[New Year Interview] Wei Yongding "China in Quasi-Deflation Situation... Must Boost Growth Rate Through Domestic Circulation"

Interview with Wei Yingding, Member of the Academic Committee at the Chinese Academy of Social Sciences
"China Can Maintain High Economic Growth Rate"
"Real Estate Slump Unlikely to Trigger Financial Crisis"

"Despite many external criticisms, China can maintain a high economic growth rate. We must not harbor the illusion that political and economic conflicts with the United States will be resolved in the short term. Instead, we should focus on expansionary monetary policies to enable domestic demand to lead the economic flow."

Yu Yongding, a member of the Chinese Academy of Social Sciences, expressed optimism about China's medium- to long-term prospects in an interview with Asia Economy, though he did not provide precise figures regarding the 2024 growth rate. While acknowledging that it is difficult to be completely reassured, his tone carried strength in identifying points that can be expected. Even as authorities repeatedly deny recession rumors by stating "this is not deflation," he maintained a clear-eyed view diagnosing the current situation as "quasi-deflation."

Wei Yongding, Member of the Academic Committee at the Chinese Academy of Social Sciences

He held relatively clear solutions regarding concerns surrounding China. Concerning the real estate market crisis, considered a trigger for the Chinese economy, he advised that "risks must be eliminated by placing companies under strict government control." He asserted that political and economic conflicts with the United States, hardened by geopolitical risks, are unavoidable and that expectations for a short-term resolution should be abandoned. He especially urged focusing on domestic demand recovery by further easing monetary policy even if fiscal deficits expand, rather than being shaken by diplomacy and trade. This emphasized "internal circulation," concentrating capabilities inward, instead of the "dual circulation" that the leadership has promoted as the core economic growth strategy.

- Experts generally agree that the 2023 gross domestic product (GDP) growth rate will meet the government target of around 5%. What is your view on China’s economic situation in 2024?

▲ Scholars abroad, including those in the United States, predict that the Chinese economy will hit a wall, but I believe China can maintain a more robust growth trend. However, fiscal and monetary policies need to be further eased. Although fiscal deterioration is possible during this process, the national debt-to-GDP ratio is not high compared to major countries.

- Local government debt and real estate downturn are cited as risk factors that make it difficult to be optimistic about China’s economy in 2024. While outsiders diagnose a significant crisis, inside China it is seen as a controllable risk. How do you see the situation unfolding?

▲ Since the Chinese government introduced the "three red lines" in 2021, housing prices began to decline. After real estate investment plunged 10% year-on-year in 2022, the government significantly eased policies, but the familiar "real estate rebound" did not materialize. From January to October 2023, real estate investment growth rate fell 9.3% year-on-year, and unsold inventory increased by 18.3%. High debt ratios combined with liquidity shortages have pushed more developers into default risk. Authorities claim defaults by companies like Evergrande are one-off events without market impact, but the increasing risk cannot be denied. However, the possibility of this situation triggering a financial crisis in China is small.

- What significance does real estate hold in the asset structure of Chinese people?

▲ Due to capital controls, Chinese people cannot easily invest in overseas assets, and the stock market is currently weak. However, since there are no transaction or inheritance taxes on residential real estate, real estate inevitably becomes the most attractive asset for ownership. Yet, housing price increases have far outpaced the growth of household disposable income, making it increasingly difficult for migrant workers and young Chinese to afford homes. The real estate sector’s complex value chain broadly affects both upper and lower classes in various ways.

- How should authorities respond to prevent the real estate crisis from spreading to the real economy?

▲ As of the end of the third quarter of 2023, mortgage loans in China totaled 39 trillion yuan (approximately 7,076.16 trillion KRW), accounting for only 16.6% of the total, and credit loans to real estate developers stood at about 13 trillion yuan. Considering high lending standards and down payment ratios, the quality of mortgage loans remains good. To prevent spread to the real economy, the government must keep companies under control to suppress risks. Specifically, measures include assisting the liquidation of developers who fail to repay debts or temporarily nationalizing related companies.

- Recently, the central bank has frequently emphasized an "expansionary monetary policy." Does China have sufficient capacity to implement this?

▲ The main reason domestic and international economists believe China lacks room for expansionary fiscal and monetary policies is the overall high leverage ratio. According to the International Monetary Fund (IMF), China’s government debt-to-GDP ratio in 2023 is estimated at about 110% of the 2022 level. This ratio compares to 137% for the United States, 118% for Singapore, 113% for France, and 113% for Canada (Germany 69.3%, Eurozone (20 euro-using countries) 95.6%).

- It is difficult to explain fiscal capacity by debt ratio alone. Does this mean there are no other problems?

▲ High corporate leverage poses a significant problem in our economy’s financing structure. As of 2022, the stock market capitalization as a percentage of GDP is 37% in China, compared to 152% in the United States. Conversely, the bank loan-to-GDP ratio is 176% in China and 48% in the United States. The excessive reliance of Chinese companies on bank loans must be resolved. However, a high corporate leverage ratio does not necessarily mean there is no room for policy implementation. The key lies in non-performing loans (NPLs) at banks. Currently, the NPL ratio at major Chinese banks does not exceed 2%. Since 2010, China’s GDP growth rate has continuously declined due to variables such as aging, diminishing economies of scale, delayed reforms, and geopolitical risks, as well as overly cautious fiscal policies. If policy responses can reverse the downward trend as soon as possible, maintaining a GDP growth rate in the 6% range is entirely feasible.

- Concerns about deflation are rising due to China’s low inflation trend. How do you diagnose the current situation?

▲ China is in a quasi-deflation state. What I fear most is stagflation (low growth with rising prices). Currently, China has an open window of opportunity. If this opportunity is not seized, time will be wasted, and China could fall into a long-term recession. However, I believe it is not too late yet.

- The China-US hegemonic competition is identified as a major variable determining the direction of the global economy. How should China overcome the US containment, which has become the biggest risk to the Chinese economy?

▲ From the perspective of the "Thucydides Trap," it is natural that the hegemonic power, the United States, feels concern and fear over China’s rapid growth and changes its China policy based on national interests and geopolitical strategy. However, the US must also recognize the existence of the "Afghanistan Trap." The British expeditionary force occupied Kabul in 1983 fearing an alliance between Afghanistan and Russia, but ultimately suffered a devastating defeat with 16,000 soldiers and civilians killed or captured. Later historians revealed that Russia had no plan to ally with Afghanistan at that time. Based on this, I call "misinterpreting the opponent’s intentions and formulating policy based on that" the "Afghanistan Trap." The US decoupling strategy will certainly fail. The best outcome the US can achieve is "killing the enemy and self-destructing." Moreover, US decoupling has only stimulated Chinese technological innovation and revolution, enabling companies like Huawei to produce premium phones. The "Pandora’s box" of deteriorating bilateral relations was opened by US political elites, and they must take responsibility. Unrealistic illusions about improving bilateral relations should be avoided, and China must first focus on managing its own affairs well.

- One of China’s long-standing goals and challenges is the internationalization of the yuan. Throughout 2023, the yuan’s value has remained weak against the dollar. What strategy should authorities maintain?

▲ The solution to China’s overseas asset safety issues lies not in yuan internationalization but in accelerating economic restructuring and strengthening domestic demand for sustainable growth. Yuan internationalization should be market-driven and not regarded as the ultimate goal. It is merely a tool to improve national financial security and cross-border resource efficiency. Under current geopolitical conditions, China’s top priority is to realize a growth strategy centered on "internal circulation" as soon as possible.

◆ About Yu Yongding: Born in 1948 in Taishan, Guangdong Province, Yu Yongding is a leading senior economist researching China’s macroeconomy. After joining the Institute of Economic and Political Research at the Chinese Academy of Social Sciences in 1995, he served as its director within three years and has led the China World Economy Society since 2000. Notably, from 2004 to 2006, he served as a member of the Monetary Policy Committee of the People’s Bank of China and was the only academic at the time advocating for yuan appreciation. In 2017, he expanded his market insight through roles such as advisor for the IMF Asia-Pacific region and member of the UN committee on international finance and monetary system reform.