Preface: On the evening of November 13, 2022, the 62nd China Economic Observer conference was held simultaneously at Chengze Garden [Peking University Campus] and online. This conference session was hosted by Peking University National School of Development (NSD) and co-organized by the Peking University NSD Think Tank and Communication Center. Those invited to discuss the new journey of China’s economy and the new macroeconomic situation together included Yao Yang, President of Peking University NSD, Dean of the NSD BiMBA Business School, Executive Dean of the Institute of South-South Cooperation and Development, and Director of the China Center for Economic Research; Lu Feng, Professor of Economics at Peking University NSD; and Zhao Bo, tenured Associate Professor of Economics at Peking University NSD. This article is based on Professor Yao Yang’s speech.

Challenge One: Consumption

The most important reason why China’s economy is currently facing so much downward pressure is still insufficient domestic demand.

Why is domestic demand insufficient? The primary reason is still caused by the epidemic prevention and control policy. China’s epidemic prevention and control was very successful for the early Delta variant of COVID-19. After the emergence of the Omicron variant, China continued to implement a dynamic zero-COVID policy, paying an increasingly high price. Omicron is very contagious, and is not like the Delta variant, which can be choked off by blocking the transmission pathways. Now, when one place is blocked, the virus may appear again in another place, and there are many asymptomatic infections that are simply undetectable without nucleic acid-based testing (PCR).

In this context, COVID-19 caused by the Omicron variant has hit consumption hard, and consumer confidence among the general public has fallen nearly 30%. At the time of the Delta variant outbreak, consumer confidence did not drop as sharply as this, despite the fact that more than half of the country’s cities had adopted lockdown measures. This shows that when a COVID-19 variant strikes again, if we take the same measures to deal with it, failing to receive the same effect, and there are also some delayed and derived negative effects, it may instead trigger stronger psychological changes.

Challenge 2: Real Estate

During 2020-2021, real estate contributed at least one third of the economic growth, and it may have contributed more to economic recovery than exports. The ensuing rise in housing prices led several ministries and commissions to jointly introduce “three red lines” in early 2021, which classified real estate companies into four classes: red, orange, yellow and green. This basically meant that real estate enterprises could not increase new loans. Then the banks also classified different types of real estate enterprises, and set loan ceilings for enterprises in different classes. This unintentionally gave banks a hint that they could not lend to real estate companies, and this approach had a big impact.

Later, the government found that the above policies put excessive pressure on real estate, and started to switch to other policies, such as “real estate policies appropriate to local situations.”

This year, the government has continued to roll back its policies, but the effect seems to have been negligible, as the real estate sector is still falling and related investments are falling deeper and deeper. This is a big problem. For the first time in China, consumers have lost confidence in buying homes, because a large number of real estate companies have been unable to deliver their properties. This is a completely different situation from the past. Before, consumers would buy homes with just a little government encouragement, or they would at least have the confidence to do so.

There are many reasons for this phenomenon. The delivery risk is only one of them, and an expected fall in housing prices is another.

Despite the fact that both the government and the people think that housing prices are too high, local governments are alike in not wanting housing prices in their jurisdictions to fall, and only want to raise them. This is very understandable. Local governments get nearly half of their revenue from land sales, which are closely related to real estate, so local governments naturally do not want to see housing prices fall.

I once heard a story to this effect. The secretary of a central city was transferred to another central city. After taking up his new post, the secretary thought that the level of housing prices in that city did not match its positioning as a central city, so he had measures taken to attract talent. Within a year more than 100,000 university graduates were attracted to come and settle there, and the city’s housing prices also went up. This indirectly reflects the desire of some local governments. When housing prices are high, land sells at high prices, and tax revenue and local government income increase accordingly. In contrast, ordinary people are relatively rational. When the price of housing is too high, they will put off buying.

Challenge 3: Exports

Exports are still a strong support for economic growth and recovery this year. If the growth rate of exports also falls, the growth rate for the first three quarters of this year may not even reach 3%. The growth rate of China’s exports started to decline in October, however. The United States has, through high interest rates, unexpectedly brought inflation under control, or at least the inflection point has appeared, so now everyone is speculating on whether the U.S. economy and Europe’s economy will fall into real recession next year. If that is the case, our exports will also be affected. Should exports continue their negative growth trend or grow minimally, our economic growth next year will face even greater challenges.

CPI is likewise a problem. If we exclude pork prices, our CPI is already negative, which means China has entered a deflationary path. We are currently in the midst of a hog cycle pullback, and our CPI has temporarily stayed positive under the influence of pork prices. This will not last forever, and the CPI cannot rely on pork prices forever.

If we do not take corresponding measures, the economy may go into deflation, and adding in the above-mentioned unfavorable factors, China’s economic recovery may then face great challenges.

Necessary policy adjustments

It is heartening that the government’s actions have been quicker, and the pace more consistent, after the 20th Party Congress than before.

On the real estate front, the central bank and the China Banking Insurance Regulatory Commission have issued consecutive policies to allow well-qualified real estate enterprises to issue new debt. Longfor Properties recently issued $20 billion of debt, which is a positive sign.

On November 13, the two institutions jointly issued “Document 254,” promulgating the “16 measures” policy. In my opinion, this signaled that the entire banking and financial system should give loans to real estate enterprises in a targeted manner.

In the past, regulators gave banks lending quotas, but no bank dared to lend to real estate enterprises. That was because the banks were not sure whether the money could be recovered after being lent. This time, the “16 measures” clearly stipulate that when banks lend to real estate enterprises, if they have done their due diligence and still have bad debts, so that the money cannot be recovered, the banks will not be held responsible under such circumstances. I think this policy is very strong, and we will definitely be able see results. In addition, “Document 254” requires banks to treat SOEs and private enterprises equally.

I hope that such a policy can really be implemented to improve the confidence of real estate industry players. As the saying goes, confidence is more precious than gold. Once confidence back, and real estate enterprises begin to buy and collect land, the pressure of falling housing prices will also be weakened. People need to feel the signs of the market’s recovery before they might put their money in housing. Houses are used for living in, not for speculation, but real estate itself also has financial attributes, and follows the same “herd behavior” pattern as the stock market. When housing prices keep falling, people will feel that there is still room for them to fall further, so no one will buy a house. People will only buy houses when they clearly feel the signals that house prices are going up.

Regarding the epidemic, the central government has also recently introduced the 20 epidemic prevention measures. I think that is very encouraging. This is what I have been calling for in the past. Epidemic prevention and control must be precise, preferably precise to the individual. The 20 epidemic prevention and control measures are precise down to the building unit, and clearly say that only building units can be sealed. They don’t say neighborhoods, or pop-up notifications, which is very big progress. This means that the whole central level has realized that the cost of prevention and control measures at this stage is too high and necessary improvements need to be made.

Good policies also must be truly put into effect

Now that the policy has been adjusted, the next step is to truly put the policy into effect. This step is also very important.

In terms of real estate, it is mainly the Document 254 refinement that has really and truly made banks dare to lend. I remember that in a seminar organized by Peking University National School of Development some time ago, Xu Gao, Assistant President of BOC International, suggested forming a “national team” to raise a trillion yuan to buy the shares of high-quality real estate enterprises, so as to stabilize “morale” and restore market confidence.

In addition to that, I think we have to let the market work. If houses need to come down in price, prices are going to go down. It is only when prices have fallen to a certain level that people will feel they may regret not buying a house. That is when demand will naturally return. Now every city is waiting and giving orders not to let housing prices fall. If the market is unable to clear automatically, and only the government’s unilateral efforts are relied on, I think it would still be difficult for consumer demand to pick up. Many cities are implementing “guaranteed building delivery,” but the effect seems to be negligible, which only means that the strength is not enough. The hundreds of billions of yuan of support that the government has raised through various policies is far from enough for the size of China’s real estate market. I think that for people’s confidence to return, some very significant signals or indicators must emerge to make them feel that the government remains confident in the real estate industry.

On the epidemic prevention side, many cities such as Guangzhou made big improvements to their prevention policies immediately after the latest 20 measures were introduced. Beijing has also made some improvements, but no substantial moves have been seen yet. Beijing is a city with significance as a signal and value as an economic hub, and if Beijing does not change, economic activity overall cannot be revived. Looking at the whole country, there are many cities that have been locked down for a long time and that are not in compliance with the provisions of the latest 20 measures for epidemic prevention and control, because the 20 measures clearly state that you cannot just lock down a district, let alone a city.

In my opinion, the latest 20 measures for epidemic prevention leave something to be desired. Although with specific provisions there is deregulation to a certain extent, what the implementing principle still emphasizes is not deregulation, but strengthening epidemic prevention. For local governments, the inertial thinking must be to believe that epidemic prevention still comes first. If epidemic prevention is not handled well, it will be necessary to take responsibility, and the responsibility is very clear. But if the economy is not handled well, the responsibility is not so great. Moreover, revitalizing the economy requires marshaling the efforts of the whole country, as it cannot be done with the strength of a single city. On balance, local governments will inevitably continue to choose to prioritize epidemic prevention.

Given this context, I think the central government should make a clear statement. It cannot require “both…and…,” and should clearly prioritize tasks. So far, we have lost three percentage points of economic growth, equivalent to almost 3 trillion yuan. In Beijing, it has been almost a year and you’re still not allowed to hold a wedding. In Chinese people’s view, a couple cannot be considered married if they don’t hold a wedding, and if you aren’t married, it’s not good to have children. Our population is already close to negative growth, so a situation like this is not good for the fertility rate, either.

We often say that in epidemic prevention, you need to calculate the political costs and benefits. The Omicron virus is highly contagious but less virulent. Under these conditions, the focus of epidemic prevention should be on preventing serious illness and death, not on preventing infection, much less on preventing infection by simply and harshly sealing off and controlling whole cities regardless of the cost. Someone once calculated that with the current number of ICUs in China, plus the number of mobile field hospitals built in the last few years, we are fully capable of dealing with serious illnesses.

I am by no means advocating taking it lying down like the United States. PCR testing should still be done, once every 3 days or once every 7 days, to facilitate the screening of infected people. But we definitely have to let people move around. Many people are now afraid to travel outside the city because once they leave the city, the process of returning is difficult, or at least very uncertain. Personally, I also hope that Beijing will lead the way and that epidemic prevention will become increasingly rational. If the capital, Beijing, takes the lead, other cities will naturally follow. Let’s wait and see.

Finally, although it has become commonplace, having been talked about for more than two years, I still want to propose giving money to the people. The function of giving money is not just to make people happy and rescue consumer confidence, which has fallen severely, but also to rescue unemployed people who have begun living in debt. We should pay more attention to this group of people. We can help this group tide over their difficulties by issuing consumer vouchers, which would help a lot in stabilizing and boosting confidence.

Here I would like to call on the government again to give this more consideration. I hope that, in the epidemic prevention process, local governments will look more closely at the latest 20 epidemic prevention measures, be more precise in epidemic prevention and control, and give more consideration to the feelings of the people. Only then can our economy be expected to recover quickly in the coming months.