There is no Breakthrough without Economic Reform
Author： Source： Date：2017-09-01
Editor’s notes: Chinese and global economy have a lot to learn from Japan’s economic development path and the current economic scene. Mr. Tanaka went in-depth to illustrate the pros and cons of negative interest rate policy. He identified the economic interdependence in a globalized world and thus the importance of a good management of Chinese economy to the world’s sustainable growth. He then pointed out the challenges in Chinese loans, bond and equity markets and offered suggestions.
This was my 7th time to visit to Shenzhen. My first visit to Shenzhen was 1979. At that time, Deng Xiaoping delivered the principles of reform and opening. And Shenzhen became one of the most important testing places in reform and opening. So I came here in order to see the original site of Shenzhen. Mr. Hu mentioned, the urbanization rate of the city of Shenzhen is 100 percent. In 1979, a lot of cows were walking in the rice fields. I had good sentiment for that because it represented the best place of my country. Now Shenzhen became the very important innovative city, the Silicon Valley in China, and is now being observed by a lot of visitors.
Japan’s economic situation and negative interest rate
Today I have to mention the current reform we need in China. A lot of Chinese speakers mentioned, such kind of breakthrough, economic thinking breakthrough, we need it. Before that I have to mention the economic situation in Japan because revolutionizing our economic thinking would be needed in Japan. As you know, in Japan this year negative interest rate was introduced by the chairman of the Bank of Japan, Haruhiko Kuroda What do you mean by negative interest rate? UK economist John Keynes described the situation in which the rate of interest may become negative in the historical situation in Ireland in 19th century. At that time, farmers in Ireland couldn’t get very good crops when they sowed the seeds. At that time, natural rate of interest became almost zero or minus. In such situation, farmers didn’t want to borrow money in order to buy seeds. That was the reality. A lot of farmers left their country, they became immigrants. So that was the situation of natural rate of interest, which was minus. In Japan, we are now experiencing the negative rate of interest rate. In the world, almost 60 trillion bonds, national bonds are transacted in the market. Among them, 16 trillion US dollars bonds experienced negative interest rate in the middle of this year. Half of that, almost 8 trillion US dollars Japanese bonds are negative. That was the situation in Japan. Of course, in Denmark, in Switzerland and some of European countries, they are experiencing the negative interest rate in the bond market. However, their rates are not so big one. Almost half of the negative interest bonds are transacted in Japan. That was the reality.
So lots of economists in the world are presenting very innovative or very peculiar ideas to Japan, as Japan has become the textbook for such kind of economic situation. So one of that is dead money. Mr. Bernanke says something on the interaction of money in the United States. Then Bernanke came to Japan in July10th. At that time, upper house election was held. Shinzo Abe LDP won the upper house election. So after that the equity market in Japan should respond to that. At the same time Bernanke came to Tokyo to meet Mr. Kuroda, chairman of BOJ. Mr. Bernanke then proposed to Mr. Kuroda not to make a deep negative interest rate in Japan because the financial institutions in Japan deteriorate. Then Bernanke proposed to buy more in the equity market. Such kind of rules spread in the capital market in Japan. So the morning of July 11th, the equity recovered. It’s not from victory of the upper house election by LDP but a proposal by Bernanke. Not to make deeper the negative interest rate in Japan that means profit revolution of financial institutions in Japan will be improved. So a lot of investors wanted to buy Japanese financial institutions equity. This kind of story continues in our country. So negative rate, negative natural rate of interest is a very historical one but it deeply reflects some economic situation in Japan.
Economic interdependence
So from the viewpoint of rationalizing economic concept, or economic policy thinking, I have to mention on Chinese economy. As a visitor of this year in China, private investment in plant and equipment began almost zero interest rate over the three previous years. This is a shock for investor in the market and some kinds of reactions took place in the volatile economic conflicts. I have to pick up two cases. One is the response of Saudi Arabia. As you know, Saudi Arabia and Iran have a rival relationship in the Middle East. So in this situation, Iran wanted to expand their oil export. In such situation, Saudi Arabia didn’t want to reduce the supply of oil. It was a situation in the first part of this year. But even Saudi Arabia decided to reduce the supply of oil. According to my understanding, it is related to the economic situation in China, where private investment for plant and equipment increase became zero or sometimes minus over the previous years. That means this kind of stagnation will continue in the near future. In that situation, demand for oil will not recover. So in the case of Saudi Arabia, if they stick to the share of their export amount of oil, that means more reduction on petroleum prices. It is not good for the management of Saudi Arabia. So Saudi Arabia and OPEC change attitude towards the supply of oil. As you know, oil price recovered.
So in such kind of situation in the United States, shale gas and shale oil production will increase. Because in the case of shale gas and oil, after the investment started, 3 weeks or 4 weeks after, they will get gas or oil. So very flexible supply side is now being realized in the U.S. market. So in this situation, monetary policy in the United States will have the direction to raise the rate. In December, their policy rate of interest will be raised. Such kind of expectation takes place in the money market. After that, Japan has a favorable yen rate with the US dollars. That was a relief for chairman of BOJ because as the favorable yen rate continues, equity price for the export sectors will be improved. It came from Abenomics. Abenomics wanted the correction of the abnormal exchanges rate of Yen vis-à-vis U.S. dollars. Tradable rates are desired.
Now from the economic situation in China came to Japan on the easy management of monetary market of Mr. Koruda. So such kind of relationship exists. In Japan, very close observations on Chinese economy are now being done .Of course, Japan has enhanced the industrial products. However, even the financial sector in Japan has such kind of industry bonds for Chinese economy because differentiation of the money market in Japan, especially the exchange rate market, is very important. Chinese economy will have such kind of impact on the management of the monetary policy in Japan. That is a reality.
Monetary and financial situation in China
So I have to say something on the monetary and financial situation in China. As you know, three trials exist in the money market. One is the loan market, second is the bond market and third is the equity market. As for the loan market, people in China wanted more loans for manufacturing sector or other sectors, less loans for housing sector according to my understanding. However, managers of banks, commercial banks have had some kind of suspicion as to the content of their capital because their loans were hit very seriously by the other sectors, the validity of the economic conditions. If these strict assessments were done for the asset side of banks, more provisions should be packed up. Managers of financial sectors in China should appreciate and perceive such kind of relationship. So for them, our capital base was deteriorated because of the increase in long-term loans. So in the near future, we should be careful to take risks for investment and for making loans. So it should be described as capital crunch. Capital crunches are now coming to this area. But according to my understanding, this is the reflection of capital crunches. Why such kind of understanding exists in Japan or in my understanding? Because two decades ago, we experienced such kind of capital crunch in Japanese economy. The situation is now appearing in Chinese financial market, especially the loan market. That is my understanding.
Second in the bond market, as you know, shadow banking has played a very important role for the stagnation in investment in local areas. So central bank presented guidelines for local banks to issue to local bonds in order to pay the debt. Such kind of operation was done. In such kind of process, bond markets are full of such kind of local bonds. So in the operation of bond market, shadow banking plays, or re-correction of shadow banking plays a very important role. So bond market in China is not working well. That is my understanding. Third, in the equity market, last year there were some kinds of turbulences in the equity market. After that, operations in the equity market became very difficult.
So in Chinese economy, three trials, all those three trials have some problems. So in order to see the next situation, methods should be introduced to this financial sector. According to my understanding, tolerance policy will not be good for next management of Chinese economy. Why such kind of understanding came to this situation? 20 years ago, in Japan, such kind of tolerance policy led to very troubled situation where the problems of finance and debts continued. In the end, the distortion of our resources continues. That was the reason of low growth of Japanese economy. For a tolerance policy is not good for the management of your economy. However in some cases, we can pick up some kind of good news in equity slump. Such kind of method is now being introduced. Of course, we don’t see a lot of disorder in industry or a lot of unemployment. We don’t want to see such kind of things. However in some cases, bankruptcies mean the relocation of new resources in the next phase. That will bring innovation in the market. So as to the tolerance policy, lots of discussion should be done in the academics of economics. That is my understanding. Of course, there are lots of different opinions in China. So discussion should be done in order to have a renewed economic situation in China.
Thank you!
Naoki Tanaka is a prominent Japanese economist and the president of the Center for International Public Policy Studies
Speech delivered at the China Economist Forum during the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
This was my 7th time to visit to Shenzhen. My first visit to Shenzhen was 1979. At that time, Deng Xiaoping delivered the principles of reform and opening. And Shenzhen became one of the most important testing places in reform and opening. So I came here in order to see the original site of Shenzhen. Mr. Hu mentioned, the urbanization rate of the city of Shenzhen is 100 percent. In 1979, a lot of cows were walking in the rice fields. I had good sentiment for that because it represented the best place of my country. Now Shenzhen became the very important innovative city, the Silicon Valley in China, and is now being observed by a lot of visitors.
Japan’s economic situation and negative interest rate
Today I have to mention the current reform we need in China. A lot of Chinese speakers mentioned, such kind of breakthrough, economic thinking breakthrough, we need it. Before that I have to mention the economic situation in Japan because revolutionizing our economic thinking would be needed in Japan. As you know, in Japan this year negative interest rate was introduced by the chairman of the Bank of Japan, Haruhiko Kuroda What do you mean by negative interest rate? UK economist John Keynes described the situation in which the rate of interest may become negative in the historical situation in Ireland in 19th century. At that time, farmers in Ireland couldn’t get very good crops when they sowed the seeds. At that time, natural rate of interest became almost zero or minus. In such situation, farmers didn’t want to borrow money in order to buy seeds. That was the reality. A lot of farmers left their country, they became immigrants. So that was the situation of natural rate of interest, which was minus. In Japan, we are now experiencing the negative rate of interest rate. In the world, almost 60 trillion bonds, national bonds are transacted in the market. Among them, 16 trillion US dollars bonds experienced negative interest rate in the middle of this year. Half of that, almost 8 trillion US dollars Japanese bonds are negative. That was the situation in Japan. Of course, in Denmark, in Switzerland and some of European countries, they are experiencing the negative interest rate in the bond market. However, their rates are not so big one. Almost half of the negative interest bonds are transacted in Japan. That was the reality.
So lots of economists in the world are presenting very innovative or very peculiar ideas to Japan, as Japan has become the textbook for such kind of economic situation. So one of that is dead money. Mr. Bernanke says something on the interaction of money in the United States. Then Bernanke came to Japan in July10th. At that time, upper house election was held. Shinzo Abe LDP won the upper house election. So after that the equity market in Japan should respond to that. At the same time Bernanke came to Tokyo to meet Mr. Kuroda, chairman of BOJ. Mr. Bernanke then proposed to Mr. Kuroda not to make a deep negative interest rate in Japan because the financial institutions in Japan deteriorate. Then Bernanke proposed to buy more in the equity market. Such kind of rules spread in the capital market in Japan. So the morning of July 11th, the equity recovered. It’s not from victory of the upper house election by LDP but a proposal by Bernanke. Not to make deeper the negative interest rate in Japan that means profit revolution of financial institutions in Japan will be improved. So a lot of investors wanted to buy Japanese financial institutions equity. This kind of story continues in our country. So negative rate, negative natural rate of interest is a very historical one but it deeply reflects some economic situation in Japan.
Economic interdependence
So from the viewpoint of rationalizing economic concept, or economic policy thinking, I have to mention on Chinese economy. As a visitor of this year in China, private investment in plant and equipment began almost zero interest rate over the three previous years. This is a shock for investor in the market and some kinds of reactions took place in the volatile economic conflicts. I have to pick up two cases. One is the response of Saudi Arabia. As you know, Saudi Arabia and Iran have a rival relationship in the Middle East. So in this situation, Iran wanted to expand their oil export. In such situation, Saudi Arabia didn’t want to reduce the supply of oil. It was a situation in the first part of this year. But even Saudi Arabia decided to reduce the supply of oil. According to my understanding, it is related to the economic situation in China, where private investment for plant and equipment increase became zero or sometimes minus over the previous years. That means this kind of stagnation will continue in the near future. In that situation, demand for oil will not recover. So in the case of Saudi Arabia, if they stick to the share of their export amount of oil, that means more reduction on petroleum prices. It is not good for the management of Saudi Arabia. So Saudi Arabia and OPEC change attitude towards the supply of oil. As you know, oil price recovered.
So in such kind of situation in the United States, shale gas and shale oil production will increase. Because in the case of shale gas and oil, after the investment started, 3 weeks or 4 weeks after, they will get gas or oil. So very flexible supply side is now being realized in the U.S. market. So in this situation, monetary policy in the United States will have the direction to raise the rate. In December, their policy rate of interest will be raised. Such kind of expectation takes place in the money market. After that, Japan has a favorable yen rate with the US dollars. That was a relief for chairman of BOJ because as the favorable yen rate continues, equity price for the export sectors will be improved. It came from Abenomics. Abenomics wanted the correction of the abnormal exchanges rate of Yen vis-à-vis U.S. dollars. Tradable rates are desired.
Now from the economic situation in China came to Japan on the easy management of monetary market of Mr. Koruda. So such kind of relationship exists. In Japan, very close observations on Chinese economy are now being done .Of course, Japan has enhanced the industrial products. However, even the financial sector in Japan has such kind of industry bonds for Chinese economy because differentiation of the money market in Japan, especially the exchange rate market, is very important. Chinese economy will have such kind of impact on the management of the monetary policy in Japan. That is a reality.
Monetary and financial situation in China
So I have to say something on the monetary and financial situation in China. As you know, three trials exist in the money market. One is the loan market, second is the bond market and third is the equity market. As for the loan market, people in China wanted more loans for manufacturing sector or other sectors, less loans for housing sector according to my understanding. However, managers of banks, commercial banks have had some kind of suspicion as to the content of their capital because their loans were hit very seriously by the other sectors, the validity of the economic conditions. If these strict assessments were done for the asset side of banks, more provisions should be packed up. Managers of financial sectors in China should appreciate and perceive such kind of relationship. So for them, our capital base was deteriorated because of the increase in long-term loans. So in the near future, we should be careful to take risks for investment and for making loans. So it should be described as capital crunch. Capital crunches are now coming to this area. But according to my understanding, this is the reflection of capital crunches. Why such kind of understanding exists in Japan or in my understanding? Because two decades ago, we experienced such kind of capital crunch in Japanese economy. The situation is now appearing in Chinese financial market, especially the loan market. That is my understanding.
Second in the bond market, as you know, shadow banking has played a very important role for the stagnation in investment in local areas. So central bank presented guidelines for local banks to issue to local bonds in order to pay the debt. Such kind of operation was done. In such kind of process, bond markets are full of such kind of local bonds. So in the operation of bond market, shadow banking plays, or re-correction of shadow banking plays a very important role. So bond market in China is not working well. That is my understanding. Third, in the equity market, last year there were some kinds of turbulences in the equity market. After that, operations in the equity market became very difficult.
So in Chinese economy, three trials, all those three trials have some problems. So in order to see the next situation, methods should be introduced to this financial sector. According to my understanding, tolerance policy will not be good for next management of Chinese economy. Why such kind of understanding came to this situation? 20 years ago, in Japan, such kind of tolerance policy led to very troubled situation where the problems of finance and debts continued. In the end, the distortion of our resources continues. That was the reason of low growth of Japanese economy. For a tolerance policy is not good for the management of your economy. However in some cases, we can pick up some kind of good news in equity slump. Such kind of method is now being introduced. Of course, we don’t see a lot of disorder in industry or a lot of unemployment. We don’t want to see such kind of things. However in some cases, bankruptcies mean the relocation of new resources in the next phase. That will bring innovation in the market. So as to the tolerance policy, lots of discussion should be done in the academics of economics. That is my understanding. Of course, there are lots of different opinions in China. So discussion should be done in order to have a renewed economic situation in China.
Thank you!
Naoki Tanaka is a prominent Japanese economist and the president of the Center for International Public Policy Studies
Speech delivered at the China Economist Forum during the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
