The current COVID-19 pandemic has brought about changes in the macroeconomic system of each country and also in that of the world: inflationary pressure shows signs of slowing down while deflation is observed in parts of the world where the money supply is tightening ; low interest rates, even negative in some places, are starting to become widespread; the volatility of economic growth has diminished; deficits and debt have become long term problems; government bond markets have become a major focus of fiscal and monetary policies; amid calls for de-globalization, countries are slowly weakening transnational economic ties… All of these changes challenge traditional macroeconomic theories and written expert analyzes of global economic and trade issues.
This article will mainly address the issues of global debt, Chinese debt, and employment.
Since the 2000s, huge debts have accumulated in advanced economies like the United States. Some of the reasons for this are internal, such as long-term economic downturns and the governments of these countries needing to continually stimulate the economy through budget deficits leading to ever higher debts. External factors include a decline in the competitiveness of their own economies, leading to frequent and growing current account deficits. By controlling the issuance of global reserve currencies, these countries can use their own currencies not only to finance their trade deficits, but also their debts. Such a mechanism has closely linked global debt and international finance to the domestic debt, financial transactions and even macroeconomic policies of these countries. On the basis of this mechanism, the global debt of this century has not seen its ups and downs, but on the contrary peaked all the time and eventually resulted in an influx of global liquidity.
At the end of the second quarter, total global debt reached $ 296 trillion, or 355% of global GDP. If calculated on the basis of a world population of 7.5 billion, the per capita debt reaches $ 39,400. Such high debt intensity fully demonstrates that the efficiency of financial services for the real economy is declining globally. How to deal with such a huge debt is a big problem to be solved in the post-COVID era.
In October, the Fed’s interest rate meeting indicated that it will reduce debt purchases on a monthly basis, starting in November, and stop the practice altogether in the first half of 2022. If the reduction in the balance sheet is- that is, the return of monetary policy to a state of normalcy － is a process, stopping debt purchases is only the first step. First, he will stop increasing his scale. Regarding the reduction of the total volume of debt and the accompanying interest rate adjustments, no action has yet been taken. However, since volume (liquidity) and price (interest rate) are linked in the market economy, it can be predicted that since debt reduction actions have taken place, interest rates will change sooner. or later. In this regard, China must have put in place countermeasures.
If the Fed expands its balance sheet, the overall impact will not be very negative for the rest of the world, as the implementation of the Fed’s expansionary policy will increase capital outflows to other countries, which will lead to its expansion. turn down interest rates. , currency appreciation and firming asset prices. Although it may be accompanied by imported inflation, as the availability and cost of funds will be improved, the overall impact will be beneficial, especially for the large number of developing countries. On the contrary, if the Fed cuts its balance sheet, a large amount of funds will flow back to the United States, leading to lower asset prices in other countries. The overall result will increase development costs and slow down the pace of development in these countries. The above issues, in my opinion, are what the country needs to prepare for right now.
Against the backdrop of the global debt spillover, China’s debt has also grown, with leverage increasing alongside it. Thanks to structural reforms carried out in the country in the years leading up to the COVID-19 outbreak, the rising tide of high leverage has been curbed. The year 2020 has pushed the budget deficit and lending with the COVID-19 epidemic, resulting in increased debt and indebtedness. However, the situation reversed as the debt ratio of the non-financial sector declined, and the decline was significant in the first three quarters.
The issue of leverage, in my opinion, should be a neutral word, rather than something that we still see as detrimental to the proper development of the economy. This is especially true when the decline in debt levels in non-financial sectors in the first three quarters was due to weak investment sentiment among companies. This is not the image we want to show or see. And when it comes to the financial sector itself, the sector’s leverage ratio over the period, whether on the debt side or the asset side, is dropping sharply. This obviously indicates that the financial risk has weakened, but also shows that the country’s monetary policy has been generally restrictive since the start of this year.
Going further at the local level, the problem of mutual spillover between fiscal risk and financial risk becomes more and more serious. In recent years, we have strictly prohibited local governments from borrowing from financial institutions and have gradually replaced a large number of direct borrowing in the past with the issuance of government bonds. This not only regulates the government’s lending behavior, but also lowers their borrowing costs.
However, what is happening is that local governments are compensating for their spending shortfalls by issuing bonds. Most of the bonds issued are mainly bought and held by commercial banks. The supplier is still a financial institution and the nature of the whole process has not changed. How to establish an effective local government deficit financing mechanism and debt reduction mechanism remains an important task.
A few years ago, employment officially became a priority in the definition of the country’s macroeconomic policies, which shows the modernization of the macroeconomic control system and the national governance system.
According to employment data from the National Development and Reform Commission, in the first three quarters, 10.45 million new jobs were created nationwide, reaching 95 percent of the annual target. In September, the registered unemployment rate in the country’s urban areas was 4.9%, down 0.2 percentage point from the previous month. The unemployment rate recorded in 31 large towns and villages was 5%. At the end of the third quarter, the total number of rural migrant workers stood at 183.03 million, a 2% year-on-year increase, as the scale had returned to practically the same level before the COVID-19 outbreak.
Since China has yet to fully recover from the shocks of COVID-19, the situation fully demonstrates the superiority of its system. However, we must also highlight three aspects in this regard.
First, the pressure on youth employment in the total population is increasing. China must step up its efforts to address these concerns. Especially as a new market economy is emerging, the meanings of unemployment and employment have all changed, with challenges and opportunities that present themselves alongside these transformations.
Second, the driving force behind entrepreneurship is insufficient. Statistics show that in 2015, the average number of new urban jobs corresponding to each new market entity was 0.9. The figure then fell to less than 0.5 by 2020, indicating either a deterioration in the quality of entrepreneurship or poor data collection. But still, how to improve the driving force of entrepreneurship should be well studied.
Third, the labor market faces multiple imbalances and mismatches between supply and demand, and this pressure has increased this year.
Industries with high emissions and high energy consumption are gradually decreasing in number. They have ousted, and will continue to do, a large number of employees in need of adjustment.
In the process of rectifying the education system, the once thriving off-campus education and online training industry has been severely affected. The contraction in real estate sales and intermediate industries is also evident. These changes should sound the alarm bells for changes in employment policy, as they are triggered by development progress towards a new economy.
We have seen time and again throughout history that to solve the problem of large-scale population employment, small and medium-sized enterprises are the best answer.
Small businesses have always been the mainstay of employment. There is no doubt about it. Small businesses are also the engine of innovation. The point has not been well promoted in the past, and people’s understanding of it varies.
But, in the unfolding Fourth Industrial Revolution, characterized by services, computerization, networking, intelligence and platform, “the smaller the better”. Small enterprises are no longer just complements to large enterprises, but have an independent existence value and are economic entities which cooperate with large enterprises and complement each other. In this context, the concert economy could become the mainstay in the future, which will significantly change the face of the economy.
The writer is an academician at the Chinese Academy of Social Sciences and president of the National Laboratory for Finance and Development.
Opinions do not necessarily reflect those of China Daily.