978 (from bottom to top)
        • The problem of food supply were solved, but there exist shortcomings in large-scale operation.
          • The contradiction between collective ownership and population changes
            • As the population increases, farmers expect to be allocated more land upon the expiration of their contracting rights. However, the central government emphasized that "adding personnel does not increase land area". The factors influencing population growth and decline were uncontrolled and there was no long-term expectation.
          • Fragmentation of land management
            • The collective land was constantly being divided as the population grew, and thus it failed to achieve the scale advantages.
          • The issue of separating contracting rights and operating rights
            • As more and more farmers moved to cities for work, the ownership of the contracted land and the management rights became separated, making it difficult to clarify the land ownership. Moreover, short-term tenants of the land had no motivation to carry out large-scale development and mechanized operations.
        • In some areas, the reform of collective production materials into shareholding had been initiated.
          • Concentrated settlement verified all the production materials of the entire village, and handed over the collective assets to the collective economic cooperative for management.
        • Overall, the collective agricultural land has gone through the process of collective cooperation - household responsibility system - land management rights transfer - re-collectivization through land shareholding system.
      • · The issue of rural residential land（aka homestead, 农村宅基地）
        • Rural housing is provided by the collective, which allocates the land free of charge to the farmers. The farmers then build their own houses to solve their housing problems.
          • Rural residental land is collectively owned
            • Theoretically, individuals have no right to use their homestead land for trading, mortgaging, leasing or pledging.
            • The allocation of homesteads is exclusive, and non-collective members are not allowed to participate in the allocation. Therefore, urban residents cannot purchase homesteads or build houses on collective land.
        • Two problems have arisen.
          • （1）Although the homestead is free, it still provides value to farmers, which leads to an increase in management difficulty.
            • Firstly, farmland in the village is occupied
            • Secondly, in some areas, rural residential plots have spread to the suburbs and urban villages, which is not conducive to urban management.
          • （2）A large number of migrant workers go to cities to work, resulting in a lot of idle homesteads. Since the homesteads belong to the collective, they cannot be sold to people outside the collective. Therefore, people from outside the village are unable to enter and revitalize the abandoned homesteads, causing waste of resources.
      • · The land system reform in cities
        • The attempt of the Shenzhen Special Economic Zone
          • In 1981, the "Interim Regulations on Land Management" was promulgated, stipulating that land use rights could be transferred (but ownership could not).
          • In 1987, the state-owned land use rights were first transferred through the bidding, auction and listing process.
          • Promoted the constitutional amendment of 1988,which specified that "land use rights can be transferred in accordance with the provisions of the law."
        • In 1990, the State Council issued the "Interim Regulations on the Allocation and Transfer of State-owned Land Use Rights in Urban Areas", officially establishing that state-owned land use rights could be allocated and transferred through methods such as agreement, bidding, and auction, and promoting it nationwide.
    • Conversion of land use purposes
      • How can the agricultural collective land in rural areas and suburban areas be transformed into non-agricultural construction land?
        • The two channels during the initial stage of Reform and Opening up
          • One approach is to transfer agricultural collective land to township enterprises（乡镇企业）, and directly convert agricultural land in rural areas into construction land.
            • Farmers' income has been increased, but also caused serious problems.
              • · Large amount of farmland were occupied by rural industries.
              • · The existance of problems such as environmental pollution and scattered industrial layout.
          • The second approach is to convert the agricultural collective land into state-owned land, and then convert it into construction land.
        • In the "Land Management Law" of 1988, it was clearly stipulated that in order to convert agricultural collective land into construction land, it must first be transformed into state-owned land.
          • That is: Farmers cannot transfer the collective land use rights by themselves, nor can they convert the collective land into construction land on their own. Only the local government can transform the collective land into construction land. The local government is the sole buyer of rural collective land.
      • In 1988, the "Land Management Law" affirmed the right of local governments to profit from the transfer of land use rights.
      • After 1994, the revenue from land sales in all regions was officially recognized as fully belonging to local governments.
      • 力After the implementation of the tax-sharing system reform, the discretionary income available to local governments has significantly decreased. Therefore, there is a strong desire to increase their discretionary financial resources by boosting land sale revenues.
    • Housing commodification reform in the townships
      • In the era of planned economy: Housing was provided free of charge by the units. The expenses were covered by government allocation and self-funding by the units. The ownership of the houses was entirely owned by the government or the units, while the supply was severely insufficient.
      • The three documents
        • · "Implementation Plan for the Phased and Gradual Implementation of the Housing System Reform in Urban Areas Nationwide" issued in 1988.
          • The purpose of the housing system reform has been clarified.
            • · To address the problems of severe shortage of housing supply and unreasonable housing allocation system.
            • · By promoting the development of the real estate industry, the construction industry and the building materials industry can also be stimulated.
        • · "The Decision on Deepening the Reform of Urban Housing System" issued in 1994
          • ”Three Changes and Four Establishments“
            • Three Changes：
              • · The allocation of housing, which was previously done by the state units for free, has been changed to a more reasonable sharing among the state, units and individuals.
              • · The systems for construction, allocation, maintenance and management of housing in each unit have been changed to a socialized and professionalized approach (construction of houses is handled by professional developers)
              • · The distribution of housing benefits has been changed to a monetary wage system (previously, housing was provided as a benefit; from now on, one will have to pay for it themselves)
            • Four Establishments：
              • · Establishing commercial housing system and affordable housing system
                • Rich people purchase commercial housing. Then, the government acquires land surplus and builds affordable housing for those who are financially disadvantaged.
              • · Establishing the Housing Provident Fund system
              • · Establishing the housing credit system
              • · Establishing a real estate trading market
            • Since then, the concept of "housing being provided by the government or the units" has changed. Public housing, as a product of the planned economy era, has gradually vanished. Normal people began to save money to buy houses, or take out loans to purchase houses, and they started to find their own ways to meet their basic and improvement needs.
        • · "Notice on Further Deepening the Urban Housing System Reform and Accelerating Housing Construction" issued in 1998
          • In 1998, the Asian financial crisis broke out. To stabilize the economy, strengthen domestic demand and stimulate consumption, the central government decided to completely open the floodgates of the housing market.
          • · Residential Allocation System Reform: Starting from the second half of 1998, the physical allocation of housing was officially halted and the monetary allocation of housing was gradually implemented. Welfare housing distribution by units became a thing of the past.
          • · Supply system reform: High-income families purchase or lease market-priced commercial housing; middle and low-income families purchase affordable housing; the lowest-income families rent low-cost housing provided by the government or units.
          • · Housing finance support: All commercial banks can issue personal housing loans in all towns. The direction of HPF loans has been adjusted to be used for individuals' purchase of self-occupied housing. The combined housing loan business of combining housing provident fund loans with commercial bank loans has been developed.
      • Since 1998, the development of China's real estate market has entered a "fast lane".
      • Real estate sales have driven various industrial chains such as real estate brokerage, property management, furniture and appliances. Meanwhile, real estate investment, construction and completion have also driven various cycle industrial chains including building materials, steel and cement, glass, non-ferrous metals, and coal.
      • In the "Notice on Promoting the Sustainable and Healthy Development of the Real Estate Market" issued in 2003, it was clearly stated that the real estate industry has a high degree of interconnection and strong driving force, and has become a pillar industry of the national economy.
    • All the necessary conditions for the emergence of land finance are now in place.
      • · After the implementation of the tax-sharing system reform, local governments' discretionary financial resources decreased, but the pressure of GDP assessment did not abate.
      • · The local authorities monopolized the land market, thereby monopolizing the price difference in land transactions. As the right to profit from the transfer of land use rights gradually gained recognition from the central government, the portion of the local benefits derived from the land could be freely allocated and used for the development of the local economy.
      • · Commoditized housing market and the overall society's demand for improving housing living conditions has raised the value of land. The soaring land value has made it possible for land finance to boom.
  • 2.3 From land conveyance income to land mortgage financing
    • Why do local governments have such a strong interest in establishing development zones and building new cities?
      • There are generally two ways for local governments to acquire land:
        • · Revitalizing the existing urban land, such as through the demolition of old urban areas and the renovation of shantytowns, which contains relatively high transaction costs.
        • · Expropriating land in suburban or rural areas, under the original land system, compensation is given based on the original use of the land being expropriated, so the expropriation cost is relatively low.
    • Why is it necessary to strictly adhere to the farmland protection line?
      • The government's motivation for acquiring and selling land is simply too strong.
      • Out of concerns for food security, the central government has repeatedly issued instructions, demanding that local authorities strictly adhere to the red line for cultivated land.
    • Before the reform and opening up, the planned economy accumulated surpluses through the price gap between industrial and agricultural products (by adopting the collective agricultural management model to reduce the transaction costs for the state to purchase grain). After the reform and opening up, it accumulated a large amount of surpluses through the price gap between urban and rural land.
      • （1）Local governments obtain the remaining funds by levying agricultural collective land and changing the land use.
      • （2）Local officials have KPI targets related to GDP, and they also have the desire to compete with other regions in attracting investment.
      • （3）By using the surplus funds obtained from residential land, the local government can offer large tracts of land to industries at a low price
        • Land transaction prices in the top 100 major cities in 2021: The average floor price of residential land was 5,663 yuan per square meter; the average floor price of commercial and service land was 2,421 yuan per square meter; the average floor price of industrial land was 291 yuan per square meter.
    • The government accumulated funds for industrialization through the price difference between urban and rural land, creating a miracle in China's industrial development speed. However, there are also some problems.
      • The rapid industrialization overly relies on the low-cost input of factors (land and labor), with the low-cost industrial land coming at the expense of high-priced housing and commercial land in the city center, which restricts the transformation of high-end service industries.
      • Widening gap between the rich and the poor, restricting further expansion of the market scale and leading to industrial overcapacity.
    • Land capitalization: land transfer fees + land mortgage financing
      • Before the revision of the "Budget Law" in 2014, local governments were not allowed to borrow money. How could they obtain financing through land mortgage?
        • Local governments established LGFVs, injected land funds into these companies, and then had the LGFVs mortgage the land to banks for financing.
        • After obtaining the money, the LGFVs carried out infrastructure investment in accordance with the requirements of the local government.
      • Since 2009, the model where local governments used LGFVs to conduct land mortgage financing began to expand rapidly.
        • As farmers' awareness of their rights has increased and cities have begun to support rural areas, the surplus of land transfer fees that local governments can freely allocate has begun to decline.
        • To counter the global financial crisis, it was necessary to boost domestic demand and thus the "4 trillion" stimulus policy was adopted.
        • The rapid growth of credit reflects the change in China's economic growth model: when the surplus from land sales declined, local governments began to drive local economic growth through the model of financing by land mortgage.
  • 2.4 The issues and reforms of land finance
    • 2.4.1 The gap between urban and rural areas has widened.
      • Normal sources of income: property income, wage income
      • For rural workers who have moved to cities for employment:
        • property income
          • The agricultural land in rural areas, as idle land resources, has seen a separation of the contracting rights and the operating rights. This has made the process of confirming ownership more difficult and has also resulted in a lack of the ability for collateral or guarantee.
          • Rural construction land, especially residential land, basically only has residential functions and no market trading functions. As a result, farmers' property income is restricted.
        • wage income
          • Compared with the urban registered population, the welfare benefits of migrant workers have a certain gap. Therefore, they will minimize current consumption expenditures and increase precautionary savings.
        • Farmers, with meager land acquisition subsidies, find it difficult to afford houses in cities, resulting in a slow process of the migrant workers' integration into urban society.
        • On the one hand, it has hindered the expansion of domestic demand; on the other hand, it has widened the gap between urban and rural areas.
      • In the future, local governments need to transfer more of their financial or land surpluses to the migrant worker population.
        • rural revitalization strategy
        • common prosperity for all
        • In essence, it is the cities that are benefiting the countryside.
      • The revision of the "Land Management Law" in 2019 has significant implications for the improvement of the land expropriation system.
        • Breaking away from the "expropriate-then-allocate" model, eligible collectively-owned construction land and state-owned construction land can now directly enter the market on an equal footing with the same rights and prices.
          • The efficiency of land supply from rural areas to cities is further enhanced through reducing administrative procedures.
          • Breaking the monopoly of local governments in the primary land market and transfering some of the benefits to farmers.
          • More fully leveraging the decisive role of the market in the allocation of land resources, and promoting the rationality of land distribution between urban and rural areas.
          • When collective land is put into the market, it is necessary to determine the share of farmers in the collective land. The collective land will be leased to merchants for operation, and farmers will receive dividends annually.
    • 2.4.2 Boosting economic growth through debt
      • The "closed-loop" model of current economic growth
        • S1: Turn the wasteland into developable land and use land mortgage financing to develop infrastructure.
        • S2：Using infrastructure projects as a bargaining chip to attract investment
        • S3：Successful investment promotion has led to the introduction of excellent enterprises.
        • S4：The entry of the core enterprise leads to the entry of the upstream and downstream industrial chains.
        • S5：Talents are continuously flowing in.
        • S6：After talents move in and purchase properties in the local area, it further boosts the land value.
        • S7：Sell the land as collateral to continue developing infrastructure.
      • The infrastructure projects funded by land mortgage financing lack effective sources of repayment. How can repayment be guaranteed?
        • (1) With the entry of core enterprises and the establishment of the industrial chain, the economic scale expands and tax revenue increases.
        • (2) As long as the land appreciates in value, the repayment issue won't be a problem.
        • (3) Even if the project has no cash flow, as long as refinancing continues, new funds can be borrowed to replace the old ones.
      • This growth model is overly dependent on the real estate sector.
        • The stability of the financial system is not based on the projected cash flow of infrastructure projects, but rather on land.
        • As the most important collateral for the credit expansion of financial institutions, land prices are highly correlated with the stability of the financial system.
        • As long as the land prices are expected to remain stable, even if the loans issued turn bad, financial institutions can still deal with the situation by auctioning off the land. In this way, the financial risks can be relatively easily managed.
        • Therefore, the most ideal outcome of implementing the "housing for residence, not for speculation" （房住不炒）policy is to ensure the stability of the real estate market and prevent the disruption of the expectation of stable land prices. The most desirable regulatory result is to make the return rate of real estate and the return rate of the real economy match.
• Lecture Three: Globalization
  • 3.1 The background and origin of globalization
    • After the end of World War II, various countries took a series of measures to rebuild production and restore the economy. Trade activities began to become increasingly frequent.
    • Carrying out internationalized specialized production based on comparative advantages is conducive to maximizing the interests of all countries - this is the fundamental driving force for the development of economic globalization.
      • David Ricardo's theory of comparative advantage
    • Since the 1970s, the process of globalization accelerated.
      • Food crisis: During the period from 1972 to 1974, due to natural disasters, global grain production decreased significantly.
        • Countries like the Soviet Union entered the international market and made large-scale purchases of grain, causing global food prices to rise.
      • Oil Crisis: The 1973 Middle East War and the 1978 domestic unrest in Iran led to two global oil crises.
        • Developed countries were in a stage of rapid industrial development. The increase in oil prices led to a significant increase in the cost pressure on enterprises, prompting capital to be transferred to locations with lower costs.
    • The fundamental reason for globalization: The rising wage costs in developed countries have led to an acceleration of capital flowing to developing countries with large labor forces and low costs.
    • The issue of rising labor costs in the United States
      • In the early stage of the Cold War, the Soviet Union, through its planned economic system, vigorously developed industry and agriculture, attracting a large amount of capital, scientists, and labor from the United States.
      • Under external pressure, the United States was forced to enhance labor welfare (by increasing taxes on the wealthy class)
      • The workers' benefits have seen an unprecedented increase, reaching their peak in the 1970s.
      • High labor costs and insufficient real returns, but as long as the macroeconomy continues to grow, there is still profit potential and it can persist. However, the arrival of the food crisis and the oil crisis has disrupted this balance.
        • Wages and prices were spiraling upwards, making it extremely difficult for factories to operate.
        • The inflation rate and unemployment rate soared, while corporate profits declined significantly .
        • The development of technology had reached a bottleneck stage, and there were no new growth points.
        • Entrepreneurs had to look for places with lower costs, especially lower labor costs, and relocate their industries there.
          • Path of industrial transfer：United States--Japan、Germany--The Four Asian Tigers--Mainland China--South East Asia, South Asia
          • The manufacturing industry was shifting outward, and the industrial sector of the United States is gradually becoming "hollowed out"（空心化）.
          • The government's tax policies returned to normal, with the tax burden for the wealthy reduced. However, the good times for American workers had gone forever.
            • JD Vance：Hillybilly Elegy
  • 3.2 First element of globalization: The demographic dividend
    • Starting from the 1990s, especially after joining the WTO, China took on the majority of low-tech and labor-intensive industrial transfers from overseas, thus becoming the "world factory".
      • On the one hand, the external demand obtained through joining the WTO contributed to the release of domestic production capacity potential.
      • On the other hand, China's abundant and highly productive labor force has become the most powerful driving force for the rapid improvement of the entire manufacturing industry supply chain system.
    • There were three waves baby booms after the founding of PRC.
      • （1）In the early 1950s, right after liberation
      • （2）After the end of the three-year difficult period in 1962
      • （3）The 1980s and 1990s
      • During this period when China took on overseas production tasks, the overall population structure became younger, and the abundant labor force provided a large number of fresh forces for the development of domestic manufacturing industries.
    • Why not India, Bangladesh and Africa?
      • After the founding of PRC, basic education was rapidly extended across the country, enhancing the human capital level. Therefore, China had both "quality" and "quantity" advantages in participating in the globalization process.
      • The planned economy era laid a solid industrial foundation, and a large number of workers were familiar with and knowledgeable about industry.
      • China emerged successfully at the end of the 20th century and took the lead in taking over the industrial transfer from the "Four Asian Tigers", developing a complete manufacturing industrial system and becoming one of the world's three major manufacturing centers.
  • 3.3 Second element of globalization: Investment attraction
    • After the Reform and Opening up, under the guidance of a series of documents issued by the central government to attract foreign investment, local governments competed to introduce policies that were more favorable and more generous in attracting foreign investment.
    • Under the assessment system based on GDP, local governments were in a competitive relationship. In terms of attracting foreign investment, in order to gain a comparative advantage, the competition among local governments was extremely intense.
  • The demographic dividend combined with policy incentives had jointly driven the rapid growth of FDI. Especially after China's accession to the WTO, the import and export trade channels between China and the international market became more smooth, and the capital aggregation effect of China in the global market became more prominent. The pace of opening up to the outside world had also accelerated.
  • 3.4 What problems have been brought about by globalization?
    • Initially, China engaged in international division of labor mainly in low-end production stages. By taking advantage of the relatively low prices of production factors such as labor and land, China achieved rapid expansion of exports, but this led to overcapacity and the problem of low-end duplication.
      • Insufficient innovation and inadequate protection of property rights
      • The root cause: Under the assessment system based on GDP, China's industrial structure is overly fragmented. This has affected the mode of enterprise development and expansion, forcing enterprises to expand production capacity, compete on price and resources, and drive competitors out of the market, thereby seizing market share.
        • Each region has a complete industrial structure, but it is difficult to achieve effective resource integration, and it is also difficult to carry out large-scale innovation. As a result, they can only maintain a low-end position.
    • With the changes in the international situation and the development of China's economy and society, this kind of overcapacity and low-end repetitive industrial structure has become unable to meet the actual conditions of the country.
      • （1）The overarching logic of globalization has undergone a change.
        • As the high welfare benefits for workers in developed countries have disappeared, the gap between the rich and the poor has gradually widened. To narrow this gap and maintain social stability, a rebalancing of the production sector is needed.
          • Trump's plan for manufacturing reversion?
      • （2）China has gradually established an export-oriented economic growth model, which has made the domestic economy overly sensitive to changes in the international market situation.
        • e.g. The 2008 crisis and the "4 Trillion Yuan" plan; 2020-2022 period of the COVID-19 pandemic
    • In the long run, "anti-globalization" is accelerating the reconfiguration of the global industrial chain, and the industrial chain strategies of multinational enterprises are shifting from "prioritizing efficiency" to "prioritizing security".
      • Under the process of industrial chain restructuring, some countries will promote the localization of their industrial chains, thereby reducing their trade demands with other countries.
      • External demand gradually shifted towards domestic demand. China should accelerate the establishment of a new development pattern where the domestic circulation plays a leading role and the domestic and international circulations reinforce each other.
    • At the import end, with the intensification of trade protectionism, the "choking" problem of high-end components has emerged. China need to accelerate the strengthening of domestic substitution and enhance the independent control capabilities in core areas.
    • With the weakening of the demographic dividend and the increase in labor costs, the low-end and low-priced export model will no longer be sustainable.
  • 3.5 How to resolve the problem?
    • 3.5.1 Make full use of the advantages of the demographic quality dividend
      • The coverage of basic education in China has reached or exceeded the average level of middle- and high-income countries.
      • How to effectively leverage the quality advantage of the population to promote economic growth?
        • Forming a high-end industrial chain and attracting high-quality job seekers
          • Currently, there are not enough positions available for high-quality talents.
        • Further strengthen the advantage of China's demographic quality dividend and enhance the overall educational level of the nation
        • Industrial upgrading and the demographic quality dividend are mutually reinforcing and mutually promoting.
    • 3.5.2 Disposal of low-end production capacity and substitution with high-end imports
      • Continuously deepen the supply-side reform of low-end production capacity, and promote independent innovation and import substitution in high-end industries
      • Supply-side structural reform should be carried out in a gradual and orderly manner. If the efforts are too intense, it will lead to a large number of unemployed workers.
      • Industrial policies should support the healthy and sustainable development of core manufacturing industries.
    • 3.5.3 Utilize the pricing function of the capital market
      • Chinese enterprises mainly obtain financing through indirect financing methods such as bank loans.
      • Bank credit provides insufficient support for the strategically important emerging industries that are under the focus of national development.
      • The capital market focuses on the long-term growth potential and stability expectations, which is more beneficial for the development of emerging industries.
      • The continuous accumulation of residents' wealth in our country has created a significant demand for investment, thus providing ample room for the development of the capital market.
• Lecture Four: Leverage
  • 4.1 Leverage of public sector
    • Government leverage ratio = Total government debt (central + local)/GDP
    • The reasons for the government to increase its leverage
      • On one hand, central government could regulate economic development through fiscal policies.
      • On the other hand, local governments use debt to promote local economic development and meet the strict GDP targets set by the government.
        • After 2008, the proportion of local government fiscal revenue was only about half, but the proportion of fiscal expenditures it undertook accounted for 85%.
    • The changes in the government's leverage ratio in our country have mainly gone through two phases.
      • （1）Before 2009, the central government's practice of issuing bonds and increasing leverage was the main factor contributing to the rise in the leverage ratio.
        • Affected by the Asian financial crisis in 1997, the Ministry of Finance proposed in June 1998 to increase 100 billion yuan in construction bonds to help restore the economy.
        • In 1998, the central government issued 270 billion yuan of special government bonds to replenish the capital of the four major banks.
        • Successfully promoted the recovery of domestic economy
      • （2） Since 2009, local governments have replaced the central government as the main department involved in increasing leverage.
        • From 2008 to 2015, the leverage ratio of local governments continued to rise, while that of the central government decreased.
        • The main body responsible for the task of supporting the economy through proactive fiscal policies shifted from the central government to local governments.
    • The issue of invisible debts of local governments deserves attention.
      • Local governments were not the direct borrower, so they didn't have the direct responsibility for repayment and it is not directly reflected in their accounts.
      • Causes?
        • After the implementation of the tax-sharing system reform, there was an imbalance in local fiscal revenue and expenditure, and the revenue pressure was relatively high.
        • The old budget law imposed restrictions on local governments' ability to issue bonds independently.
        • Therefore, they had to turn to other platforms, usually LGFV, to raise the funds needed for development.
      • Local governments establish LGFVs, inject land into these platform companies. LGFVs use the land as collateral for financing, and invest in infrastructure in accordance with government instructions, thereby driving economic growth.
        • Local governments provide implicit guarantees and bear final responsibilities for repayment.
      • There is a positive feedback relationship between land financing and urban infrastructure investment.
        • Local governments rely on a combination of land sale revenue and land mortgage loans to ease their budget constraints, thereby providing a large amount of financial support for urban infrastructure expansion.
        • The improvement of infrastructure enhanced the quality of life for residents, stimulated population aggregation and urbanization development, and subsequently drove economic growth.
        • The local economic development and the increase in population further drove up land prices, enabling the government to obtain more funds for infrastructure development.
      • Infrastructure projects usually have relatively low economic returns and slow cash flow recovery, which cannot cover the financing costs.
        • Relying on government guarantees and land appreciation, the leverage ratio increased steadily.
      • Since the "4 trillion" era, urban infrastructure construction expanded rapidly, and the amount of credit funds mobilized also increased significantly.
    • As the scale of generalized debt expanded, the debt pressure was acceleratingly accumulating in local government. Since 2014, the central government began to gradually standardize the borrowing methods of local governments.
      • In the long run, government deficits are merely one way to regulate the economy and should not become the dominant force driving economic growth.
      • In August 2014, the new "Budget Law" was promulgated, for the first time allowing local governments to exercise greater autonomy in borrowing and integrating local government debt management into the budget system.
      • In September 2014, the State Council issued Document No. 43, officially kicking off the process of regulating local government borrowing activities.
        • （1）Clearly define the boundaries between government and enterprises, explicitly separate the government financing functions of LGFVs, and financing platforms must not undertake any new government debt.
        • （2）Grant local governments the authority to undertake moderate borrowing. Clearly define that local government bonds are the sole financing channel for local governments. Within the approved amount determined by the State Council and approved by the National People's Congress, local governments can issue bonds and incorporate them into budget management.
        • （3）The existing debts borrowed by the LGFVs should be carefully identified. Those for which the local government is responsible for repayment can be replaced by issuing local bonds.
        • （4）Promote the PPP model to mobilize social capital to participate in infrastructure and public service provision
      • As the pressure to maintain stable growth increased in 2015, the newly introduced policies were slightly relaxed without violating the major premise of "clearly demarcating the boundaries between government and enterprises".
        • Regarding the PPP model
          • Previously, the regulations stipulated that the social capital partner should not include the LGFVs affiliated with the current level of government and their wholly-owned SOEs.
          • As the pressure to maintain stable growth intensified, the document No.42 issued in 2015 relaxed the criteria for identifying the private sector partners in PPP projects.
            • For those enterprises that have established a modern enterprise system and achieved market-oriented operation, provided that the local government debts they are undertaking have been included in the government's fiscal budget, properly handled, and it has been clearly announced that they will no longer undertake the function of local government debt financing in the future, they can participate as social capital in local government and social capital cooperation projects. Through signing contracts with the government, the relationship of responsibilities, rights and interests can be clearly defined.
            • This loosening has provided local governments with an opportunity to expand their debts by leveraging financing platforms, using PPP projects that are ostensibly equity but actually debt-based, with large amounts of equity and small amounts of debt as the vehicle.
              • The local debt problem has not been resolved; instead, it has become even more complex in structure, with more concealed leverage and less transparency in the debt.
      • After 2016Q4, the effect of stabilizing growth became apparent. The central government began to correct the behavior of local governments frequently exceeding the bottom line of Document No. 43 and providing illegal guarantees, which increased the debt burden of local governments.
        • 4.1.1 Regulation of local governments and LGFVs
          • In 2017, six ministries and commissions jointly issued Document No. 50, which explicitly reaffirmed that local government bonds are the only legitimate means for local governments to incur debt. It prohibited local governments from providing various forms of implicit guarantees to urban investment companies and banned projects involving fake equity but real debt （明股实债）
          • In 2017, the Ministry of Finance issued Document No. 87 to regulate government procurement of services （政府购买服务） through a negative list approach (supplementing Document No. 50). It clarified three fundamental principles for government procurement of services: 'basic services,' 'budget approval before procurement,' and 'inclusion in the guidance catalog.' Additionally, it outlined a negative list specifying what must not fall within the scope of government procurement of services
            • Compelling local governments to promote standardized PPP models in these sectors.
          • The CSRC's Document No. 89 of 2018 clearly stated that it supports local governments in piloting the issuance of project income special bonds within the scope of special bond quotas, in areas where the project income and financing can achieve self-sufficiency.
          • Open the main entrance, block the side entrances, promote the separation of the LGFVs from its role as a government financing agency, transform them into a public welfare or commercial enterprises, rely on the company's own operating income to repay debts, and strive for a balance between project returns and financing.
        • 4.1.2 Regulation of financial institutions
          • The intensified financial regulatory measures implemented since 2017 (including the new interbank business regulations and asset management rules) have established standards for practices such as implicit guarantees, pooled fund operations, and non-standard asset investments.
          • In 2021, the CBIRC issued Document No. 15, which reiterated the prohibition against incurring local government implicit debt in any form. It specifically restricted banks' working capital loans （流动资金贷款）by prohibiting them from providing such loans to clients carrying local implicit debt, nor allowing them to offer supporting financing for these clients' participation in local government special bond projects
          • Gradual replacement of existing debts
      • The ultimate goal of local governments' borrowing is to promote economic growth. In the past, due to loose budget constraints, the sole focus on GDP, and the lack of supervision, a large amount of implicit debt was accumulated. On one hand, this led to heavy debt-reduction pressure on local governments. On the other hand, the risks hidden behind the debt and the insufficient efficiency of government investment deterred private capital, all of which hindered the formation of effective social investment.
  • 4.2 Leverage of enterprises
    • The macro corporate leverage ratio = Non-financial corporate debt balance / GDP = (Corporate debt / Corporate total assets) * (Corporate total assets / GDP) = Microscopic debt ratio * 1 / Total asset output rate
      • Therefore, if an enterprise can increase its total asset output ratio through borrowing (for example, by implementing technological upgrades and equipment innovations to enhance output), then the increase in the macro leverage ratio will be lower than that of the micro leverage ratio. On the contrary, if a company has a low debt-raising efficiency and the funds raised fail to enhance the output efficiency of the enterprise, this will lead to a deterioration in the total asset output rate, and further increase the macro leverage ratio.
    • The changes in the macro leverage ratio of the non-financial enterprise sector in our country
      • Phase 1: Before the 2008 crisis, the leverage ratios of enterprises fluctuated upward, but the increase was relatively small.
        • During this period, China's economic performance was excellent, and after joining the WTO, it experienced a period of rapid development.
        • During the economic upswing period, the demand and ability of enterprises to borrow money increased, while the capacity utilization rate and input-output ratio of enterprises also remained at a relatively high level.
      • Phase Two: From 2009 to 2016, the leverage ratio of enterprises rose significantly, and when compared horizontally, it was notably higher than that of other countries.
        • Usually, when the production and operation environment deteriorates, enterprises will start to reduce their production capacity, actively reduce debts and deleverage.
        • However, the Chinese enterprise sector is mainly composed of SOEs, which largely undertake social responsibilities and serve as an important vehicle for local governments' macroeconomic regulation.
        • After the crisis, under the "4 trillion" policy, although private enterprises began to deleverage, SOEs started to increase leverage. However, at this time, expanding production not only failed to improve the production efficiency of enterprises, but also led to an overcapacity in the market, causing a further decline in the production efficiency of SOEs and further increasing the macro leverage ratio.
        • The increase in debt scale combined with the decline in production efficiency jointly drove the rapid rise in the leverage ratio of non-financial enterprises during this period, and also brought huge potential risks to the real economy.
          • In 2015, the Chinese central government first proposed the supply-side structural reform（供给侧结构性改革）, advocating the 'Five Priority Tasks' of cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness（三去一降一补） .
      • Phase Three: After 2017, encouraging enterprises to gradually enter the stage of deleveraging.
        • The central government strengthened the regulation of local governments' borrowing activities and issued a series of supervisory regulations for LGFVs.
        • Improve the production efficiency of state-owned enterprises (through supply-side structural reform), reduce ineffective supply and expand effective supply, and strive to enhance the quality of the entire supply system.
          • The reform of SOEs was accelerating. Through means such as mergers and reorganizations, mixed-ownership reforms of state-owned enterprises, and elimination of outdated production capacity, the efficiency of SOEs was enhanced.
        • Reduce the debt of SOEs
  • 4.2 Leverage of household sector
    • Resident leverage = Debt of the resident sector / GDP
    • The increase in housing prices has driven up the leverage ratio of the household sector.
      • Before 2008, the leverage ratio of the household sector remained on a slow upward trend overall.
      • After 2008, the household leverage ratio showed a significant increase.
      • Since 2015, the central government initiated supply-side reform and adjusted the economic structure. The upward trend of the leverage ratio of non-financial enterprises was significantly curbed, but the leverage ratio of the household sector continued to rise and even accelerated.
        • The increase in the household leverage ratio was largely due to the continuous growth of the mortgage loan scale of residents.
    • The leverage ratio of the resident sector in China is at a relatively high level and its growth rate is also among the highest globally.
    • The debt burden of the household sector can be analyzed through the ratio of household sector debt to disposable income to assess the debt repayment pressure of the household sector.
      • After the financial crisis, the debt-to-disposable-income ratio of the household sectors in Europe and the United States remained stable or even declined.
      • However, the debt repayment burden of Chinese residents has seen a rapid increase (as the growth of residents' income failed to keep up with the increase in housing prices)
      • At present, the overall debt burden of Chinese residents has surpassed that of several developed economies such as the United States. The hidden risks involved require attention.
    • On one hand, the principle of "housing for residence only" should be adhered to and the stable development of the real estate market should be maintained. On the other hand, through supply-side reform, the ability of technological innovation should be enhanced to accelerate economic transformation.
• Lecture Five: Real Estate
  • 5.1 The externality of land finance
    • 5.1.1 Positive externalities of land finance
      • Although the cash flow from infrastructure projects is relatively slow, in the long run, it is beneficial for reducing enterprise costs and facilitating the geographical connection of the national market.
      • The reduction in costs contributes to the improvement of enterprises' profitability, enabling to achieve better development.
      • The subway project has stimulated economic development along the line, facilitated residents' lives, and enabled the rise in property prices in the surrounding areas, thereby facilitating the mobilization of a larger scale of credit.
      • The well-developed logistics system and network infrastructure have enabled the rapid development of the e-commerce industry.
    • 5.1.2 The crowding-out effect of high housing prices
      • Local governments have provided low-priced industrial land for attracting investment. To obtain land revenue, they usually sell residential and commercial land at high prices.
        • Essentially, it is the commercial and residential sectors as well as high-end service industries that are continuously subsidizing capital-intensive industries such as large-scale projects and local large SOEs.
          • Firstly, it curbed household consumption
            • During the period of rapid economic development, the land finance policy has driven the rapid growth of various sectors such as manufacturing and infrastructure. The residents' income has increased significantly. Coupled with the wealth effect brought about by the rising housing prices, it can thus promote residents' consumption.
            • As the economic growth rate slows down, the growth of residents' income also slows, but housing prices continue to rise. The increase in residents' income fails to keep up with the increase in housing prices, and the impact of rising housing prices on residents' consumption has gradually shifted from the previous wealth effect to the crowding-out effect.
          • Secondly, it crowded out high-end service industries
            • On demand side: High housing prices have squeezed out residents' consumption, restricting consumption upgrading and resulting in insufficient demand for high-end services.
            • On supply-side: High housing prices have increased the operating costs of high-end service industries.
              • If the costs of production factors in the manufacturing sector increase, they can relocate to other areas. However, the service industry is highly dependent on commercial centers. Therefore, it can only be located in areas with dense populations and high housing prices.
          • Thirdly, it crowded out the space for the survival and development of manufacturing industry
            • On demand side: High housing prices squeeze out residents' consumption, making it difficult for manufacturing enterprises to open up the domestic market. The slowdown in global economic growth, coupled with the "anti-globalization" trend, has led to a double decline in both domestic and external demand, which is not conducive to the expansion of manufacturing enterprises.
            • On supply-side: With the development of the economy, the original competitive advantage of China's manufacturing industry, which had a low cost of production factors in the international division of labor, has gradually weakened.
              • The increase in housing prices has led to a rise in living costs, and has also pushed up wage levels by hindering labor mobility and reducing the growth rate of labor supply, thereby shrinking the profit margins of the manufacturing industry.
          • Furthermore, high housing prices will also lead to a misallocation of resources, causing more resources to be excessively concentrated in the real estate sector and its related industries.
            • The pursuit of high returns in the real estate sector by the manufacturing industry has led to the suppression of enterprise innovation and research and development expenditures, resulting in a decline in the long-term competitiveness of enterprises.
      • How to effectively control the rise in housing prices, maintain their stability, and thereby stimulate domestic demand and achieve economic transformation and upgrading has become an issue that must be addressed in the process of economic development.
  • Solution: Establishing a long-term mechanism for the real estate sector
    • Long-term mechanism: Through structural adjustments in supply and demand, promote long-term balance in the supply and demand of the real estate market. Adhere to stabilizing land prices, stabilizing housing prices, and stabilizing expectations, maintain stable housing prices or promote a reasonable return of housing prices, stabilize fluctuations in the real estate market, meet residents' housing needs, and restore the essence of housing as a place for living.
    • 5.2.1 Land supply: Control the total amount, rationalize the structure and rhythm
      • Controling the total amount: Land Ticket System
        • Reclaim the idle land in rural areas that has been left uncultivated due to population outflow into farmland. As long as the newly approved construction land area in cities is smaller than the reclaimed farmland, it will not only adhere to the farmland red line but also expand the supply of construction land for urban development.
        • Through land ticket transactions, new sources of income are created for rural residents who move to cities, serving as the cost for settling down.
      • Controling structure
        • The excessive proportion of industrial land and the insufficient supply of housing land exhibit a structural imbalance. Having too much industrial land but with low output inevitably leads to waste.
          • The land supply structure should be reasonably planned based on the population and mobility trends of the city, as well as the city's industries and its ability to generate GDP.
        • There is a structural imbalance in the supply between core large cities and smaller cities.
          • The land supply structure should be planned based on the urban industrial layout and the trend of population mobility.
            • In first- and second-tier cities, the land supply for residential areas can be appropriately increased. At the same time, idle and vacant houses should be revitalized.
            • In third- and fourth-tier cities, the supply of real estate land should be controlled, and efforts should be made to accelerate the disposal of housing inventory.
      • Optimization of supply structure
        • Implementing centralized land supply to cool down the land auction market.
    • 5.2.2 The financial system: the upper limits on banks' real estate mortgage concentration ratio + the 'three red lines' policy for property developers
      • The real estate industry has excessively seized financial resources, but its contribution to output has failed to keep up. There is a significant imbalance in the financing structure.
        • （1）The industry, driven by the increasingly high leverage, expanded blindly, which contributed to the housing price bubble.
        • （2）The excessive financial credit extended to the real estate sector has led to capital 'diverting from the real economy to the virtual economy,'（脱实向虚） resulting in reduced credit availability for other sectors and a deteriorating financing environment for small and medium-sized enterprises (SMEs)
      • The excessive allocation of bank credit to the real estate industry has increased the difficulty for the country in regulating the economy.
        • Since 2012, regulatory restrictions have been relaxed, ushering in the era of large-scale asset management. Various types of asset management financial products have emerged one after another. The original intention of the policy was to guide residents' savings into the real economy. However, through various financial innovations and multiple layers of nesting, the funds ultimately still flowed into real estate and infrastructure.
      • To curb excessive financing in the real estate industry, the government has implemented new policies for both banks and real estate developers, the two parties involved in the real estate leverage.
        • 5.2.2.1 Banks：management on real estate mortgage concentration ratio
          • At the end of December 2020, PBOC and CBIRC issued the "Notice on Establishing a Management System for Real Estate Loan Concentration of Banking Financial Institutions", setting upper limits for the proportion of real estate loans and personal housing loans for five types of institutions, and giving banks that exceeded the limits a 2-4 year period for excessive rectification.
          • Reduce the lending willingness of banks to the real estate industry from the supply side and optimize the credit structure
        • 5.2.2.2 Real estate developers: The "three red lines" to keep leverage within a reasonable range.
          • Background of introduction: The "fast turnover" business model of real estate enterprises
            • Real estate developers acquire land and accelerate new project launches to meet pre-sale requirements, then put the projects on the market for pre-sale
            • After receiving the advance payment, due to insufficient strict supervision of the advance payment, when real estate developers withdraw the advance receipts in advance, they will not accelerate the construction and delivery process, but instead start a new round of "land acquisition - new construction - advance sale" procedures.
            • By doing so, the company can rapidly expand its scale, which is conducive to obtaining larger-scale financing in the future.
            • The prerequisite is that residents are willing to purchase pre-sale properties, and their expectation of rising housing prices remains unchanged.
          • Under the "fast turnover" model, the leverage of real estate enterprises has been increasing continuously. Once there are problems with the capital chain (such as poor sales performance and unfavorable capital turnover), it may trigger a series of economic and social issues, and at the same time cause damage to the asset quality of the financial system, potentially leading to systemic risks.
            • As the housing supply in some cities becomes excessive, sales continue to decline, and the external financing conditions tighten, the phenomenon of unfinished projects has occurred frequently.
          • In August 2020, the Ministry of Housing and Urban-Rural Development and the People's Bank of China held a meeting for key real estate enterprises, setting out "three red lines" regulatory requirements for real estate financing.
            • （1）The debt-to-asset ratio excluding prepayments should not exceed 70%.
            • （2）Net debt ratio should not exceed 100%
            • （3）The ratio of cash to short-term liabilities must not be less than 1.
            • property developers are categorized into four tiers based on their compliance with the metrics:
              • Red Tier: In breach of all three red lines — Barred from increasing interest-bearing debt
              • Orange Tier: In breach of two red lines — Annual debt growth capped at 5%
              • Yellow Tier: In breach of one red line — Annual debt growth capped at 10%
              • Green Tier: Compliant with all three red lines — Annual debt growth capped at 15%
          • Policy effect: Since 2022, the real estate industry has entered a downturn period. The financial flow of real estate enterprises has become increasingly strained, and their willingness and ability to invest and acquire land have both weakened.
    • 5.2.3 Parallel Development of Housing Rental and Sales （租售并举）: Develop and improve the rental market and build a multi-level housing supply system.
      • The housing rental market in China has long been neglected.
        • · Chinese people have an obsession with buying houses and believe that real estate can retain and increase its value.
        • · Real estate enterprises are reluctant to develop rental housing (the rental income cash flow is small and slow, and it is not as quick and direct as selling houses).
        • · Renters do not have property rights and may not be entitled to the same social security and welfare benefits such as education and medical care.
        • · In the rental market, there are relatively few specialized operating institutions. The vast majority of rental properties are in the hands of individual landlords, resulting in an overly fragmented market.
      • Promoting parallel development of housing rental and sales, and increasing the supply of rental housing.
        • First is for the government to improve the public rental housing and affordable rental housing systems to meet the demand for stable housing.
          • The government can raise the funds needed for building rental housing by issuing REITs.
        • Second is to cultivate specialized housing rental operation enterprises.
          • （1）An intermediary agency that does not own the property rights but only provides rental and housing services - integrates the scattered housing resources of individual landlords, expands diversified supply, and improves rental efficiency
          • （2）Real estate developers engage in the business of renting out commercial housing.
      • Implementing equal rights for renting and selling
  • 5.3 A different real estate cycle
    • Historical experience: The prosperity of the real estate sales market is closely related to government policies.
      • Relaxing purchase restrictions and lowering mortgage interest rates - the real estate market would recover
      • Introducing policies to tighten restrictions on home purchases and lending - the real estate market would weaken
      • In the second half of 2020, following the implementation of a series of regulatory policies such as the "three red lines", the real estate market cooled down. Housing prices and sales area both declined year-on-year and even turned negative.
    • Starting from the second half of 2021, the economic pressure began to increase. To stabilize the economy, the real estate regulation began to show a marginal relaxation.
      • On the demand side, local governments are implementing city-specific policies to stimulate the housing market. These measures include: lowering mortgage rates and down payment ratios; easing or lifting home purchase restrictions; increasing the cap on housing provident fund loans; relaxing household registration (hukou) requirements, which in turn lowers the threshold for purchasing property.
      • On the supply side, the government has prioritized ensuring the delivery of pre-sold homes to restore market confidence. Furthermore, it has rolled out a "three-arrow" strategy (comprising credit, bonds, and equity financing) to provide liquidity support for real estate developers and ease their financial strain.
      • However, after this round of relaxation, the market did not stabilize and recover. In 2022, housing prices and sales data remained in a negative growth range.
    • Why is the public not buying it?
      • Firstly, people's wallets have become tighter.
        • The debt of residents has reached a relatively high level.
        • The slowdown in economic recovery, coupled with unstable employment, has undermined future income expectations. As a result, residents have reduced current consumption and increased precautionary savings to prepare for unexpected situations.
      • Secondly, the credit risk incidents of developers have aroused a strong sense of risk aversion among residents.
        • The tightening of external financing and the sluggish sales situation have further exacerbated the financial pressure on real estate companies, resulting in delays in the delivery of some projects.
        • Residents' trust in real estate developers has dropped to an all-time low. Many are adopting a wait-and-see attitude and are only willing to purchase existing properties.
      • Thirdly, the expectation of rising house prices has disappeared.
        • In the short term, the credit risks of real estate enterprises, policy adjustments, and the downward pressure on the economy all combine to undermine residents' expectations for rising house prices, especially in the third- and fourth-tier cities.
        • The LPR has been repeatedly lowered. Due to the time lag between the "re-pricing date" of personal mortgage loans and the changes in policy interest rates, the difference in interest rates between new and old loans has widened. Residents have taken the initiative to repay their loans in advance to avoid high interest payments.
          • The contraction of mortgage loans, which are high-yield and stable quality assets of banks, directly affects the bank's profit situation, thereby influencing its ability and willingness to provide credit, and leading to a decrease in the effectiveness of monetary policy.
        • In the long term, factors such as an aging population, low birth rates, and a slowdown in urbanization mean that future housing demand will decline, and there will be no impetus for housing prices to rise.
    • Why have the "three red lines" failed to achieve the desired effect?
      • The root cause of the current credit risks faced by real estate enterprises lies in the previous fast-turnaround strategy, which pushed up the leverage ratios of these enterprises and led to a large-scale expansion of their operations.
      • The trigger that causes risks for real estate companies is the decline in property sales. The poor collection of sales proceeds further exacerbates the financial strain on these companies, ultimately leading to inability to repay debts and delaying the project delivery schedule.
      • If internal financing weakens while external financing becomes more stringent, the situation will undoubtedly deteriorate for developers already under financial strain. The more regulatory thresholds a firm violates, the greater its funding pressure becomes, necessitating more capital support to resolve its debts.
        • The tightening of policies has accelerated the exposure of credit risks for real estate companies, causing financial institutions to be even more reluctant to lend money to these companies.
        • At the level of people's livelihood, many real estate projects are facing difficulties in delivery, falling into a vicious cycle of "high financial pressure - project suspension - residents' concerns over the delivery of pre-sale properties, reduced home purchases - further increase in the pressure to recover funds - larger-scale suspension - further decline in sales".
    • In July 2022, the Political Bureau meeting set the task of "stabilizing housing delivery and protecting people's livelihoods". Various departments have successively introduced multiple policies for "stabilizing housing delivery" and "protecting real estate enterprises".
      • In 2023, the construction area completed saw a significant year-on-year increase, indicating that the "rescue of housing projects" has made some progress. However, the financial pressure on real estate companies has not improved significantly, and the sales of new houses remain sluggish. The local land revenue also declined year-on-year.
    • How will the real estate industry develop in the future?
      • （1）The fast-turnaround strategy is no longer sustainable. Future sales will mainly rely on the sale of existing properties.
        • The cycle of the real estate project will be extended.
      • （2）The real estate market will enter an era dominated by SOEs
      • In the long run, the policy of "housing for residence, not for speculation" remains firmly in place.
        • In the short term, the lack of trust in pre-sale housing sales, the increased uncertainty in the income end of residents, and the high level of household leverage all contribute to a decline in the demand for housing purchases by the household sector.
        • In the long term, the growth rate of the Chinese population eligible for home purchases is gradually declining, and the slowdown in the urbanization process means that there is an upper limit to the potential new purchasing power.
        • In the past, our country has frequently used real estate as a means to stimulate the economy. After years of development and construction, the current supply of housing has largely been able to meet the housing needs of the majority of people.
      • Real estate is a pillar industry of the national economy. Instability in the real estate sector can easily lead to widespread consequences. The future regulatory direction should focus on ensuring the stable operation of both the economy and the real estate market. This means not only controlling housing prices from rising but also avoiding significant fluctuations in the market.
        • Measures should be taken to establish and improve a long-term mechanism for promoting the stable and healthy development of the real estate market.
• Lecture Six: Finance
  • 6.1 Before 2012: The Era of Interest Rate Control
    • Before 2012, China's interest rates were generally controlled. The central bank set the levels of deposit and loan interest rates (or within a relatively narrow floating range), and there was a relatively stable interest spread.
    • The bank's revenue model was relatively stable, so there was a tendency to expand its scale - provided that the non-performing loans could be controlled.
      • Lend money to SOEs or platform companies with soft budgetary constraints, and use land and real estate as collateral.
    • Positive effects: By organizing residents' savings at a lower cost and concentrating the funds in areas necessary for economic development, a complete industrialization system can be established rapidly in a short period of time, and urbanization can be achieved.
    • Negative effect: Low efficiency in the utilization of funds
      • A large amount of credit funds flowed to SOEs and LGFVs, making it relatively easy to obtain funds for them, which had exacerbated moral hazards.
      • SOEs' reckless expansion and disregard for profitability have resulted in low operational efficiency and overcapacity.
      • The banks had a low risk appetite, and the interest rate control prevented the banks from obtaining risk premium. As a result, the resources available to SMEs and private enterprises were limited.
        • The high entry barriers for A-share listings and the subdued activity in the capital market left SMEs with no choice but to seek private lending, exacerbating their financing difficulties and high costs.
    • This drawback was tolerable in the past when the focus was on achieving high economic growth rates. However, as the economy has shifted from a high-speed growth phase to a high-quality development phase, in order to foster new growth momentum, it is necessary to attach importance to the development of small and medium-sized enterprises.
      • Only by liberalizing interest rates can more small and medium-sized enterprises be included in the consideration scope of bank lending.
  • 6.2 2012 - 2018: Regulatory Relaxation and Rectification
    • The reform of interest rate liberalization in China accelerated significantly.
      • In 2012, the central bank raised the upper limit for the floating rate of deposits in financial institutions to 1.1 times the benchmark interest rate, and lowered the lower limit for the floating rate of loans to 0.8 times the benchmark interest rate.
      • In 2013, the loan interest rates were fully liberalized.
      • In October 2015, the central bank announced the removal of the upper limit on deposit interest rates.
    • Following the deregulation of interest rates, the profitability of traditional deposit and loan businesses faded. As competition among commercial banks intensified, some innovative and aggressive small and medium-sized banks, seeking to expand their profits, began to shift their strategy. They chose to expand aggressively into off-balance-sheet businesses like interbank activities and wealth management, thereby fueling the growth of China's shadow banking sector.
      • China's "shadow banking" business - commercial banks shift credit activities that should have been within the balance sheet to the off-balance sheet, circumventing regulatory restrictions, to meet financing demands that were previously beyond the reach of commercial banks, ultimately achieving growth in profits
        • It is different from the shadow banking system in the United States. The shadow banking system in the US operates independently outside the commercial banking system. Its business entities are non-bank financial institutions. They provide financing for enterprises through asset securitization, money market funds, and other means, using trust loans, asset management plans, etc. Their sources of funds do not rely on banks.
      • While interest rate liberalization reform is advancing rapidly, on-balance-sheet activities are still subject to certain interest rate controls, and the issuance of on-balance-sheet credit is also influenced by credit policies.
      • The on-balance-sheet business requires the use of capital. With the introduction of Basel III after the crisis, the regulation of capital has become even more stringent.
      • The on-balance-sheet business was also subject to investment restrictions. It was strictly prohibited from being invested in enterprises with overcapacity, platform companies, and the real estate industry.
      • In the backdrop of the country's encouragement of financial innovation and the relaxation of regulatory constraints, a favorable institutional environment was created for the off-balance-sheet operation of bank credit business.
    • During the process of developing off-balance-sheet business, banks relied heavily on the asset management departments of non-bank institutions.
      • The banks absorbed large amount of savings by offering wealth management products with higher expected returns than deposit rates. Due to the rigidity on liability side, the asset side would face investment challenges.
        • With the consecutive cuts in the reserve requirement ratio from 2014 to 2016, the total liquidity was in an abundant state. The returns on fixed-income assets declined. Banks tended to entrust their investments to non-bank institutions with stronger research capabilities in order to obtain higher returns to cover the rigid expenditures on liabilities.
      • Non-bank institutions can act as channels for banks. By purchasing non-bank asset management plans, banks can channel funds to the target areas, thereby circumventing credit investment restrictions and achieving higher returns.
      • As economic downward pressure intensified, the return on physical investments declined, and banks shifted to issuing interbank asset management products issued by non-bank institutions.
        • The interbank market (at least before 2019) placed great emphasis on reputation, and thus was more reassuring to banks than credit assets.
    • The drawbacks brought about by shadow banking are also quite obvious.
      • Shadow banking essentially refers to bank loans under the guise of off-balance-sheet operations. It is large in scale but does not require capital, and is not subject to the supervision and regulation of monetary authorities. This makes it prone to the accumulation of systemic risks.
        • The product structure is complex, with numerous channels and a long transaction chain. This reduces the transparency of capital flow, making it difficult for both investors and regulators to identify, monitor and promptly address risks.
      • The expansion of shadow banking is more dependent on the model of "expected returns + pool of funds + guaranteed payment", rather than benefiting from the improvement of active management capabilities. Financial institutions, in their pursuit of profit growth, have overlooked the corresponding risks.
        • The "Pool of Funds" Model: Under this model, assets and liabilities are not matched on a one-to-one basis. It operates through a maturity mismatch—using short-term fundraising (e.g., by rolling over wealth management products) to finance long-term investments.
      • The rising cost of debt forced financial institutions to be more aggressive in allocating assets, thus leveraging additional external funds.
        • In a loose liquidity environment, financial institutions can borrow short-term funds at extremely low interest rates to increase their leverage in the bond market and repo transactions, and then invest these funds in relatively long-term assets such as wealth management products and bonds, thereby earning interest spreads.
        • By taking advantage of the regulatory vacuum in the case of interbank certificates of deposit (which are not subject to the 1/3 limit on interbank liabilities as a proportion of total liabilities, do not pay reserves, and are not included in the broad definition of credit), they significantly expanded their interbank liabilities.
        • With complex capital chains and inter-borrowing operations, once policies are tightened, it will lead to systemic risks.
      • The entities that these off-balance-sheet operations support are not small and medium-sized enterprises. Instead, financial institutions have moved funds through a series of nested channel operations and other means into areas subject to regulatory restrictions, such as industries with excessive profits, real estate, and financing platforms.
        • Contrary to the original intention of the interest rate marketization reform
          • While the real economy offers poor returns and carries high risks, entities with implicit government backing—such as SOEs, LGFVs and the real estate sector with sufficient collateral—are the preferred destination for capital.
          • Industries labeled as "two highs, one excess" (energy-intensive, highly polluting, and suffering from overcapacity), along with real estate and infrastructure, exhibit massive financing needs.
          • The fund pool and the channels provided operational feasibility and convenience for banks to invest funds in these areas.
          • After securing funding, some SOEs, in a bid to boost returns and mask their operational inefficiencies, channeled the capital into purchasing wealth management products instead. This diversion of funds from the real economy into financial arbitrage (“脱实向虚”) severely defeats the very purpose of the original policy
    • With the economic recovery in 2017, the central bank's monetary policy tightening and strict supervision have gained a solid foundation for implementation. The era of strict risk prevention and supervision in the financial industry started.
      • The 2018 Asset Management New Rules mandated a fundamental overhaul of the industry. They: banned the "pool-of-funds" operation; strictly restricted "channel businesses" (using third parties for regulatory arbitrage); prohibited implicit guarantees of capital and returns; required a shift to net-asset-value (NAV) pricing for all products and enforced "look-through" disclosure to identify underlying assets.
        • Negative effects: The credit preference contracted too rapidly, and credit risks began to be frequently exposed.
          • Since 2018, bond market defaults occurred frequently.
          • A rapid deterioration in risk appetite led to a widespread pullback in strategies like extending duration and adding leverage. Consequently, bonds issued by private enterprises attracted little investor interest.
            • The financing situation for SMEs became even more difficult.
          • The maturity structure of local government bond issuance became increasingly short, which did not match the long-term capital requirement of infrastructure construction.
            • Infrastructure investment declined sharply since 2018.
      • Why is the financing problem for SMEs still not resolved, regardless of whether regulatory relaxation or corrective measures are taken?
        • The indirect financing system centered around banks does not match the development characteristics of SMEs, as well as those of innovative technologies.
          • （1）As creditors, banks receive a fixed interest margin. Small and medium-sized enterprises have high growth potential in the future, but banks can only obtain a fixed return.
          • （2）Banks are inherently risk-averse. Innovative enterprises are mostly capital-intensive and face higher risks with no collateral available. This is contrary to the preference of banks.
          • （3）Although banks will strive to expand credit support for SMEs in accordance with policy intentions, they will still require collateral or guarantees. This remains related to the land economy.
          • （4）The bank, out of its own self-protection considerations, is unable to quickly withdraw from traditional industries.
            • When the industrial structure is facing challenges of transformation and upgrading, banks have often already established symbiotic relationships with heavy industrial enterprises (as well as local government investment projects and real estate enterprises). Considering factors such as delaying bad debts, they will not immediately cut off loans either. Otherwise, they would directly face losses. As a result, old industries cannot be liquidated, and the emergence and development of new industries are relatively slow.
  • 6.3 Since 2019: Regulatory Reversal and the Reconstruction of the Financial System
    • The main issue of China's financial supply lies in its inability to effectively meet the demands of the real economy. There is an imbalance between supply and demand of funds, resulting in efficiency losses and waste of resources.
      • From a macro perspective, while aggregate liquidity remains ample, its transmission to the real economy is impaired. Past attempts to stimulate demand through monetary easing and rate cuts have proven ineffective.
      • Structurally, funds have flowed into sectors that may not be truly capital-constrained, indicating a significant mismatch between credit supply and demand. Consequently, the long-standing problems of inaccessible and expensive financing for SMEs remain as acute as ever.
      • Financial systems need to adapt to the demands of high-quality development and be restructured and reorganized.
        • 6.3.1 The capital market shall replace banks and become the main body of the future financing system.
          • The development of China's capital market began in the 1980s and 1990s. The entry threshold was always high and the positioning was mainly towards large enterprises and state-owned enterprises. The CSRC had strict reviews, making it difficult for small and medium-sized enterprises to gain a foothold.
          • The excessively high threshold has prevented many high-quality and promising enterprises from entering the capital market. These enterprises either give up on going public or seek to list overseas.
            • Giving up going public would miss out on development opportunities. Going public overseas would prevent the domestic residents' sector from sharing the growth dividends of high-quality enterprises and thus missing out on investment opportunities.
          • The registration-based IPO system: It lowers the listing门槛 for small and medium-sized enterprises (SMEs) and firms that meet the "Specialized, Refined, Unique, and Innovative" criteria.
            • In 2023, it extended to the main boards of Shanghai and Shenzhen, and the era of comprehensive registration system started.
          • The SSE STAR Market （科创板）, ChiNext （创业板）, and the Beijing Stock Exchange (BSE)（北交所） collectively formed a multi-tiered capital market in China, providing dedicated platforms for companies of different types and growth stages to develop and access financing.
          • Accept/Allow/Permit weighted voting rights (WVR) structures.
          • Further improve the delisting system to provide a competitive mechanism for market survival of the fittest.
          • Improve the investor protection system
            • The litigation system for representatives of insurance institutions
            • Investor Protection Fund System
        • 6.3.2 Channel household savings into the capital markets
          • The A-share market has a relatively high proportion of retail investors, which makes it prone to herd behavior. This is an important reason for the significant fluctuations in China's stock market.
          • When individual investors make their own investments, most of them are unable to achieve stable wealth growth.
          • There should be a wide variety of long-term products (such as funds, insurance, pensions, etc.) available for residents to choose from (to match different preferences).
            • Since the crackdown on shadow banking, China's public fund industry has experienced explosive growth. However, the sheer number of products has created an overwhelming choice for investors, posing a challenge and creating an urgent need for the development of professional fund advisory services.
            • The pension market has a promising future.
              • There are three levels in China's pension insurance system
                • 第一支柱是基本养老保险，具有强制性质且由政府分配
                • 第二支柱包括企业年金和职业年金，由企业和个人共同缴纳，具有半强制性质
                • 第三支柱由个人自愿缴纳、选择的个人养老金融业务，包括在政府支持下建立的个人养老金账户制度以及其它的商业性养老保险、理财等
              • The current pension system in our country is mainly supported by the first pillar, which has a wide coverage and a large scale.
                • 第一支柱为收付实现制，随着未来老龄化程度加深，过度依赖第一支柱会加重财政养老压力
                • The second pillar is unable to cover a large number of flexible workers within its coverage scope.
                • The development of the third pillar is extremely urgent.
                  • With the aging population becoming more severe, it is a long-term trend for residents to increase their pension contributions. The large scale and long-term nature of pensions perfectly align with the demands of the capital market.
                • In the future, residents shall nvest in the capital market through their pensions, sharing the dividends brought about by economic growth and stock market rises. This not only achieves wealth appreciation but also ensures the quality of their retirement life.
        • 6.3.3 At present, the role of indirect financing by banks cannot be ignored.
          • Although direct financing has developed rapidly in recent years, in the long run, the capital market will become the main focus of social financing. However, at present, the scale of indirect financing, which is mainly based on bank credit, still dominates the social financing system.
          • At present, the external financing for small and micro enterprises mainly relies on bank loans. How can we encourage banks to increase their lending to small and micro enterprises?
            • One approach is to set targets, incorporating the loan scale/proportion of enterprises in specific sectors into the annual assessment, such as in the field of inclusive finance.
            • Second, tolerate the bad loan rate. Allow small and medium-sized enterprises to use intellectual property rights and other assets as collateral. Through financial innovation, reduce the review costs for banks, improve the lending efficiency, and enhance the banks' willingness to actively extend loans.
              • · Correspondingly lower the regulatory standards
              • · Establish a technology credit risk compensation fund
              • · The banks chould enhance customer identification through financial innovation and big data, and improve risk control capabilities.
            • For small and medium-sized banks with relatively weak capital strength, how can their ability to serve the real economy be enhanced?
              • First is to provide direct financial support to small and medium-sized banks. For instance, in 2020, the State Council's executive meeting decision allowed local governments to issue special bonds to reasonably support these banks in replenishing their capital, helping them to reform and mitigate risks, and enhancing their ability and efficiency in serving the real economy.
              • Second, lower the threshold for external financing. For instance, consider going public through an IPO, issuing perpetual bonds, and increasing the issuance volume of secondary capital bonds.
              • Thirdly, implement differentiated regulatory policies, such as through targeted reduction in reserve requirements, issuance of special credit support tools, and lowering of reserve capital requirements, to provide more low-cost and medium-to-long-term funds support.
• Lecture Seven: Monetary Policy
  • 7.1 The Era of Foreign Exchange Purchases （外汇占款）—A Quantity-Based Monetary Policy
    • Before 1993, the central bank mainly injected base money through overdrafts from the central government and relending to commercial banks.
    • After the 1994 reform of the foreign exchange system, the injection of base money increasingly shifted to a mechanism dominated by foreign exchange purchases.
      • During the planned economy period, China faced a significant foreign exchange gap, and foreign exchange receipts and payments were managed under a mandatory plan.
      • With the advancement of reform and opening up, the foreign exchange management system began its reform process.
        • In the early days of reform and opening up, China implemented the foreign exchange retention system: Foreign exchange was uniformly managed by the state, and a certain proportion of it was also reserved for export enterprises.
          • Although still mainly based on plans, market regulation began to emerge.
        • In the 1990s, the country set the goal of establishing a socialist market economy system. The foreign exchange management system underwent further reforms. One of the significant changes was the implementation of the bank foreign exchange settlement and sale system （银行结售汇制度）, which abolished the requirement for foreign exchange remittances and allocations （外汇上缴和留成）.
          • Compulsory Settlement and Sale of Foreign Exchange
            • The 2008 revision of the Regulations on Foreign Exchange Administration explicitly abolished the compulsory settlement and sale system, replacing it with a policy combining voluntary settlement and quota-based settlement.
            • Excess foreign exchange of enterprises and individuals must be sold to the designated commercial banks.
            • Commercial banks must sell the excess foreign exchange to the central bank.
            • The RMB paid by the central bank to commercial banks to purchase these foreign exchange funds constitutes foreign exchange purchases (外汇占款), while the foreign exchange acquired from commercial banks forms the country's foreign exchange reserves.
    • The sources of funds for foreign exchange purchases (FX purchases) primarily consist of three main components.
      • trade surplus
      • FDI
      • hot money
      • Procyclicality: During periods of strong exports, the economy expands accordingly, attracting more FDI to invest domestically, while higher investment returns draw increased international capital into China's capital markets.
        • The stronger the economy, the greater the volume of foreign exchange purchases (FX purchases), leading to a larger injection of base money into the system.
    • With the gradual development of the market economy, coupled with China's accession to the WTO in 2001, the Chinese mainland actively took on the industrial transfer from the "Four Asian Tigers", and took over the role of the "world factory" in the new century.
      • The domestic export business developed rapidly, and China's economy gradually shifted towards being driven by external demand. This resulted in a situation of "double surplus" in both the current account and the capital account, bringing a large amount of foreign exchange to our country.
      • Foreign exchange purchases expanded rapidly in sync, accounting for a striking 90% of the central bank's total assets by the end of 2014.%
      • Under the export-oriented economic system, foreign exchange purchases (FX purchases) became the primary channel for base money injection.
    • The expansion of base money should align with economic development rather than pursue unlimited growth. The substantial increase in foreign exchange purchases may lead to challenges within the existing monetary policy framework.
      • The procyclicality of foreign exchange purchases is in contradiction with the counter-cyclical adjustment of monetary policy.
        • When the domestic economy overheats, the central bank often tightens monetary policy to counter inflationary pressure and the rapid rise in asset prices. However, economic overheating usually boosts the real return rate and the prices of RMB assets, accelerating the inflow of foreign exchange purchases. As a result, the central bank not only fails to implement a contractionary policy but is instead forced to expand the money supply passively.
          • From 2003 to 2007, the increase in investment led to an overheated economy. The central bank was forced to release excessive base money. To withdraw the excessive liquidity, the central bank chose to raise the deposit reserve ratio.
            • The adjustment of the reserve requirement ratio will affect the money multiplier, and its impact on money supply is too significant, which may cause severe fluctuations in the market.
            • The changes in the reserve requirement ratio have a strong signaling effect and are an important indicator for observing the policy direction of the central bank.
            • Therefore, it is not suitable to be used as a daily regulatory tool.
            • The central bank established the central bank bill (or "central bank note") as an open market operation regulatory tool, which is used as a routine measure to address liquidity issues.
              • Since 2002, the issuance scale of central bank bills expanded rapidly.
                • On one hand, due to the economic being in an upward cycle, counter-cyclical regulation was carried out through tightening monetary policy.
                • On the other hand, it was used to counteract the rapid expansion of foreign exchange holdings in an outward-oriented economy, in order to control inflationary pressure.
              • After 2011, the economic downward pressure increased, and the growth rate of foreign exchange purchases slowed down. After 2014, it began to fall into a declining trend.
            • During this period, the central bank's monetary policy focused mainly on controlling the quantity, and was greatly influenced by external factors, making it difficult to ensure independence.
        • When the economy is in a downturn and monetary policy needs to be more accommodative and counter-cyclical regulation strengthened, due to the fact that economic downturns are often accompanied by low returns on RMB assets and rising risk premiums in the real economy, foreign exchange purchases tend to flow out. As a result, the money supply, which should be expanded, may contract instead, exacerbating the risk of economic downturn.
          • When foreign exchange purchases (FX purchases) ceased to be the channel for base money injection and credit creation became less dependent on the financing needs of export enterprises, the orientation of monetary policy shifted accordingly, moving from quantity-based to price-based tools.
  • 7.2 The era of land credit - the transition from quantity-based to price-based system
    • After the crisis, the driving force of export-oriented economic development gradually weakened. A number of policies, including the "4 Trillion Yuan" plan, were introduced in an attempt to stimulate domestic demand through consumption and investment.
      • During an economic downturn, consumption was difficult to boost.
      • Investment has become the main force carrying the responsibility of stabilizing the economy.
    • Under the model of land finance, most of the liquidity did not flow into the areas that the regulatory authorities hoped to see, which were in line with the economic transformation and upgrading. Instead, it flowed into the real estate market. This not only fueled the real estate bubble but also laid hidden dangers for the local government's debt problems, and at the same time led to the continuous accumulation of risks in the financial system.
    • After the crisis, the IMF and the BCBS began to focus on improving the financial regulatory system, and the core of this was to establish a sound macro-prudential framework.
      • Macroprudential policies focus on the financial cycle. By strengthening supervision over various aspects such as systemically important financial institutions and shadow banking, they aim to reduce systemic financial risks and enhance the resilience and stability of the financial system.
        • In 2009, the central bank began to study and implement more stringent macro-prudential policies. In 2011, it introduced a dynamic adjustment mechanism for differential reserve requirements.
          • The core point is that the credit lending volume of financial institutions needs to be in line with their own capital levels and the demands of economic growth.
            • Banks with poor qualifications (low CAR, high NPL) pay more reserves to the central bank, resulting in a reduction of their available funds.
            • By using the required reserve ratio as a means, banks are guided by the central bank's policies to make loans. Eventually, this aims to control the total amount and pace of bank lending.
        • With the rapid development of financial innovation, banks created various channels, and shadow banking developed rapidly during this period.
          • Just adjusting the reserve ratio is not sufficient to control the lending behavior of banks.
        • The rapid expansion of off-balance-sheet business implied a large amount of financial risks, posing a threat to financial stability.
          • In 2013, the CBRC issued Document No. 8, requiring banks to incorporate off-balance-sheet wealth management products into on-balance-sheet supervision. While the central bank firmly conveyed signals of a prudent monetary policy, it also continuously enhanced its ability to cope with short-term fluctuations in liquidity.
    • How did the central bank shift from quantitative monetary policy to price-based monetary policy?
      • Mainly focusing on improving the monetary policy regulation system and asset allocation, continuously enriching the monetary policy toolkit.
        • Prior to 2013, the toolkit for open market operations was relatively limited. Liquidity was injected primarily through reverse repos, while withdrawal was achieved via repo or by allowing reverse repos to mature without rollover. Additionally, central bank bills (CBs) were issued to sterilize the impact of foreign exchange purchases.
        • After 2013, more regulatory tools for open market operations were introduced, such as the Short-Term Liquidity Adjustment Tool (SLO), the Standing Lending Facility (SLF), and the Medium-Term Lending Facility (MLF).
          • SLO: Short-term reverse repos within 7 days fall under the category of short-term liquidity adjustment tools in the open market. Introduced by the central bank in January 2013, they are mainly used to address the issue where traditional reverse repos are unable to meet the demands for ultra-short-term liquidity.
          • SLF: Its purpose is to meet the large-scale liquidity demands of financial institutions. The terms are mostly 7 days and 1 month, with an emergency nature, and the interest rate is higher than the market rate.
            • Can be regarded as the upper limit of the interest rate corridor
      • Focusing on improving the entire monetary policy regulation system and establishing an interest rate corridor
        • What is the interest rate corridor? The 7-day repo rate in the market has a high degree of volatility. To stabilize market expectations, the central bank conducts open market operations to adjust the market funds rate and determine the upper and lower limits of the market funds rate. As a result, market expectations become stable.
        • SLF represents the upper limit of the interest rate corridor.
        • Lower limit of the interest rate corridor?
          • Theoretically, it should be the excess reserve interest rate.
            • If the market interest rate is lower than the excess reserve interest rate, then the returns that financial institutions can get by lending money to their peers are not as good as those obtained by depositing with the central bank. Therefore, the market interest rate must be at least higher than the excess reserve interest rate.
          • In the early years of establishing the interest rate corridor, the reverse repo policy rate actually served as the implicit lower limit of the interest rate corridor.
            • Reverse repo is a way for banks to borrow funds from the central bank.
              • If the market interest rate is higher than the reverse repo rate, banking institutions will preferentially borrow funds from the central bank. In this case, the reverse repo can lower the interest rate.
              • If market liquidity is too loose and the market's interest rate is lower than the reverse repo rate, the market will not borrow from the central bank, and thus the reverse repo cannot be issued.
              • Before 2018, the reverse repo rate did indeed play the role of serving as the lower limit for market interest rates in most cases.
                • （1）The excess reserve interest rate remained at an extremely low level of 0.72%, which is far from the current interest rates of funds and thus failed to effectively provide support.
                • （2）In the early stage of establishing the interest rate corridor, especially during the period from 2015 to 2016, the central bank's open market operations were quite frequent. The reverse repo policy interest rate, as the lower limit of the corridor, helped enhance the central bank's control over monetary policy.
                • （3）In its announcement in November 2015, the central bank clearly stated that the SLF rate was the upper limit of the interest rate corridor, but it did not provide a clear definition for the lower limit.
          • Starting from the second half of 2018, the market interest rates repeatedly broke through the reverse repo rate and the implicit lower limit gradually became ineffective. At the end of 2018, then-PBOC governor Yi Gang pointed out in a forum speech that the 0.72% excess reserve interest rate constituted the lower limit of interest rates.
            • Since then, the excess reserve interest rate has been officially designated as the lower limit of the interest rate corridor. The 7-day reverse repo rate, which was originally a hidden lower limit, has begun to serve as the operational core of the interest rate corridor.
          • Why did the implicit lower limit fail?
            • The effectiveness of monetary policy depends on the liquidity demands of banks. The reverse repo rate is regarded as the lower limit under the premise that banks have a liquidity gap and have no other sources of funds.
            • Since 2015, the central bank has carried out four rounds of reduction in the reserve requirement ratio, resulting in extremely loose and stable capital availability.
            • In 2016, with the start of financial deleveraging, the central bank halted the consecutive cuts in the reserve requirement ratio. Monetary supply relied on open market operations such as reverse repos and MLF. During this period, the money supply was tight, and banks had no other sources of funds. Therefore, reverse repos became the actual lower limit of the interest rate corridor.
            • After the central bank resumed the reduction of reserve requirements in April 2018, the frequency and scale of open market operations significantly decreased. The reduction of reserve requirements once again became the main method of monetary injection, and the liquidity in the banking system was extremely abundant. Therefore, reverse repo no longer served as the lower limit of the interest rate corridor.
      • The introduction of the Long-Term Liquidity Injection Tool (MLF)
        • SLO and SLF have emergency features, and whether it is SLO, SLF or reverse repo, they are all short-term liquidity management tools.
        • Foreign exchange purchases (FX purchases) represent a long-term liquidity injection (excluding hot money), serving as a stable source of deposits or base money for financial institutions.
        • To counter the impact of declining foreign exchange purchases (FX purchases), the Medium-term Lending Facility (MLF) was introduced. With its longer maturity terms—primarily 3-month, 6-month, and 1-year—the MLF's liquidity injection profile better matched that of FX purchases, effectively helping to fill the gap left by their reduction.
        • The one-year MLF is linked to the new loan pricing benchmark LPR. Therefore, the MLF, especially the one-year MLF rate, is regarded as an important policy rate.
          • The one-year MLF interest rate has become an important policy rate and serves as the pricing benchmark for LPR.
            • The pricing of LPR is derived by adding a certain margin to MLF.
            • The one-year MLF serves as the policy benchmark. It is largely determined by the central bank and also takes into account the supply and demand situation of interbank medium- and long-term funds. However, the main decision-making power lies with the central bank, not the market.
            • The "MLF plus" part represents the final LPR quote. The "plus" portion is determined by the market and its benchmark is the supply and demand situation of the interbank funds.
            • The MLF still has a significant influence on LPR pricing, and market pricing will also take into account expectations of monetary policy.
              • For instance, if the MLF interest rate is lowered, there will be expectations of monetary easing in the market, which in turn will affect the market's spread component.
      • The central bank's policy orientation is also linked to the asset allocation behavior of banks, guiding commercial banks to give more support to the weak links in the real economy development.
        • The Pledged Supplementary Lending (PSL) facility was introduced in 2014. It primarily provides base money from the central bank to policy banks to fund shantytown redevelopment projects （棚户区改造）, representing a highly targeted monetary policy tool.
        • The Relending Facility for Supporting SMEs was established, with eligible borrowers including small-scale city commercial banks, rural commercial banks, rural cooperative banks, and village banks. The interest rate is priced at a discount to the central bank's benchmark rate. This mechanism aims to provide targeted support to small and micro enterprises (SMEs), addressing their difficulties in accessing affordable financing.
    • To further improve macro-prudential management, the dynamic adjustments of differentiated reserve requirements and the desirable loan management mechanism were upgraded to a Macro-Prudential Assessment (MPA) framework.
      • The regulatory scope was expanded from narrowly-defined credit to broadly-defined credit, incorporating not only loans but also debt investments, equity and other assets, reverse repurchase agreements, and balances placed with non-deposit-taking financial institutions.
      • In 2017, off-balance-sheet wealth management was included in the broad credit category.
      • In 2018, negotiable certificates of deposit were included in the assessment of interbank liabilities, and relevant supporting measures were introduced to control the growth of interbank business.
  • 7.3 Monetary Policy in the Era of High-Quality Development
    • In the 2019 first quarter monetary policy implementation report of the central bank, it was mentioned that efforts should continue be made in deepening the market-oriented reform of interest rates and steadily promoting the integration of the two interest rate systems into a single system.
      • Interest rate integration refers to the process where the policy benchmark interest rate approaches the market interest rate.
      • Although the reform of interest rate liberalization was basically completed in 2015, the central bank still continued to announce the benchmark interest rates for deposits and loans for financial institutions to refer.
    • In September 2019, in order to establish a transmission mechanism from the policy interest rate to the credit interest rate, the central bank improved the LPR formation mechanism.
      • The LPR (Loan Prime Rate) quotations of banks are formed by adding a certain margin on the MLF (Medium-term Lending Facility) rate, based on factors such as their own funding costs, market supply and demand, and risk premiums.
      • Generally, in the middle of each month, the central bank reissues the MLF and announces the MLF interest rate. Then, on the 20th of the same month, banks submit their LPR quotations to the central bank. At the same time, the bank lending rates will be quoted based on the LPR as the benchmark rate.
      • In order to enable banks to better fulfill their quotation responsibilities, the central bank has incorporated the application of LPR and loan interest rate competition behaviors into the MPA, and urges all banks to use LPR for pricing.
      • Under this model, the central bank can effectively guide the loan interest rate through its monetary policy tool, MLF.
    • The monetary policy implementation report in 2021Q1 pointed out that the ultimate goal of China's monetary policy is to maintain currency stability. The operational targets are a policy interest rate system where the open market operation rate is the short-term policy rate and the MLF rate is the medium-term policy rate.
      • The monetary policy transmission mechanism is divided into two parts
        • First is to allow market interest rates such as DR007 to fluctuate around the policy interest rate (OMO) rate. This part mainly affects the inter-bank funding rates.
          • DR007 refers to "the 7-day repo rate for deposit-taking financial institutions using treasury bonds as collateral"; OMO rate is "the 7-day reverse repo rate of the central bank".
        • Second is the transmission to the real economy. It does so by influencing the LPR through the policy rate MLF, and then transmitting it to the actual interest rate through the LPR plus-point system.
        • The central bank, within the framework of the interest rate corridor, adjusts the supply and demand of funds and allocate resources through interest rate fluctuations, thereby achieving its monetary policy goals.
    • After establishing the interest rate corridor, the central bank needs to consider how to ensure that the policy can better reach the real economy.
      • The central bank is unable to control the financing demands of enterprises, especially when the real economy is in decline. The central bank cannot force enterprises to obtain financing under such circumstances.
      • What the central bank can do is to optimize the supply side, encouraging banks to provide more cost-effective credit to the real economy. Through some structural designs and adjustments, it can guide banks to increase loans to those sectors that are in line with high-quality development.
        • Under the previous model, banks tended to favor infrastructure, real estate and traditional sector state-owned enterprises that had sufficient collateral and guarantees.
        • In recent years, the central bank has increasingly employed structural policy tools to support sectors that are conducive to high-quality economic development but do not align with banks' risk preferences and are underdeveloped.
          • Targeted reduction in the reserve requirement ratio: Compared with the comprehensive reduction in the reserve requirement ratio, it conveys a weaker signal, and the amount of funds released is not as large. However, it is more precise.
            • In 2018, the central bank implemented four rounds of targeted cuts in the reserve requirement ratio, releasing medium- and long-term funds to support the inclusive economy and private enterprises.
            • In 2020, in response to the impact of the epidemic, a comprehensive reduction in the reserve requirement ratio was implemented, accompanied by targeted reductions. In March, a targeted reduction in the reserve requirement ratio for inclusive finance was carried out. In April, the reserve requirement ratios of rural commercial banks and rural credit cooperatives were lowered by 1%, with the aim of optimizing the liquidity structure and supporting the economic development in weak areas.
          • In 2018, a new facility called Targeted Medium-Term Lending Facility (TMLF) was established.
            • Large commercial banks, joint-stock banks and large city commercial banks that meet the macro-prudential requirements can apply. The central bank will determine the scale of the TMLF based on their lending situations to small and medium-sized enterprises and private enterprises.
            • The TMLF has a longer term than the MLF, usually lasting for one year. It can be renewed twice and the longest duration can reach three years.
            • The TMLF has the policy intention of encouraging banks to increase loans to small and micro enterprises as well as private enterprises. The interest rate will be set more favorably, similar to that of the 1-year MLF.
      • For structural tools to be effective, the key is to properly control the total amount.
        • If the market liquidity is already very abundant, institutions will not be overly concerned about marginal changes.
        • Only when there is a liquidity gap in the market can the funds released by structural policy tools truly follow the central bank's intentions.
    • In the past two years, due to the sluggish demand in the real economy, the central bank further established more "direct" policy tools, aiming to break through the "last mile" of monetary policy transmission.
      • In October 2018, the central bank adopted a "disbursement-first, borrowing-second" reimbursement-based mechanism for relending funds supporting small businesses (支小再贷款). This model was later extended to other areas including agriculture support, poverty alleviation, green finance, and more.
        • That is, the bank first provides eligible loans to enterprises in the sectors designated by the central bank at the required interest rate, and then uses these loans to apply to the central bank for relatively cheaper financial support.
      • Rediscounting Policy Tool: This refers to the central bank's practice of discounting the undiscounted commercial bills held by financial institutions that have not yet matured. This mechanism inherently follows a "lending-first, borrowing-second" approach.
      • In June 2020, in order to alleviate the impact of the epidemic on real enterprises, the central bank newly established two monetary policy tools that directly targeted the real economy:
        • The extension payment tool for small and micro enterprise loans: The People's Bank of China and the Ministry of Finance provided a 1% incentive to local commercial banks for the principal of the extended repayment loans for small and micro enterprises they handled. Later, in May 2022, this incentive was raised to 2%.
        • Credit loan support program: The central bank will use the special quota for re-lending to purchase a portion of the new inclusive small and micro business loans issued by qualified local banks through innovative monetary policy tools.
          • The aim is to encourage banks to increase the supply of credit loans to small and medium-sized enterprises, and to support more of these enterprises in obtaining credit loans without collateral guarantees.
    • Some other measures of the central bank
      • One measure is to encourage banks to issue perpetual bonds to replenish their Tier 1 capital. At the same time, to enhance the liquidity of these perpetual bonds, the central bank created the Central Bank Bill Swap (CBS) tool in 2019 and included it in the eligible collateral categories for tools such as MLF, TMLF, and SLF.
      • Second, reform the deposit interest rate pricing mechanism and optimize the supervision of deposit interest rates. Instead of using a certain multiple of the deposit benchmark interest rate as the upper limit for deposit interest rates, it will now be determined by adding points to the deposit interest rate.
      • This helps to reduce the liability costs of banks, ensuring their credit lending capabilities and reasonable profit margins. By combining policies with the market, it fully motivates banks and thereby achieves the goal of reducing the financing costs for enterprises and consumer credit.
• Lecture Eight: High-quality Development
  • 8.1 The problems brought about by rapid economic growth
    • The issue of environmental damage
      • The long-term investment required for environmental protection is disconnected from the short-term GDP growth targets that are pursued. The assessment mechanism based on GDP easily causes local authorities to neglect environmental protection.
      • In the process of attracting investment in various regions, larger projects are given more preference, usually closely related to heavy industries, and they often impose a considerable burden on the environment.
      • Environmental protection is a cost for enterprises. Environmental governance is a long-term and systematic project.
      • The past growth model was solely focused on achieving short-term economic growth, resulting in problems such as the abuse of resources and low utilization efficiency.
      • The issue of energy security at the supply end is also very prominent.
        • Crude oil and other fossil energy sources are highly dependent on imports, and the pricing power lies abroad. As a result, domestic industries face risks associated with price fluctuations.
        • Geopolitical risks may lead to disruptions in crude oil supply, thereby restricting the production and development of the domestic mid-to-lower value-added industrial chain.
        • Energy self-sufficiency and ensuring energy security are urgent issues to be addressed during economic transformation and high-quality development. Promoting the transformation of the energy structure from traditional fossil energy to clean new energy is an essential approach to achieving this goal.
          • Propose the "carbon neutrality target"
          • But it is necessary to avoid the "one-size-fits-all" approach.
    • The problem of low efficiency
      • In the past, competition was driven by growth. Economic growth was mainly achieved through the accumulation of debt and intensive input of resources and factors.
      • The aging of the population is becoming evident, and the cost of labor (wages) has risen. The intensive investment of human resources is no longer sustainable.
        • A new round of industrial chain relocation has begun.
          • The mid-to-low-end manufacturing industries are gradually shifting to Southeast Asian countries.
          • There is a trend for high-end manufacturing industries to return to developed countries such as Europe and the United States.
          • In 2020, the COVID-19 pandemic temporarily reversed this trend, and China's advantages in having a stable supply chain and a complete industrial chain were fully demonstrated.
      • After the external demand weakened, the contradiction of excessive middle and low-end production capacity in our country gradually became apparent.
    • The simple model of relying on increased resource and factor inputs is unsustainable. In the future, high-quality development must rely on scientific and technological innovation. China's economic growth requires higher technological content for support.
      • Supply chain security: The problems of core technology shortages and insufficient supply of high-end manufacturing industries are gradually becoming more prominent.
      • Change the assessment method that only focuses on GDP, establish a unified national market, eliminate disorderly competition, and provide a suitable environment for enterprises to grow and expand.
  • 8.2 Approaches to Solving the Problem
    • 8.2.1 Green transformation under high-quality development
      • In terms of overall planning, the assessment system could consider incorporating more indicators related to environmental protection.
        • When allocating tasks and achieving targets, it is necessary to adapt to local conditions. We should not assign all the target tasks to the same region or require them to be completed at the same time, to avoid a one-size-fits-all approach.
        • Tax policies can support the "dual reduction" goal, thereby compelling enterprises to improve production processes and reduce carbon emissions.
        • Financial policies can be coordinated in multiple ways to support green development.
        • Relying on market forces, establish a carbon emission rights trading center
      • Through technological innovation, develop new types of clean energy to replace traditional energy sources.
    • 8.2.2 Enhancement of efficiency under high-quality development
      • Through supply-side reform, it can be aimed to eliminate backward and excessive production capacity, enhance industry concentration, and create resources and space for high-end production capacity.
      • The enhancement of economic benefits cannot be achieved without the support of the capital market.
      • Combining the equity structure with the market-oriented incentive mechanism can effectively stimulate the innovation vitality of state-owned enterprises.
        • Over the past few decades, state-owned enterprises have been the main force in undertaking the responsibilities of industrialization and urbanization.
        • When economic development shifts from being driven by factors to being driven by innovation, the responsibility for tapping new growth drivers lies with private enterprises, mainly small and medium-sized enterprises.
          • · The government endorsement and the concentration of banking resources are the advantages of state-owned enterprises in the market competition, which will weaken the innovation drive of state-owned enterprises; while small and medium-sized enterprises have neither government endorsement nor sufficient collateral, and can only enhance their product competitiveness through continuous research and technological innovation.
          • · The assessment and incentive mechanisms of state-owned enterprises have restricted their innovative activities.
          • · The salary levels of the management and employees in state-owned enterprises are not sufficiently market-oriented, and the successful completion of research and development cannot directly lead to an increase in remuneration.
        • Promote the reform of mixed ownership by introducing non-state-owned components at the equity level, in order to solve the problem of the absence of an owner.
          • However, state-owned enterprises usually undertake more social responsibilities. Moreover, if innovation fails and results in losses or risk incidents, it will have a negative impact on the entire industrial chain.
            • “Reverse Mixed-Ownership Reform” has emerged as a new trend. It refers to leveraging state-owned enterprises' (SOEs) societal influence and strong financial capacity to promote their investment in and acquisition of stakes in private and small-to-medium enterprises (SMEs), particularly those within industrial and supply chains, thereby achieving synergistic development.
            • State-owned enterprises can also support the development of innovative industries by establishing subsidiaries or grand subsidiaries, or by participating in venture capital through a limited partnership model.
        • In response to the issue of the "lack of clear separation between government and enterprise functions," the State Council has in recent years promoted the establishment of "Two Types of Companies".
          • State Capital Operating Companies--Manage the ownership of state-owned enterprises and the state-owned equity within the corporate system. They do not engage in industrial investment. Through operations in the capital market, they aim to improve the distribution structure and quality of state capital, thereby enhancing the efficiency of resource allocation.
          • State Capital Investment Companies--Through investment and financing (i.e. project construction), to serve the national strategy, cultivate industrial competitiveness and optimize the economic structure.
        • Reform the assessment mechanism and the incentive mechanism
          • Integrate the support measures for small and medium-sized enterprises into the assessment mechanism
          • By using tools such as equity incentives, dividend rights, and employee shareholding plans, the income of the company's management and employees is linked to the enterprise's performance, innovative achievements, etc.
          • Implement the follow-in investment system, mandatorily requiring the core team of the venture capital of state-owned capital to hold shares and participate in the investment projects using their own funds.
          • Link the project profits with the management team's profits to achieve profit sharing; the core team's shareholding and co-investment mechanism can reduce certain moral risks.
      • The policies should remain stable and consistent, and at the same time, effectively guide them and convey clear policy signals to the market.
    • 8.2.3 Regional Collaboration under High-Quality Development
      • 8.2.3.1 adjusting to local conditions for the four regional sectors
        • It is necessary to emphasize the coordination among different regions and avoid excessive competition. From the top-level design perspective, it is important to adapt measures to local conditions, select the most suitable development path based on each region's characteristics, and formulate corresponding policies.
          • Northeastern Region：
            • Accelerate the promotion of state-owned enterprise reform, encourage state-owned enterprises to carry out strategic market-oriented restructurings, and resolve excess production capacity.
            • Encourage state-owned enterprises to assist private enterprises located in the industrial chain, thereby enhancing their financial strength and adding active market factors to the state-owned enterprises.
            • Innovation in the system is the core. Consider incorporating factors such as business environment and policy stability into local assessment, in order to attract more foreign capital and thereby generate an industrial clustering effect.
            • Fully leverage the inherent advantages, relying on the previously solid industrial foundation and the advantage of low-cost labor, successively undertake the manufacturing transfer from the eastern region; at the same time, by virtue of the abundant ice and snow resources, gain the characteristic incremental boost of ice and snow economy and cultural tourism; vigorously develop modern agriculture and food industries
          • Mid and Western Region:
            • Attention should be paid to the manufacturing industry. By leveraging its abundant resources, vast land and low-cost labor, opportunities for the transfer of industries from the eastern region should be seized.
            • Transform some regions with strong foundations into national advanced manufacturing demonstration bases, and let these demonstration bases take the lead and drive the overall development.
          • Eastern Region:
            • Always serving as the vanguard and experimental field of reform and opening up
            • The "14th Five-Year Plan" proposes that the eastern region should be encouraged to accelerate the process of modernization. In the future, whether it comes to technological innovation or institutional innovation, the eastern region will still shoulder the responsibility of being the leader.
      • 8.2.3.2 Build urban agglomerations to enhance the synergy among regions
        • Adopt region-specific assessment mechanisms for different areas
        • Change the assessment entity. For different provinces or cities, assess them as a whole to create urban clusters and economic belts.
          • How to properly coordinate the relationships among different cities and form complementary industrial structures within the region is a rather challenging issue.
          • How to weaken administrative boundaries, promote the free flow of factors between regions, form a unified product market, and allow market laws to function more fully, is a problem that requires further exploration.
          • Attracting and retaining migrant populations, improving and innovating the current population service and management system - all these tasks are not easy to accomplish within the existing household registration system, especially when it comes to making reasonable adjustments within a certain region.
• Lecture Nine: Common Propensity
  • 9.1 The reasons for emphasizing common prosperity
    • Over the past 40 years since the reform and opening up, China has achieved remarkable accomplishments in all aspects of its economic and social development, which have attracted worldwide attention.
      • The total GDP has ranked second in the world.
      • The living standards and quality of life of the people have been greatly improved.
      • Made significant contributions to the global cause of poverty reduction
    • However, the per capita GNI still lags far behind that of developed countries, and the gap between the rich and the poor is continuously widening.
      • Why, despite the rapid economic development, has the gap between the rich and the poor become significantly wider?
        • （1）After the reform and opening up, the development of the socialist market economy has broken away from the egalitarianism of the planned economy era. Material resources are no longer distributed evenly; instead, they are allocated according to the rules of survival of the fittest under the impetus of market forces.
        • （2）In the early stage of reform and opening up, China adopted the approach of "leading the less developed areas and people with more resources to prosperity first". This was done to enable a certain number of people and regions with better conditions to become prosperous, thereby causing the gap between the rich and the poor to widen during the initial period.
          • At present, the concept of "those who are prosperous first" has achieved great success. The question of how to encourage those who are less prosperous to catch up and ultimately achieve common prosperity has become a matter that needs to be seriously considered and actively addressed at this stage.
    • Specifically, achieving common prosperity involves two key aspects: one is to increase the size of the pie; the other is to distribute the pie fairly.
      • In the early days of reform and opening up, the goal was to liberate the backward productive forces in order to meet the people's demands for material goods.
        • During this period, more emphasis was placed on economic growth rate and on expanding the size of the pie. However, as long as income is increasing in absolute terms and living standards and quality are constantly improving, society can tolerate a certain degree of wealth disparity.
      • When the economic development enters a new normal, on one hand, the main contradiction in our country has changed. People have higher demands and greater aspirations for social fairness and justice, and it becomes particularly important to narrow the gap between the rich and the poor. On the other hand, the decline in economic growth rate has a greater impact on low-income groups. How to protect the interests of the former is a problem that needs to be closely monitored.
        • In the face of the new normal, we must not only increase the size of the pie but also ensure a fair distribution of it, balancing efficiency and fairness.
  • 9.2 Common prosperity relies on high-quality development
    • Currently, China has become a manufacturing powerhouse, but a manufacturing powerhouse is not the same as a manufacturing superpower.
    • In the future, economic development needs to take a path with higher technological content. The industrial structure needs to shift towards the high-end, and product competitiveness needs to be enhanced. Only then can the pie grow larger.
    • By conducting research and development and promoting innovation, we aim to break the monopoly of foreign enterprises and promote the mass production of domestic alternatives.
      • On the one hand, it can ensure the security of China's industrial chain.
      • On the other hand, the increase in self-production rate and large-scale production can effectively reduce the production costs of enterprises, enhance product competitiveness, expand market share, and thereby achieve an increase in profit margins.
  • 9.3 Solution: Allocate resources in favor of workers and enhance their sense of job satisfaction.
    • 9.3.1 Reduce rent and costs
      • 9.3.1.1 Controlling land rent
        • House prices have been continuously rising, especially since 2008. When the growth rate of house prices exceeded the growth rate of income, the increase in housing costs indirectly reduced disposable income. The return on labor was not as high as the return on real estate investment, which inevitably led to a decrease in the sense of gain from labor.
          • After 2008, external demand gradually weakened, and the growth momentum of China's economy began to shift towards land. Driven by land mortgage financing, housing prices rose rapidly.
        • When expectations of housing price increases stabilize, on one hand, households tend to bring forward their future home purchase demand, thereby boosting current demand; on the other hand, it can also give rise to a large number of speculators.
          • Both scenarios will further drive up housing prices.
            • Those who own houses are waiting for their properties to appreciate and can also receive rental income. The returns from real estate have taken away the distribution of labor remuneration, reducing the sense of gain from labor and dampening the enthusiasm of workers to work. This is also contrary to China's distribution system which is mainly based on distribution according to work and coexists with various other forms of distribution.
        • The increase in housing prices will also cause a displacement effect on residents' consumption. Most of their income is used to repay mortgages and pay rent, resulting in insufficient consumption motivation among residents.
          • Insufficient domestic demand cannot support future economic growth, and thus the prerequisite for expanding the pie no longer exists.
        • Establishing a long-term mechanism for the real estate sector and maintaining the stable development of the real estate market is an inevitable path to achieving common prosperity.
      • 9.3.1.2 Reducing data charges
        • With the rapid popularization of the Internet, the digital economy has rapidly integrated with the real economy, providing convenience for all aspects of production, circulation and consumption, and significantly enhancing the efficiency of resource allocation.
        • Data rent emerged along with the rise of the internet platform economy.
          • During their process of maturing, internet platform enterprises are prone to forming monopolies. Data rent is the outcome under platform monopolies.
          • Data rent can be defined as the difference between the fees charged by the platform enterprise during transactions conducted by users and the actual value of the data goods or services provided by the platform enterprise.
            • The platform economy has a natural tendency towards monopoly.
              • The initial setup cost is very high and requires a large capital investment. At the same time, the marginal cost is very low.
              • Every platform enterprise strives to expand its scale and capture market share. Once the market share reaches a certain level, a monopoly naturally emerges.
              • Once they gain a monopoly position, platform enterprises can easily raise prices or earn excessive profits through price discrimination, that is, data rent.
                • Ultimately, the costs are usually borne by the relevant enterprises and individuals operating on the platform, as well as the platform's consumers, which encroaches upon the interests of these enterprises and individuals.
              • The core of competition among platform enterprises lies in data.
                • The existence of data rent is reasonable to some extent. After all, platform enterprises have invested a large amount of capital and labor in technological innovation to provide better services, and they should be entitled to a certain reward. However, this reward rate should not be too high.
                • The massive amount of data information is generated by a large number of users and has certain public attributes. Therefore, the vast majority of users also have the right to share the capital gains generated by the platform based on the data.
                • High data rental fees are not conducive to narrowing the gap between the rich and the poor. Therefore, we need to fundamentally address this issue by implementing anti-monopoly measures to avoid unfair competition and break the existing pattern of interest distribution.
                  • Accelerate the improvement of anti-monopoly policies and regulations, and intensify the crackdown on platforms in 2022.
    • 9.3.2 tax reform
      • Several problems in China's tax system
        • The proportion of indirect taxes is relatively high
          • Indirect Tax: This type of tax allows taxpayers to pass on the tax burden to others. Although the tax is paid by the taxpayers, it is indirectly borne by consumers. Examples include value-added tax and consumption tax.
          • The nature of indirect taxes, which are prone to being passed on, leads to a significant regressive effect on income distribution. That is, as income increases, taxpayers' tax burdens become lighter and the proportion of tax in their income decreases.
            • The regressive nature is caused by the diminishing marginal propensity to consume.
              • As residents' income increases, consumption will also rise. However, the proportion of newly earned income that is spent on consumption will gradually decrease.
              • The consumption of middle and low-income groups mainly consists of basic necessities. However, the rich have already transcended the level of meeting basic needs. Therefore, the marginal propensity to consume of the rich is usually lower than that of middle and low-income groups.
              • The person who consumes more (with a higher consumption proportion) bears a heavier tax burden.
              • Moreover, consumers' demand elasticity for basic necessities is relatively low. Even if enterprises raise prices, it will not significantly reduce sales volume and revenue. The higher the indirect tax rate, the more tax burden enterprises will pass on to consumers.
          • The higher the proportion of indirect taxes, the heavier the tax burden that middle and low-income groups have to bear will be, which is not conducive to achieving common prosperity.
            • Increasing the proportion of direct taxes is an important driving force for moving towards common prosperity.
              • Direct taxes are mainly levied on personal income, property and corporate profits. They do not affect people's willingness to consume but rather their ability to do so.
              • Taxation on personal income and property is usually progressive, meaning that the higher the income and the greater the property, the higher the tax rate. Thus, it has a stronger regulatory effect on income distribution.
        • The structure of direct taxes in China places too much emphasis on taxing labor while giving relatively less attention to taxing capital. This results in a weak sense of gain from labor for residents.
          • Personal income tax is the second largest tax category among direct taxes in China, ranking only after corporate income tax.
          • However, personal income tax accounts for 8% of the government's revenue, which is much lower than that of corporate income tax and that of personal income tax in the United States. The salaried workers who earn their income through labor are the main force contributing to personal income tax under the current system.
            • The ways in which the rich earn their income are diverse. They mostly obtain returns through means such as capital gains, and labor income only accounts for a very small portion.
            • The marginal propensity to consume among the rich is low, and they have more wealth available for investment. According to the Matthew effect, the property and capital income of the rich have a cumulative advantage.
              • The disparity in wealth among the people is more often attributed to non-labor income components.
            • There are various ways for the rich to avoid taxes.
          • The tax system of China is lenient towards capital for historical reasons.
            • At the beginning of the reform and opening-up, compared with the developed countries in the West, there was a huge funding gap in China's economic development. It urgently needed capital to expand investment scale, introduce advanced technologies and increase labor productivity.
            • The country actively supported domestic capital investment and development, providing corresponding tax preferences to qualified enterprises, continuously expanding the scope of tax incentives, promoting enterprise venture capital activities, and actively leveraging the driving role of capital in economic development.
            • Under conditions of economic backwardness, utilizing capital to develop the economy is the most effective way to promote the rapid development of China's economy and solve the problem of people's basic livelihood.
          • As the scale of capital continues to expand and the growth rate of the real economy faces pressure, the expansion of capital has, in some respects, deviated from the economic development goals.
            • The return on investment in the capital market is higher than that in the real economy. On one hand, this creates a certain "siphoning effect" on funds, causing financial resources to "shift from the real economy to the virtual economy", which goes against the original intention of the policy.
            • On the other hand, it also led to excessive expansion of the financial industry, distorting the distribution of labor skills.
      • The tax system reform should focus on personal income tax and other property taxes.
        • One option is to moderately reduce the individual comprehensive income tax rate. An excessively high marginal tax rate not only hinders the attraction of high-caliber talents to pay taxes in China, but also impedes the enhancement of the sense of labor earnings.
        • Second, appropriately increase the capital-related tax rate, or incorporate individuals' equity, dividends, etc. into the unified taxation of comprehensive business income.
        • Thirdly, the collection efforts for existing property taxes such as deed tax and property tax can be intensified.
      • In terms of indirect taxes
        • Appropriately lowering the value-added tax rate can help reduce the tax burden on low-income groups, lower their living costs, and effectively regulate income distribution.
        • In terms of consumption tax
          • One approach is to include high-pollution, high-energy-consuming consumer goods or consumption behaviors, as well as emerging high-end consumer goods and high-end entertainment consumption, within the scope of consumption tax collection, and to adopt higher tax rates.
          • Secondly, as the economy develops, some high-end consumer goods that were originally within the tax scope have become common items for ordinary families. Therefore, their tax rates should be lowered or even eliminated.
          • In summary, based on the dynamic adjustment of economic development, it is aimed to ensure that the regulation of income distribution can play its due role. By reducing the consumption tax burden for meeting normal living needs, it can also play a role in regulating and guiding high-consumption and high-pollution types of consumption as well as production behaviors.
      • The key to common prosperity
        • Initial distribution: The core lies in the market-oriented reforms of factors such as labor, capital, and land. The focus is on efficiency. Eliminating capital monopolies is one of the key means of the reform.
        • Redistribution: The core lies in taxation, social security and transfer payments, with the focus on fairness.
        • Three types of distribution: Distributing income and wealth among units and individuals through donations and other means.
          • By increasing tax incentives for charitable acts, optimizing incentive policies, and leveraging the regulatory role of the "third distribution", the enthusiasm of all sectors of society can be motivated to engage in charity, and promote common prosperity.