When it comes to China’s current economic situation, resolving it is undoubtedly a huge challenge. The current operational state of the Chinese economy has persisted for a long time, yet consumption has slid downward, which has only become increasingly severe. In May of this year, total retail sales of consumer goods fell by 0.6% year-on-year, exhibiting a rare negative growth for recent years and dragging the cumulative growth rate from January to May down to 1.4%. The entire economic entity has fallen into a "supply-side depression" of weak growth. Corporate production has also been experiencing difficulties, which then impact consumption and employment. Conversely, the sluggishness and lack of vitality in consumption and employment restrict market expansion. This causes the production activities of enterprises to become further unsustainable and compounds challenges, thereby forming a negative loop for the economic entity.
How, then, can such a negative loop be broken? Textbook-style recommendations and commentaries are visible everywhere. This includes past efforts to curb this negative loop, like stimulating consumption and issuing consumer vouchers on a large scale. There is also the suggestion of optimizing interest rate policies and regulating interest rates, which has led interest rates to approach zero. In addition, some points point towards implementing large-scale reforms that, despite having extremely broad coverage, remain decoupled from substantial effects. Then, others thought of "stabilizing housing prices" alongside fiscal support, which has also been proposed for many years, yet market conditions remain as bleak as ever. A large number of temporary, stimulatory measures have yielded unremarkable effects on the structural problems of the overall socio-economy, and theoretically cannot resolve genuine structural issues. Therefore, the operation of the Chinese economy still faces the harsh reality.
From the perspective of economic policy planning and based on the current situation, the direction in which efforts must be exerted is to seek a viable path. This path should align with the trends of economic development, focus on leveraging the original, accumulated potential energy within the economic entity, shift the economy off the downward track of the negative loop, and subsequently create a healthy cycle that allows policies to ground themselves in reality, truly boosting the economy and stimulating consumption growth.
Such a policy option does exist. The basic logical cycle of this policy solution is that, within the economic operating system, there needs to be encouragement and integration of small and medium-sized importers and exporters to engage in international trade, creating a large volume of exports, producing employment for university students, and generating new consumption that flows from external markets into the domestic economy. Next, there should be the construction of widespread international trade networks overseas, exporting Chinese commodities to compensate for the shortcomings of the platforms. This could then generate overseas revenue and profits, which would be used to purchase issued foreign-currency-denominated government bonds. On this basis, there is a need to create a controllable policy platform, including online platforms, to form windows that provide policy convenience as well as management constraints. Transactions would be conducted through the platform, using sovereign bonds to collateralize long-term credit, and simultaneously clear export costs. Finally, there would be the re-export, hence forming a cycle of international trade. If this cyclical system is viewed as a policy model, then it can be a possible and essential solution to the current challenges facing China's economy.
According to a simple estimation of this policy model, if China's current total consumption is calculated at RMB 50 trillion, provided that the external exports can increase by an additional nearly USD 500 billion, it would be equivalent to a rough estimate of a 10% or so growth rate in China's consumption. This is already several times higher than the current consumption growth rate, which would naturally constitute a monumental success. At the same time, China can also utilize sovereign bonds to claw back a large amount of external funds outside the economic entity to support local fiscal construction, social welfare, and help defuse non-performing debts. This opens what is in fact, an existing channel that provides long-term credit to small and medium-sized private enterprises, supporting them in expanding their turnover globally while universally stimulating domestic production activities due to the demand for consumer goods. This, in turn, can create a large number of employment positions for university students.
The intrinsic implication and the broader direction of this policy model demand a timely adjustment of the current policy orientation to leverage external consumption to stimulate China’s own consumption, treat the two forms of consumption as a single entity, and endow its consumer activities with an internationalized policy significance. This is to address, to a certain extent, the challenging policy task of achieving consumption growth by shifting from the outside in, and by expanding it into the scope of an international vision.
What this policy model establishes is a cyclical system that penetrates both China’s and the international economies. This means it will possess resistance that transcends the economic entity, and there will exist some potential bottlenecks and sticking points that require the powerful support of policy coordination and policy reform.
Among these bottlenecks, the most crucial one is the issue of "long-term credit". Although sovereign bonds are excellent, risk-free assets suitable for collateral, their yields are very low, and sovereign bond market prices are heavily influenced by macro interest rates. Consequently, in operational links, banks are actually on strict guard against sharp drops in the prices of long-end sovereign bonds. Once risks arise, they will demand additional collateral or even enforce forced liquidations. Therefore, industry policies regarding the provision of this type of credit are actually extremely cautious. Under these circumstances, raising sovereign bond yields requires the central bank's monetary policy to cooperate moderately, considering interest rate hikes of an appropriate intensity to raise sovereign bond yields. As for the increase in the cost of exported commodities caused by interest rate hikes, this can be suppressed by exporters adopting various operational measures.
Another issue is the matter of platform construction.
On the surface, what small and medium-sized exporters need most critically when doing trade is highly liquid working capital. If the money earned is first converted into sovereign bonds and then collateralized to become loans, the interest rate differential, like credit interest rates, handling fees, and collateral discount rates, would be consumed by banks, which also prolongs the capital turnover cycle. Therefore, there appear to be problematic aspects inherent in this operation. Despite this, the utility of the policy platform is actually multi-faceted, and the construction of the actual policy platform is essential for this policy model. Its existence can provide answers to and resolve many challenging problems for small and medium-sized exporters, and can subsequently form scale effects through aggregation, a situation identical to the aggregation effect of online platforms. First, it can resolve import and export insurance issues, lower various export risks, and possess relatively strong bargaining power vis-à-vis the fees charged by insurance companies. Second, it can provide the convenience of a policy window, resolving export credit, foreign exchange settlement and sale, customs declaration, insurance, clearance, and related export supporting systems through a single window, significantly improving efficiency and relatively reducing costs. Third, it enables huddling together for warmth to grow from small to large, enhancing overseas trade protection, including legal aid and contingency assistance, to cope with geopolitical surprises and legal warfare. Fourth, it forms an organizational and management system. The establishment of the platform includes existing transactional online platforms, which can also be achieved through joint efforts by local governments and non-governmental associations, with an emphasis on forming scale effects and management effects. Fifth, with the platform as a foundation, it expands sovereign bond transactions, thereby forming an inward-oriented external cycle, providing long-term credit support to small and medium-sized exporters, consolidating the capital foundation, and fostering consumption growth.
Viewed objectively, this policy model will inevitably involve numerous policy reform issues, requiring breakthroughs in the existing system and order, and furthermore involves multi-departmental coordination within the government. Hence, the existence of multiple challenges and bottlenecks is almost certain. However, judging from the current Chinese economic situation, without reforms of considerable intensity, the structural problems in the operation of the economy cannot be resolved. With this in mind, trade-offs on the policy front would be what the decision-making level needs to undertake when seeking breakthroughs.
Indeed, individuals situated at the apex of the pyramid in the economic sector will need to take note of the subtle changes at the grassroots level of society. This policy model was actually constructed as a policy solution by abstracting a healthy cyclical system from industrial research on Japan, and then blending it with the realistic needs of China's economic environment. This process is not mysterious, and in fact, successful practical experiences in this regard are not few. Yet, because of its smaller scale, it was difficult to truly enter the policy vision in the past.
For instance, as ANBOUND revealed in a briefing many years ago, a young Chinese girl established a trade warehouse in Iraq, expanding the production and export of Chinese consumer goods, and earning a relative fortune for herself. There are actually foreigners who have done the same, and an example of this is that two young men from New Zealand, the younger of whom was only 18 years old, borrowed NZD 13,000 from their parents and came to China in 2003. They set up a corrugated iron shed in Shantou, Guangdong, to start their business. They rooted themselves in China for 8 to 10 years, developed and produced many global blockbuster toy products, and have now been among the richest men in New Zealand for two consecutive years.
Such examples are actually too numerous to mention. China is the birthplace and base camp of the world's consumer goods. Although there are some changes now, in reality, it remains largely the same, and global commodity competitiveness still exists. Faced with the current dilemma of economic growth, the key for China is that its policy departments need to assemble and mobilize the existing social production capacity and the creativity of young people, driving them to play their part.
Final analysis conclusion:
In the real world of trade, Japan also once faced a similar predicament but ultimately moved toward "glocalization" to break the deadlock. Such abstracted experience, as well as the experience of forging a healthy economic cycle, is worth drawing upon. China’s current large batch of small and medium-sized importers and exporters, along with the potential large batch of future small and medium-sized importers and exporters, may be tiny relative to the USD 3.5 trillion volume and role of China's international trade. However, as long as the policy front provides crucial and effective support, they can play a huge part in the world of trade and truly generate economic effects. (CG)
