Source: 21st Century Business Herald
Author: Pang Huawei
" People's Bank is leading the world in blockchain, including digital currency. It is hoped that the digital currency issued by the People's Bank of China will be tested first in Dawan District. This will be very helpful for us to promote the internationalization of the RMB. " November 16 Mr. Yao Yudong, former director of the Financial Research Institute of the People's Bank of China, former IMF economist, former World Bank consultant, and chief economist of Dacheng Fund Management Co., Ltd. said.
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Yao Yudong made a report on "New Currency Theory (NMT)" at the "China Financial Forum – The 5th Guangjin•Qianlun Lake Financial Summit" held on November 16.
Yao Yudong explained in the report how to understand negative interest rates in the current turbulent world. How to explain that the Fed has started to buy bonds again – if the QE operation is an operation in a crisis, why is it now starting to buy bonds? In the end, there is no inflation, why can't we find high inflation? Is there any future for digital currency? Should there be a new digital currency similar to the People's Bank of China's DCEP (Note: Digital Currency Electronic Payment, also digital currency and electronic payment tools)?
Yao Yudong proposed a new monetary theory (NMT), which is different from the traditional theory of money demand. The new monetary theory points out that money demand is exponential growth, while asset expansion in the economy is linear. On this basis, he draws a series of conclusions: global circulation is insufficient, inflation is moderate, debt is uncontrollable, dominant currency will eventually appreciate, fiscal policy is mainly to ensure full employment, etc., and future policy space in China Sufficient .
"The renminbi is already an international currency. In the future, the proportion of the renminbi in the international market will gradually increase . It is difficult to catch up with the US dollar, but it is expected to catch up with the euro in the future. We must unswervingly follow the road of internationalization of the renminbi . As an international currency, the future of the renminbi Will appreciate ." In an interview with the 21st Century Business Herald, Yao Yudong said.
Insufficient global liquidity is the final outcome
Yao Yudong introduced that he and Xie Huaizhu and Kong Zeyu took the payment and liquidation as the entry point, re-examined the demand for currency in the transaction, and constructed a money demand equation based on the micro-foundation of payment and settlement. Through research, it was found that the payment settlement network in the transaction requires money. It is extremely huge, no longer a simple linear sum of personal money needs, but a quadratic number of people involved in the payment settlement network .
Yao Yudong explained that their research shows that money demand is not linear, but exponential . For example, in the transaction, two people need two or two silvers; three people need not three or two silver, but six or two silver. What the four people need is not four or two silver, but twelve or two silver.
On this basis, he pointed out that the traditional theory is wrong—the traditional theory holds that the demand for money is linear, assuming that the demand for money grows linearly with the total volume of the economy or the volume of the transaction.
Yao Yudong further pointed out that because the money demand is exponential growth, the New Monetary Theory (NMT) believes that the lack of global liquidity will be the final outcome . " Global liquidity tightening will be the norm in the future, and deflationary pressures will intensify, not inflation. "
Yao Yudong said that due to the lack of global liquidity, digital currency is an important complement to global liquidity. It can jump out of the IMF's issuance mechanism and try to innovate based on digital currency rules, such as eSDR.
"Since the world needs digital currency, I suggest that Dawan District should try the digital currency first ." Yao Yudong said in an interview.
Yao Yudong pointed out that it is worth noting that inflation is mild once liquidity is insufficient . This answers the confusion that there is no high inflation for many years. China does not have high inflation.
The rise in debt cannot be avoided
The NMT inference believes that "the leverage rate is unavoidable ", which breaks people's consensus.
Yao Yudong said that the linear growth of the economy can not meet the demand for exponential growth of the currency. Since the financial crisis in 2008, global debt has continued to grow. The International Finance Association (IIF) released a report saying that in the first half of 2019, the global debt totaled a new record of more than 250 trillion US dollars; government, residents and non-financial corporate liabilities now account for more than 240% of global GDP, The rate has exceeded the growth rate of the global economy, and the debt ratio has continued to rise.
"Our theory tells us that global debt will continue to rise, and it will rise sharply , so individual countries will trigger 'Minsky moments' (Minsky always refers to the turning point between market prosperity and recession)." Yao Yudong introduced The long-term stability of the economy may lead to an increase in debt and an increase in the leverage ratio, which in turn raises the risk of a financial crisis and a long deleveraging cycle.
Yao Yudong said that in order to prevent the "Minsky moment", the central bank adopted QE operations, resulting in sustainable public debt . For example, the European debt crisis was resolved by the European Central Bank QE.
Another example is that Fed Chairman Powell recently promised that the US economy will not decline, but US debt is unsustainable. At present, US Treasury bonds have reached 23 trillion US dollars, and are still accelerating. The rise in debt could not be controlled, forcing the Fed to carry out the pre-operation of QE4, purchasing $60 billion in debt per month, and continuing to purchase bonds until February next year.
"This will change our mindset, In the future, it may be possible to fully secure employment, and the central bank will eventually have to pay for the debt because it can't control the interest rate without paying the bill. ”
Leverage can't be controlled anyway, then, who can add leverage?
"To the enterprise sector, the enterprise sector can't stand it. To the financial sector, the financial sector can't stand it. To the residents, the residents can't stand it, and who will add it to the government?" Yao Yudong said, if you can't control the leverage ratio, It adds leverage to the government, but other departments have to leverage .
Yao Yudong said that in developed countries, the government has been the main force of borrowing in the past decade. In emerging markets, companies are leading the way in lending, but in these countries, state-owned enterprises account for more than half of corporate debt.
Yao Yudong said that in China, the government's leverage is relatively low and the fiscal space is still quite sufficient. China's supply-side reforms have achieved tremendous and far-reaching effects in the past few years. The corporate sector has been leveraged, the residential sector has controlled leverage, and the financial sector has controlled leverage. This is a very correct choice. If you don't control, these three departments will face great risks.
Negative interest rate is the end
" Can't control the rise in debt, what should I do? Only engage in negative interest rates ." Yao Yudong said.
As of September, there were more than $14 trillion in negative-rate bonds around the world, nearly three times the size of the end of 2018. Negative-yield bonds are mainly denominated in the euro and the yen (total ratio is over 90%).
Yao Yudong believes that in the long run, with the aging of the population, the decline in labor productivity growth and the lack of scientific and technological progress, economic growth will slow down and approach zero. To maintain debt sustainability, negative interest rates will be the “final” of monetary policy .
"China's bond exchanges poured 100 billion yuan in September." Yao Yudong said, "When more and more European Central Banks and the Bank of Japan are engaged in negative interest rates, where will the global money go? Only China and the United States. But if the United States In the interest rate cut, it may only be China ."
International currency appreciation
"The international currency will not depreciate, but will appreciate. Any international currency will appreciate, and all non-international currencies will depreciate ." Yao Yudong said.
"In more than 200 countries and regions around the world, only about 10 currencies have become international currencies, which is an inevitable result of the global transaction network." Yao Yudong said.
Fortunately, China seized the opportunity in time to promote cross-border settlement of the RMB from 2009. It will try ahead in the Guangdong area and embark on the internationalization of the RMB, making the RMB one of the international currencies.
It is worth noting that Yao Yudong believes that the economic aggregate of the country or region is becoming increasingly imbalanced. International currency issuers can evolve into “super economies” . The economic aggregate of non-international currency issuers is suppressed by currency depreciation . Formed an international version of "Beijing folding" .
"Issues the international currency, don't think it is a depreciation, it may be an appreciation. This is a shocking and subversive conclusion." Yao Yudong said.
“The Bank of Japan is engaged in QE operations. Do we bet on whether the yen is appreciated or depreciated? You can’t bet on its depreciation. You have to bet on it because the yen is an international currency and the world needs the yen, so it’s a little more, but it’s on the rise.” Yao Yudong Say. In 2016, after the yen entered the era of negative interest rates, it began a strong appreciation trend.
Yao Yudong believes that The United States uses the dollar as a privilege of the world's currency to finance itself . The domestic economic situation and macroeconomic policies of the United States not only dominate the supply of overseas dollar liquidity, but also dominate the domestic liquidity of foreign exchange reserve countries. They have a strong "spill effect" and become the de facto "central bank of the world". .
Yao Yudong pointed out that the US balance of payments is balanced by "printing money ." The United States can use the US dollar as the privilege of the world currency to finance itself, and the process of financing the United States itself is the process of providing liquidity to overseas offshore centers.
Overall, since 2000, the average nominal effective exchange rate of reserve currencies is on the rise, while the average nominal effective exchange rate of non-reserve currencies is on the decline.
"This theory also shows that as an international currency, in the future, more renminbi will not necessarily depreciate because of global demand." Yao Yudong said.
In contrast, for countries that are not international currencies, including Argentina, Brazil, Russia, etc., why do many countries fail to climb the middle trap? "Not that they don't work hard, but they are not international currencies. This is a cruel trap." Yao Yudong said.
Three stages of monetary policy evolution
Yao Yudong said that MMT theory pointed out that in the case of current account balance, the surplus in the government sector corresponds to the deficit of the private sector, and the government balance means that there is no increase in wealth in the private sector .
In the case of a long-term deficit in the US government's import and export, if the private sector surplus is desired, the government sector can only be in deficit. Combined with the theory of the appreciation of dominant currencies, MMT is basically feasible for international currency issuers, and MMT implementation will not lead to a significant depreciation of its currency. Public sector deficits to support private sector surpluses .
Yao Yudong introduces the three-stage theory of monetary policy evolution:
The first stage: traditional monetary policy (Taylor rules) – such as China.
Maintaining a stable short-term interest rate stance and a neutral policy stance, when the output gap is negative and the inflation gap exceeds the target value, the nominal interest rate should be lowered ; vice versa.
China’s central bank’s monetary policy operations in recent years have combined quantitative and price-based instruments and are a “double tool” framework. Under the "double tool" framework, the operation based on the new Taylor rule is more suitable for China's current situation.
The second stage: QE – such as the United States.
As leverage increases and GDP growth is limited, it will evolve into QE to sustain debt sustainability .
The Fed will enter a new round of QE . The Federal Reserve announced on October 11 that from October 15, 2019 to the second quarter of 2020, the short-term government bond purchase plan will be restarted, and the bond purchase amount will be 60 billion U.S. dollars per month. According to the purchase plan, it is estimated that by the second quarter of 2020, the Fed's total assets will return to 4.5 trillion US dollars.
The third stage: QE + negative interest rates – such as Japan, Europe.
Negative interest rates are the “final” of monetary policy as labor productivity growth declines and technological progress is weak, and the population ages.
Yao Yudong pointed out: "The key is that the United States will not purchase bonds in the third quarter of 2020. If the Fed continues to purchase bonds in the third quarter, global flows are rampant. According to our theory, the Fed has to continue to purchase bonds in the third quarter , but not necessarily long-term debt purchases. If you are in a situation where global liquidity is rampant, then US interest rates will be lower, while the European Central Bank and the Bank of Japan are already negative interest rates. In contrast, other currencies are unstable, not dominant currencies, then, Where is the global amount of money going? The main direction is China. "
China's policy space is sufficient
According to BIS data, the current Chinese government sector's leverage ratio is at a low level , which is 49.8% in 2018, far below the level of developed countries, and the government sector still has sufficient leverage .
“In the future, China will rely on the issuance of local special debts, and at the same time convert the fiscal deficit into a private sector surplus to promote China’s economic growth. In the process of current account deficit, the renminbi can accelerate internationalization, thereby stabilizing the RMB exchange rate and guiding the capital account. Surplus. " Yao Yudong said.
In addition, the leverage ratio of China's non-financial corporate sector has risen rapidly since 2008, reaching a peak of 160% in 2016, and has declined in 2017-2018, and is still at a relatively high level. “Constructive de-leverage is still the main theme, and the leverage ratio of non-financial corporate sectors will further decline , seeking long-term higher quality growth.” Yao Yudong said.
Yao Yudong pointed out that in 2020, the Chinese economy must ensure a growth rate of 6%. From 2022 to 2030, the economy will shift from medium-to-high speed to medium-speed growth with higher quality growth, maintaining a growth rate of 4%-5% per year , which can be described as "The Silver Age."
"The total GDP of China will be 10 billion yuan next year. In 2029, according to our inference, it can reach 200 trillion. If we calculate by the exchange rate of 7, the total GDP of China is 30 trillion US dollars, with the total economy of the United States. The amount is very close, in the end who is the world's largest economy, it is difficult to say at the time. And the internationalization of the renminbi is naturally unstoppable." Yao Yudong said.
Then, can China's economy maintain a medium-speed growth in the next 10 years?
Yao Yudong believes that there is no problem, and China’s policy space is sufficient for the bottom of the economy . Comparing the relationship between the aging process of China and Japan and the economic growth rate, it is expected that China will maintain a real GDP growth rate of 4% to 5% from 2021 to 2030, with a nominal growth rate of 6% to 7%. By 2030, China’s GDP will Nearly 200 trillion.
Yao Yudong further pointed out that the current local government special debt balance is 9.5 trillion yuan, local government general debt is 11.9 trillion yuan, and national debt is 16 trillion yuan. It is assumed that local special debt will increase by 3 trillion yuan per year and general debt will increase by 1 trillion yuan. The national debt will increase by 2 trillion yuan for 10 years. By 2030, the balance of government bonds will be close to 100 trillion yuan, and the proportion of government bonds to GDP will still be about 50%. The policy space is still sufficient .
In addition, supply-side reforms have opened up growth space in recent years, and the old and new kinetic energy of China's economy has turned: According to NMT theory, technological progress can alleviate the problem of liquidity tightening and open up long-term economic growth .
“ Kechuang board has achieved initial success . Kechuang board is a very important step to realize the transformation of old and new kinetic energy and create an innovative country. There may be 10,000 companies listed in the next 20 or 30 years, we will be able to cultivate a group of great Company." Yao Yudong said.
"The Chinese economy will have sufficient local government debt space in the next decade. We will firmly support China's economy in the medium-speed growth zone and strengthen innovation and construction. We will have better and better performance." Yao Yudong believes.