Abstract: The author argues for a calmer look at the current economic situation. For the overall economic recovery to be truly felt by ordinary people, it is necessary to get household income expectations and consumption expectations back on track and to address the issue of hidden unemployment, which is not just about getting the service sector back to its pre-pandemic level, but about getting it back on track to its potential growth before the pandemic.
I. A CALMER LOOK AT THE CURRENT ECONOMIC SITUATION
1. China’s GDP grew by 4.5% year-on-year in the first quarter, which is better than expected. How do you see the current economic recovery trend? What is your outlook on economic growth this year?
Xing: In late 2022, we expected this year's GDP growth to be as high as 5.7%. Looking back, the growth rate in the first quarter was still in line with expectations. Recently, several international organizations and investment banks have also revised their estimates of the annual economic growth rate higher. But we should be more pragmatic and calm. While seeing part of the first quarter economic data better than expected, we should also see the other side of the story - the current economic recovery lacks a very solid momentum.
Recently, there have been three main debates in the market. First, in terms of the macro data, the rebound of GDP and consumer retail sales is better than market expectations. But micro speaking, there is a gap between the actual feelings of market entities and the better-than-expected market data. Second, there is a debate over inflation versus deflation. Third, exports seem relatively robust, but given the global geopolitical tensions, coupled with the possible downturn of European and American economies due to financial shock, can China's exports really remain strong?
I think we need to have a clear understanding of the current economic situation instead of jumping to the conclusion that China's economy has fully recovered. The subsequent macro policies should remain strong and not be easily withdrawn or shifted.
Compared with Q4 of last year, the economy showed a significant recovery in the first quarter of this year, with a growth rate (annualized) of 10%. But from the second quarter onwards, the growth rate is likely to slow down from previous quarters. According to our calculations, if the growth in each quarter stays at 4%-4.5%, achieve the expected 5.7% growth for the whole year is possible.
However, whether such a growth rate can be maintained in each quarter depends on two things: first, whether the policy can remain robust or not; second, the confidence of private enterprises and the market's concern about overseas geopolitics. Suppose the sentiment of private enterprises can continue to recover, while we deal with overseas geopolitical relations more pragmatically. In that case, it is likely that the GDP growth rate can be maintained between 4% and 4.5% in the second half of the year, thus achieving an annual growth rate of about 5.7%.
2. In terms of consumption, total retail sales of consumer goods recovered faster in the first quarter, up 5.8% year-on-year, and the consumption growth reached 10.6% in March. But the feelings of consumers fell a bit short of the high figure. What are the reasons for this discrepancy? To what level has current consumption actually recovered?
Xing: Recently, airfares and hotel prices have risen sharply, and total social retail sales in March saw a double-digit growth, which is also higher than the market expected. All of these signs reflect an accelerated recovery of consumption. However, at the same time, the actual feelings of enterprises and individuals for consumption recovery are not as high as the data show. In my view, there are two main reasons for the discrepancy.
First, the base effect. In February last year, many cities were affected by the pandemic one after another, so consumption, especially offline consumption, was greatly impacted. Due to last year's low base effect, the retail data in March this year rose sharply year-on-year; it is expected that the retail data in April and May will significantly increase year-on-year.
On the other hand, the recovery of consumption was uneven. During the pandemic, offline services were affected the most, such as tourism, catering, entertainment, and other sectors that require the gathering of people. These sectors rebounded most significantly in January-February this year. In the first quarter of this year, the retail sales of consumer goods were relatively good. Structurally speaking, there were mainly two areas that showed strong performances. First, the jewelry sector contributed the highest proportion, which reflected more of a kind of investment consumption of residents; second, the rebound of catering, travel, tourism, and aviation industries drove up the retail sales data.
These two aspects are not contradictory to the current feeling of micro entities that "some consumption is not strong enough." In particular, some consumption areas currently slowing down are often the ones that performed better during the pandemic, such as online shopping, home appliances, and automobiles. As the impact of the pandemic subsides, it is clear that the service segment experiential consumption, which was most depressed before, will recover significantly. Other countries’ experiences also show that large purchases will fall after the pandemic and return to their average level after some time.
Therefore, it is in line with the law of consumption recovery if there is a discrepancy between the actual feeling of the micro market entities and the official data. The current unevenness in consumption recovery is real, and the better-than-expected consumption recovery reflects both the low base effect and the distributional feature of the consumption industry.
Although the growth rate has declined in terms of large consumer goods, it is still considerably higher than in 2019. However, these are often not the key sectors to absorb employment.
The service sector, which absorbs the most employment, based on overall travel from January to April this year measured by mobility indicators such as the number of domestic airline runners, hotel booking rates, and subway passenger traffic, has just returned to 2019 levels. But recovering to pre-pandemic levels does not mean that the employment issue has been solved or that consumption has fully recovered, as the growth potential during the past three years has not been made up for.
In the years before the pandemic, the service sector could create 10 million new jobs each year, absorbing a large number of university graduates and young people graduating from vocational and technical schools. But during the pandemic, the service sector created just over 1 million jobs per year. The current unemployment rate of young people is close to 20%, which is still relatively high. Now although we are coming out of the pandemic and some industries are starting to pick up, these industries are actually only just returning to 2019 levels, and their ability to create new jobs needs to be further enhanced.
For the overall economic recovery to be truly felt by ordinary people, it is necessary to get household income expectations and consumption expectations back on track and to address the issue of hidden unemployment, which is not just about getting the service sector back to its pre-pandemic level, but about getting it back on track to its potential growth before the pandemic.
II. MAIN REASONS FOR THE SLOWDOWN IN INFLATION: IN THE EARLY STAGES OF RECOVERY, SUPPLY RECOVERS FASTER THAN DEMAND.
3. In the first quarter, the growth rate of residents' income was slower than that of GDP, while residents' deposits increased by 9.9 trillion yuan, 2 trillion yuan more than the last year. How to explain these two data?
Xing: Firstly, the relatively low growth rate of residents' income is related to the characteristics of China's economy: the recovery is driven by endogenous forces. China's path to recovery is different from that of Europe and the United States. The Chinese government has not adopted aggressive stimulus policies like Europe and the United States have done. For example, the United States and the United Kingdom directly give money to residents and stimulate consumption through monetary easing. However, China's measures are relatively moderate. In this case, China's post-epidemic economic recovery seems to mainly rely on endogenous forces driven by easing the burden on people and restoring confidence in private enterprises.
One of the characteristics of this recovery is that supply will recover significantly faster than demand. People are more willing to return to the job market without large-scale fiscal transfers,. Then in the early stage, labor supply recovers faster than labor demand. Therefore, inflation pressure is not high. It’s not surprising that wages rise relatively slowly in the short term, even if its growth rate is lower than that of the GDP.
Secondly, currently, the economy is in the early stage of recovery after the pandemic, and residents have not yet formed a stable expectation of income and employment, so excessive savings continue to exist, which also indicates that the recovery of residents' confidence still needs time. We expect that in the second half of this year or close to the end of the year, as residents' employment and income improve more significantly, excessive savings may gradually diminish, and the consumption rate of residents will gradually return to normal. This is also in line with the transmission cycle of economic recovery.
4. The recent price index shows that the year-on-year growth rate of CPI and core CPI are still low, and PPI has been continuously negative for six months. What is your view on China's current inflation situation and the inflation pressure for the whole year?
Xing: This is a hot topic in the current market debates. I’m not convinced that China's low consumer prices mean it has fallen into deflation. The use of the term "deflation" is inappropriate, and China does not have the conditions and environment for long-term deflation. China's inflation rate is just rising slowly, and prices are not falling. The appropriate description is "Disinflation" rather than "Deflation." Low prices reflect the problem of insufficient demand recovery. The use of the term "deflation" may lead us astray from the main problem we need to study. Our main challenge remains to be more policies to boost market confidence during the initial stage of economic recovery.
Currently, inflation pressure is low, and we need to consider three factors.
Firstly, inflation is a lagging indicator, and the current low inflation is consistent with the stage characteristics of economic recovery. It has only been less than four months since China has truly emerged from the epidemic, and the economic recovery is still in the early stage. In terms of price, inflation is a result and a lagging indicator, not a leading indicator. Only when the confidence of enterprises is restored and wages rise, prices will spiral up accordingly. The current low inflation pressure does not mean it will remain low for two years.
Secondly, the relatively low inflation pressure also conforms to the nature and characteristics of China's current economic recovery. As I mentioned, China's recovery mainly relies on endogenous power, and the recovery of the supply side is faster than that of the demand side. Coupled with the global demand downturn, China's industrial capacity utilization rate has slightly decreased compared to the past two years, and overcapacity has pulled down manufacturing prices.
Thirdly, from the other side of the coin, low inflation may also be an advantage. China will not have to raise interest rates in order to control high inflation, as Europe and the United States have done, which even caused shocks to the banking industry. The low inflation pressure in China means there is still a lot of policy mediation space, such as monetary policy, fiscal policy, and boosting confidence in private enterprises. We will not be constrained by inflation.
To summarize the above three factors, firstly, economic recovery has stages, and inflation is a lagging indicator. It is normal that it has not come to this stage now. Secondly, the characteristics of the economic recovery show that China relies more on endogenous power, and supply recovers faster than demand. Thirdly, this may not be a bad situation, but rather an advantage that provides policy space.
III. TWO MAJOR TRENDS BEHIND STABLE EXPORT GROWTH
5. Exports in March were significantly better than the previous two months, with a year-on-year growth rate of 14.8% (in US dollars), far exceeding market expectations. What are the main reasons for the significant improvement in exports? How can we look forward to the overall situation of China's foreign trade this year?
Xing: China's export performance is more stable and resilient compared to other countries, reflecting two trends:
First, China's export structure is upgrading, and China seems to be continuously climbing up the manufacturing chain. The main driving force that led China's exports is the "new three drivers," electric vehicles, lithium batteries, and solar cells. In the first quarter of this year, exports of electric vehicles reached 64.75 billion yuan, an increase of 122.3%, which is also the highest growth rate among the "new three drivers"; exports of lithium batteries reached 109.79 billion yuan, with a growth rate of 94.3%, which acted as a strong driving force on China's exports. Thus, we can see that the upgrading of manufacturing has maintained China's export competitiveness.
Second, the trade structure of imports and exports constantly transforms with the evolution of geopolitics. In recent years, the complex relationship between the United States and China has led to corresponding changes in China's foreign trade investment structure. In the first quarter of this year, China's total exports remained stable. Exports to the United States showed a downward trend, while its trade with Southeast Asia, the Middle East, and some emerging markets in Latin America and Eastern Europe has significantly strengthened. In the first quarter, both exports and imports with ASEAN and countries along the "Belt and Road" were in high double-digit growth.
From a trade perspective, China's external demand has declined compared to the past two years. Recently, Europe and the United States have experienced financial shocks as interest rates continue to rise. Given that the balance sheet, income statement and cash flow statement of their residents, enterprises, and government departments are relatively reasonable, the probability of a systemic financial crisis similar to that of 2008 in the United States and Europe is very low. However, the collapse of Silicon Valley Bank triggered a banking crisis. Influenced by deposit outflows, the scale of bank loans in the United States is likely to shrink, and the impact on credit conditions may slow down the growth of the US economy and further drag down China's external demand.
Over the past two years, exports have made an important contribution to driving China's economy. Considering the changes in external demand, this year's economic growth will rely more on domestic demand. Suppose private enterprise confidence can gradually be restored and the current trend of economic and domestic demand recovery can be consolidated. In that case, it is very likely that there will be a situation where "the West is not as bright as the East" this year.
As the European and American economies have entered the end stage of this economic cycle, the growth rate is likely to fall under the background of interest rate hikes, and even recession risks may arise. On the contrary, China is in the early stages of economic recovery, and if policies are appropriate, China is very likely to achieve economic growth of over 5.5% this year. It will contribute up to 40% to global GDP growth, making it the year with the highest contribution to global growth since 2009.
In a sense, export performance has a strong reference value for judging China's marginal policy adjustments after the Politburo meeting, as well as how China balances its geopolitical relationships and handles economic, trade, and investment links under the geopolitical context.
In the current extremely complex geopolitical situation, China can continue to expand and enhance the competitiveness of its extended industry chain, strengthen foreign economic, trade, and investment exchanges, and avoid "hard decoupling.” It is certainly a good phenomenon, but we should also draw some inspiration from it.
Firstly, stable relations between China and the United States are still necessary. China should maintain contact and communication with the United States. It is important to recognize that a large portion of global demand still comes from Europe and the United States, and a considerable portion of China's exports to third-party countries are ultimately exported to Europe and the United States. For example, the increase in exports to Southeast Asia is partly due to factories established by Chinese companies in Vietnam, Indonesia, and other countries to avoid risks and gain benefits. These factories become a part of their industrial chain. In this process, high-value-added products' components are manufactured in China and later assembled in Southeast Asia before being exported to Europe and the United States.
IV. INVESTMENT GROWTH THIS YEAR MAY OUTNUMBER LAST YEAR, AND HOMOGENIZATION OF MANUFACTURING INVESTMENT SHOULD BE ALERTED TO
6. In the first quarter, national fixed asset investment grew by 5.1%. Infrastructure investment maintained a high growth rate of 8.8%. Real estate development investment fell by 5.8% year on year, with its decline narrowing significantly and sales data bouncing back to positive. Then from your perspective, how much should infrastructure be invested in the next phase, and how much has the real estate market recovered at present? Furthermore, how do policies support the real estate market and ensure its smooth operation?
Xing: In the early stage of economic recovery, the private sector is not confident enough. Under this circumstance, sufficient public spending is required. While upward pressure on prices is rather low, credit and social financing perform relatively robustly from January to March, which reflect that funds are eventually used by the state-owned sectors or as public spending. This transmission chain is consistent with the characteristics of the economic recovery cycle as long as it eventually generates spillover effects. For example, public-sector spending helps stimulate employment.
This year, mainly two fields can spur investment to upstream and downstream enterprises: infrastructure construction and real estate.
First, infrastructure investment will slightly expand. Last year, the CPC central committee made great efforts to promote infrastructure investment, such as issuing local government special bonds, and speeding up project approval. However, on the one hand, real estate sales dropped sharply, and construction starts decreased significantly, partly offsetting the resilience of infrastructure investment; on the other hand, due to COVID-19 impacts, despite the financial support of infrastructure investment, many projects failed to be started, without producing any physical workload. This year, these two aspects will be improved. Though infrastructure hasn’t seen a growth rate of special debt matching loans necessarily higher than that of last year, as the pandemic gradually becomes under control, it is easier to sustain construction starts and form physical workload.
Second, as the real estate market becomes stable, home sales and corporate credit defaults enter a period of stability. Given that real estate sales typically lead to real estate investment and new construction starts by a quarter or two, it is expected that in the next quarter or two, real estate may witness better new starts.
The current round of stimulus in China is moderate, unlike in 2008 and 2009 when infrastructure was stimulated with more significant public spending. At present, the real estate market is getting off to a stable start. No further easing policy has been introduced since the real estate market witnessed a “mini-boom” in January and February. From this perspective, it seems that real estate has achieved an officially recognized “new normal,” with sales stabilizing at around 10 million units per year. As domestic demographics come to a turning point, a “V” rebound will hardly occur given that real estate supply has experienced long-term structural changes.
Therefore, this year’s infrastructure and real estate investment may outperform last year, but will not act as the leading force of economic recovery. At the same time, neither should the easing policy be rushed out of, nor should tightening policy be implemented in infrastructure, real estate, and other areas simply because the first quarter has seen relatively good GDP performance. Otherwise, the current momentum of hard-won stabilization would be put to an abrupt end.
7. In the first quarter of this year, manufacturing investment increased by 7%. Then how do you assess the current and the future performance of manufacturing investment, respectively?
Xing: Manufacturing investment is dominated by private enterprises, mainly determined by demands. Take export trade as an example. In the past two years, China’s exports performed well, and manufacturing investment maintained a momentum of rapid growth. However, if exports decline with consumer demand in Europe and the US, manufacturing investment is bound to be discouraged.
Manufacturing investment is one of the most important parts of China’s high-quality development, but we must also be vigilant about investment homogenization and avoid audacious investment, which may lead to potential risks. As we found in the research, manufacturing upgrading is valued everywhere during the process of high-quality development. When inviting investments, industrial parks, whether in less developed inland provinces or developed coastal regions, have three homogeneous focuses: First, the transformation of new energy industry, such as new energy vehicles and new energy batteries; second, chip and other cutting-edge high-tech industries; third, the upgrading of manufacturing, such as advanced manufacturing. Nevertheless, manufacturing investment is mainly determined by demand. If global trade demands decline this year, investment enthusiasm is bound to decline accordingly.
All components of the economy are mutually consistent and reciprocal. In other words, the manufacturing process is not the only part that is important. High-quality development has very broad connotations. Any component that meets people’s needs for a better life, from entertainment, tourism, and games to procedures related to sophisticated production, as long as it does not violate laws and regulations, does not enhance leverage and financial risks and meets the requirements of creating a green environment, contributes to high-quality economic development. All of them may facilitate manufacturing investment by improving consumer demand, and thus we should treat them without discrimination.
Science and technological innovation pursue the development of not only a certain field but also the whole chain, from consumption and entertainment to the production of sophisticated industries. For example, the development of AI demonstrates that consumer demand for games and entertainment in the past decade was one of the important factors that drove market players to pursue excellence and improve arithmetic.
In addition, the current round of financial shocks in Europe and the US has raised the question of whether the collapse of Silicon Valley Bank means that financial innovation is doing more harm than the contribution to the economy. Silicon Valley Bank had been working closely with VCs and PEs, forming an investment-loan linkage. In retrospect, though the past decade or so witnessed financial deregulation in the US, the development of VCs and PEs and the emergence of financial innovation laid a foundation for US productivity progress and technological innovation. While the Silicon Valley Bank collapsed, the US saw a new generation of AI technology represented by Chat GPT, whose industrial development is also supported by the whole financing system in the US
It’s not very likely to introduce extra stimulus policies.
8. What are your expectations for the following adjustment of China’s macro policies to promote economic recovery?
Xing: China’s economic recovery is characterized by more reliance on endogenous dynamics, so introducing extra stimulus policies is not very likely, whether policies on large-scale infrastructure construction, a comprehensive relaxation of the real estate industry, or on consumer vouchers, and car subsidies.
Policy-makers should follow two key points:
First, avoid policy retraction. China’s economic recovery remains mixed and is still experiencing convalescence. Therefore, a corresponding policy strength should be maintained to prevent policies from being tightened.
Second, boost business confidence. Some substantial measures should be taken to boost the confidence of domestic private enterprises. In addition, overseas geopolitical relations should be stabilized in a pragmatic and rational way, including both relations with the US and the economic, trade and investment ties with third-world countries. Such a two-pronged approach will reassure enterprises and motivate them to invest, expand, produce, and employ.
Currently, the central committee for deepening overall reform has adopted A Document on Promoting the Development and Growth of the Private Economy, which explicitly supports the development of private enterprises at the regulatory level. Multinational enterprises, investors, and market participants at home and abroad expect to see some concrete examples, such as, among those industries that have been rectified in the past few years, whether there are companies getting licenses and financing from the capital market and formally embarking on a healthy and virtuous redevelopment. It seems these questions still require clear answers.
If definite progress is made in these two areas, it will help consolidate this year’s economic and market confidence recovery momentum.
9. Looking to the whole year, will China’s monetary policy cut interest rates?
Xing: I don’t think China’s benchmark interest rate will continue falling this year. My understanding of the benchmark interest rate is: China, as an emerging economy, has a potential economic growth rate necessarily higher than that of developed economies such as Europe and the US However, the current 7-day repo rate (DR007), the benchmark interest rate in China’s market-based interest rate system, is maintained at around 2%. For an emerging market economy like China, this is indeed equivalent to the zero lower bound in the US In this case, to continue lowering interest rates is difficult. That’s why the US has adopted some unconventional policies, including QE, and so may China adopt similar policies.
At present, the market is concerned that business confidence is still lacking, that companies are reluctant to borrow and invest, and that residents are unwilling to borrow. This is normal in the early stage of economic recovery when businesses and residents remain influenced by the scarring effect. In this stage, a combination of unconventional policies, rather than a simple reliance on interest rate cuts, is required to stimulate the economy.
For example, now policy-based financial instruments are encouraged. With pledged supplementary lending (PSL) and targeted refinancing etc., commercial banks are encouraged to achieve additional capital expansion, enhance their lending capacity and increase financial support to specific fields, especially those related to industrial policies. As interest rates approach the lower bound, an unconventional policy mix as a supplement accords with international experience, which is also demonstrated by the credit situation in the first quarter.
In conclusion, currently interest rates have fallen to a relatively low level. Next, adopting the unconventional monetary policy mix is more likely instead of continuing interest rate cuts. In the long run, it is long-established policies other than monetary policy, as I mentioned above, that facilitate confidence recovery and strengthen interest-rate transmission.
V. TWO THOUGHTS ON THE TECHNOLOGICAL REVOLUTION
10. What is your view on the impact of generative AI?
Xing: Every once in a while, technological advances will ignite two kinds of debates: first, whether it will have a positive or negative impact on people's work, such as whether AI will replace humans; second, what impact it will have on the competitive landscape between countries. Neither of these debates has a definite answer yet, and we, as researchers, are also trying to understand the implications.
As for the first question, Morgan Stanley, the place where I work, is one of the first companies in the US to use ChatGPT to improve productivity. So how does Morgan Stanley, as a financial industry representative, utilize it? For example, we integrate all the knowledge, reports, and databases of all our researchers, including me, into the scope of what ChatGPT can learn. When staff such as those in the wealth management department need to form any recommendations such as asset allocation for their clients, they no longer need to communicate individually with thousands of researchers around the world one by one; instead, they can instantly find a very good analysis report by using ChatGPT. This has greatly enhanced productivity. But will ChatGPT replace humans? The answer is no, at least not in the next few years. ChatGPT is good at summarizing, while humans still need to do a lot of creative work.
In terms of the second topic, we are all thinking about how China can move forward in tandem with the US in this new round of technological revolution without falling behind. Over the past decade, many Chinese companies have accumulated a relatively large number of patents in areas such as AI. In this sense, China has a good foundation for continuous innovation. But this time, the AI revolution occurred in the US, which will lead to an explosion of innovations.
I think it's important to note that China has adopted preemptive regulation in the AI sector, which can help encourage innovation by setting up "road signs" to guide the enterprises.
With the recent release of the "Draft Measures for Managing Generative Artificial Intelligence Services" by the Cyberspace Administration of China, China has taken the lead in launching new rules to regulate AI technology, which is a very encouraging phenomenon. Some market participants might not understand this preemptive approach, but in my opinion, this approach is an improvement of past regulatory methods. Preemptive regulation is like setting "road signs" for the development of enterprises rather than setting "roadblocks" for enterprises afterward. In essence, the establishment of "road signs" is to assure private enterprises and stabilize their expectations in unknown investment areas. For enterprises, preemptive regulation sets an overall framework under which they can innovate and invest at will.
To sum up, first of all, the impact of the new technological revolution such as AI on human jobs remains to be seen, but machines will never replace creative work. Second, the impact of the technological revolution on the competition pattern between countries is worth thinking about, but the new regulatory climate of the new administration will be a positive factor in promoting business innovation.
VI. THE FED MAY MAINTAIN THE INTEREST RATES FOR A WHILE
11. How do you see the current inflation trend of the US and the
Fed’s policy adjustment?
Xing: We reckon that the Fed may stay on hold for some time after raising rates by 25 basis points to 5%-5.25%. The Fed may not cut rates immediately, and the policy shift is contingent on a significant decline in inflation, but whether inflation can fall to the 2% target remains uncertain.
In the current round of surging inflation, we need to pay attention to two factors.
First, the US is seeking to diversify its industrial chain due to political considerations, which raises its costs of trade and is not helpful for reining in inflation. According to our estimate, if the US seeks to "partially decouple" or diversify risk in many manufacturing industries where China dominates, global multinationals will suffer a total cost increase of $1.5 trillion. The inflationary pressures associated with such a reconfiguration of the industrial chain have not been seen before in history, which cannot be underestimated.
Second, the pursuit of rebalancing income distribution in the United States has led to inflation that “increases easily but is difficult to control". The Biden administration's stimulus policy, in fact, embodies a US version of "common prosperity," that is, to strengthen transfer payments to low- and middle-income groups and increase their welfare while imposing more tax burden and other constraints on high-income groups and enterprises. It can be seen that part of the US inflation comes from the rapid wage rise of the low- and middle-income groups and workers in the service sector, while the middle-class and high-income groups do not see a wage increase but instead facing layoffs.
Given the two factors above, uncertainty remains as to whether a rate hike will bring US inflation back to the target level. We tend to believe that the Fed wants to "let the bullets fly a little longer" and stay on hold for the inflation trend.
The above two factors also reflect the unprecedented change in the US for decades. In the future, the average inflation may be significantly higher than in the past, which means that even if the US needs to cut interest rates in the medium to long term, the rate cuts will be very limited and the period of extremely low interest rate in the past decades is likely to be "gone for good." It is important for the financial sector to grasp the future interest rate environment.
12. What is your assessment of this round of banking crisis in the US?
Xing: The failure of Silicon Valley Bank triggered a relatively regular financial shock instead of a financial crisis. Whenever the Fed’s rate hikes come to a close, similar incidents tend to occur, especially the collapse of small and medium-sized regional banks.
The feature of the US banking industry is that it is fragmented. Among its tens of thousands of banks, small and medium-sized banks and regional banks account for a considerable proportion of the overall assets, which means the industry is not dominated by a few large banks. This feature implies the Fed's regulatory philosophy that does not want an excessive concentration of a few large banks due to overregulation. Therefore, the Fed is not too strict when it comes to the regulation of small and medium-sized banks. However, whenever the rate hike cycle closes to an end, there will inevitably be banks facing risks due to mismanagement or maturity mismatch, leading to financial shocks similar to this one.
Compared with previous financial turmoil in the US, the current round of financial shocks is smaller in scale than the savings and loan crisis of the 1980s and 1990s and even smaller relative to the deep financial crisis of 2008. The only incident that comes close is the bust of the dot-com bubble in 2000-2001 due to the Fed's rate hike.
In fact, despite the bank failure, the US household sector has a relatively healthy balance sheet, with no huge bubbles arising from additional leverage and no risk of a financial crisis. At the same time, the US corporate balance sheet is also relatively healthy, with only a few sectors at risk (e.g., commercial real estate with high vacancy rates due to remote working during the pandemic). In general, the US corporate sector has not experienced the sharp deterioration in balance sheets seen in 2008.
It can be argued that the current round of banking risks is only a shock rather than a crisis. After the shock, the contraction of the financial sector and lending conditions will affect the economy. But for the US financial sector, it can be considered "normal," and most businesses and household sectors will survive this round of volatility.
This article was published on CF40’s WeChat account on May 5. It is translated by CF40 and has not been subject to the review of the author himself. The views expressed herein are the author’s own and do not represent those of CF40 or any other organizations.
