Mr. Lin, you may mislead Chinese people with this statement…

On May 14, 2022, the “Tsinghua Pudaokou Chief Economist Forum” was held. Lin You, president of the Institute of New Structural Economics of Peking University and honorary president of the National Development Research Institute, attended and delivered a speech.

Lin believes that in the next few decades, China’s economy still has the potential to grow by 8-9% a year. One day, China’s per capita GDP will reach 50% of that of the US, so China’s total GDP will be twice that of the US…

That’s a lot of optimism.

I once wrote an article with Mr. Lin about China’s future economic growth:

Justin Lin may well be wrong about China’s economy!

The article mentioned that, from the perspective of macro debt statistics, if the total amount of “household sector + non-financial enterprise sector + government sector debt” (” real economy debt “) reaches more than 200% of GDP, then the economic growth will be significantly slowed down. If it exceeds 250%, then its real economic growth will be significantly lower than before 200%!

In 2012, the total debt of China’s real economy exceeded 200%, and China’s economic growth rate dropped from over 10% to less than 8% that year. In 2016, the total debt of China’s real economy exceeded 250 percent, and China’s economic growth rate dropped below 7 percent. With the total debt /GDP of China’s real economy approaching 300%, China’s economic growth rate is bound to fall below 6% in the future, on par with western developed countries.

This is the logic behind the slowdown in China’s economic growth since 2012, and it is not surprising.

At the end of the article, I also said:

Without a big inflation to reduce the debt burden of the government, households and companies, real growth of 6 per cent from 2022 onwards will be the ceiling for China’s economic growth.

On the issue of debt-constrained economic growth, I personally believe that there will be no exceptions for any country that uses credit money, whether it is the United States, Europe, Japan or China.

In the past, when we said that China’s economic growth rate was relatively high, while that of the West was relatively low, it was because China’s debt in the real economy was relatively low and there was much room for growth in real credit, so the economic growth rate would be relatively high. And as our debt approaches that of the US, Europe, Japan, UK and other economies, we will become like them…

Modern credit economic systems, whose real economic growth is almost entirely driven by the growth of efficient credit, the so-called “efficient credit” here means that borrowers can repay their debts normally, regardless of those fraudulent loans.

The growth of effective credit depends on the borrowing behavior of the household sector and the corporate sector, because they are the only ones who really create wealth.

When the overall debt level of the real economy is low, effective borrowing that can create real wealth can grow at a high rate and then bring about high real economic growth.

When the debt level of the real economy as a whole is very high, most of the residents and enterprises are heavily in debt, even if the market interest rate is very low, they are no longer able to take on a larger scale of debt as before, except for the Ponzi scheme of borrowing, the growth of effective credit is bound to decline, followed by a substantial decline in economic growth.

There is nothing particularly difficult to understand about the relationship between economic growth and overall debt, which is the internal logic of the credit economic model in the era of credit money.

Zhang Ming, deputy director of the Institute of Finance and Banking of the Chinese Academy of Social Sciences and deputy director of the National Financial and Development Laboratory, has said that the excessive macro leverage ratio has brought heavy pressure on the real economy sector to pay interest on debt:

In 2018, interest payments on debt in the real economy were 1.5 times the increase in nominal GDP.

In 2019, it rose to 1.8 times;

By 2020, it will have more than doubled;

By the end of 2021, the macro debt leverage ratio of China’s economy has reached 264 percent. In this case, principal and interest service has become a heavy burden on the entire real economy sector, and the overall growth of the economy will not be able to keep up with the increase in interest. In this case, unless there is a complete evolution into a Ponzi scheme economy (e.g. Venezuela, Turkey, etc.), there will be no large-scale credit growth.

Without massive credit growth, how can you have the “8-9% economic growth potential” that Lin calls it?

On the issue of debt and economy, Hyman Minsk has long made in-depth discussion. In his book Stable Unstable Economy, Hyman Minsk divided the borrowing in the economic system into three stages based on cash flow:

In the first stage, investors (borrowers) take on a small amount of debt and have no problem repaying their capital and interest expenses. This stage is called the hedge financing stage.

In the second stage, borrowers expand their financial scale to the point where they can only afford the interest payments on the debt, which is the speculative financing stage.

In the third stage, the Ponzi scheme stage, borrowers’ rising debt levels require rising asset prices to ensure that their debt bubble does not burst. This is the Ponzi financing stage.

Of course, Mr. Lin, the master of “new Structuralism economics,” discusses the issue primarily from the perspective of China’s potential economic growth.

As it happens, the research group of the Survey and Statistics Department of the People’s Bank of China published a similar report on this issue last year, titled “The Measurement of China’s Potential Output and Growth Drivers during the 14th Five-Year Plan Period”.

Using a similar approach to Mr. Lin’s, the team measured the potential output of the Chinese economy over the next few years. Their conclusion, however, is far less optimistic than Mr. Lin’s: by their reckoning, China’s potential output will grow by 5.1-5.4% between 2022 and 2025 (see chart).

It was on the back of this research material that our central bank governor wrote in Financial Research in the second half of 2021 that the potential growth rate of China’s economy could be maintained in the range of 5-6%.

Obviously, the central bank’s conclusion of this research report and my overall judgment is still relatively close.

Of course, I have not made a rigorous and scientific calculation of China’s future economic growth potential like Professor Lin or the research team of the Central bank. But at least, from the overall debt-economic growth history of the world’s major economies, especially the United States, Japan and Italy, I do conclude that China’s growth rate cannot be maintained at 8-9% in the future.

To be sure, Lin is at least a rigorous academic who discusses China’s growth potential primarily in academic terms. In contrast, at the Pudaokou Chief Economist Forum on May 14, another famous economist’s performance was quite impressive.

Li Paoki, professor of the School of Social Sciences at Tsinghua University, president of the Chinese Academy of Economic Thought and Practice and founding president of Schwartzman College, talked about the economic response to the epidemic. On the one hand, he boasted that “China’s fight against the epidemic has extended people’s life by 10 days”. On the other hand, he also said that China’s industrial chain must be preserved.

How exactly do you protect it?

Li Paoki said, “Can front-line workers temporarily gather to build board houses instead of being quarantined at home, be quarantined next to the factory, and be quarantined while producing?”

While epidemic prevention, while production, both without delay, but also to maintain the industrial chain, win hemp, no wonder some people called “concentrated win”!


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