What Stage of Economic Development Is China Really In?

First, I would like to thank the China Economic 50 Forum for the invitation. Today I have chosen a topic that has been frequently heard in recent macroeconomic discussions: issues related to leverage ratios and real estate. Why do I say "rethink"? Because I feel that on very critical core issues, our discussions over the past few years may not have been comprehensive or deep enough, and the degree to which some core problems have been resolved is also limited. Before discussing medium- and long-term issues, I would like to first talk about my judgment on short-term issues. In recent years, there has been much debate among academics about what constitutes the "new normal" of China's economy and the economic growth rate under the new normal. Some scholars believe that whether due to the disappearance of the demographic dividend or some structural problems, China has entered a so-called medium-to-high-speed growth phase, or the growth rate may need to step down another notch. Other scholars argue that we are still a developing country with relatively low per capita GDP, and we will continue to develop at a relatively high speed for some time. These debates have presented many arguments and evidence. I think the inflation data from the past two years, such as deflationary pressures and changes in the balance of payments with large increases in surpluses, are mainly due to weak imports. After the second half of 2012, the PMI index has been below 50. These all indicate that today's economic growth rate is actually below our potential growth rate. In such circumstances, appropriate and timely counter-cyclical macroeconomic policy operations are necessary. This does not mean loosening monetary or fiscal policy, going back to old ways, or administering an anesthetic (which is also a view). When an economy is already in a deflationary state, moderate loosening of monetary and fiscal policy is not particularly harmful to short-, medium-, and long-term economic growth; on the contrary, it is beneficial, but it must be appropriate and timely. However, differences in views on some medium- and long-term issues have affected our short-term policy choices, leading to problems in how to prescribe the right medicine, avoiding treating the head when the head hurts and the feet when the feet hurt, or even putting the cart before the horse. I have been doing macroeconomic research in the market for twelve or thirteen years. On one hand, I have gained insights, but on the other hand, I have some disappointments because China's macroeconomic data are flawed, so we do not fully trust them. If we base many of our conclusions on data that are clearly flawed, no matter how good the original intentions, the final results are likely to be counterproductive. When we do stock analysis in the capital market, would you believe what listed companies tell you? You would definitely want to cross-verify whether the data they tell you are correct. If a listed company says it sold a certain amount of goods, and you think the data might be problematic, you would ask its upstream and downstream suppliers: how much did the suppliers actually supply, and did the downstream stores actually sell that much? So, the work of an analyst is sometimes like a detective, piecing together fragmented data, especially paying attention to inconsistencies in signals between different data, which also tests our analytical framework and theoretical foundation. First, let me show you this chart. In economic growth theory, it is basically the concept of per capita income, not a total amount concept. The level of per capita income determines whether a country is rich or poor. Developed countries' growth rates have fallen to 2%-3%, or even 0 in worse cases, while developing countries are still growing at 6%-7%. In this chart, China is at the bottom, the red line. Many economists use purchasing power parity, which has many assumptions. Here I simply compare China's per capita with the US per capita, both in US dollars, using current period averages. How many times more does an American produce per year than a Chinese? At the beginning of reform and opening up, it was about a hundred times more, and this was with an overvalued exchange rate. How much more does an average American earn per year than an average Chinese? After 37 years of sustained average growth of 9%, now it is about 12%-13% of the US per capita, meaning an American earns seven to eight times more than a Chinese on average. All the economic theories I learned are based on per capita concepts, not total amounts. Let's look at what constitutes a developed country, a middle-income country, and a developing country. In Asia, the countries that entered the first world are Japan and Singapore; our Hong Kong is close, at about 70%, 80%, or 100%, depending on the exchange rate. The second world includes South Korea and Taiwan, at about 40% to 50%. We consider ourselves middle-income, which should be around 20% to 30%. China's current per capita income level is similar to Thailand's, around seven or eight thousand US dollars. History may be a reference, but China's development to this point has no precedent: there has never been a case where the world's second-largest economy has a per capita ranking in the eighties. Our total volume is already the undisputed second. The US is 16 trillion, China is 10 trillion, and the third is Japan with less than 5 trillion. But our per capita is only seven or eight thousand US dollars. Whether it was the rise of the US, or the later rise of Japan and Germany, when they became the second-largest economy, their per capita was also among the top in the world. China's size has grown into a giant, but in many ways it is still like a baby. China is not "getting old before getting rich," but "getting big before getting rich." The per capita level of seven or eight thousand US dollars also represents the low per capita level of the entire country in many aspects, such as average knowledge level, average understanding of the world, and various knowledge and historical accumulation. This is the biggest challenge. But on the other hand, we all have good expectations for China, including sometimes criticism, because we want it to be better. The world has never seen a country like China with an average growth of about 9% for 37 consecutive years. The reason is simple: our starting point was too low, plus the reform and opening-up policy. If North Korea were to adopt the same reform and opening-up policy as we did, it is conceivable that it would also have 8%-9% growth for decades; otherwise, how could it catch up with developed countries? I have heard some colleagues argue that China will only have 3%-4% growth in four or five years. What does that mean? The US is currently growing at about 2.5%. If we only have 3%-4% growth, we will never catch up with the US and will always be relatively poor. Once I watched a TV drama about Deng Xiaoping, and I could really feel his urgency. After more than thirty years of isolation, including the impact of the Cultural Revolution, China and the world were too far apart. Why is this data so important? Because it is clear: the numerator is 10 trillion, and the denominator is over 1.3 billion. If people think this is wrong and that China is not that poor, then only two things could be wrong. One is that our economic aggregate is underestimated, but if it were underestimated, would the M2 to GDP ratio be that bad? There have been cases of GDP underestimation, such as the third economic census in 2005, which found 17% more GDP, mainly in the service sector. The second is that our exchange rate is underestimated, which does not seem to be a problem people think exists today. There is certainly some underestimation of GDP. And whether the RMB exchange rate is undervalued or overvalued is also an interesting question. In any case, even if it is off by 20-30%, dividing by 1.4 billion people, it cannot be too far off; it cannot become 20,000 per capita. What does the terror of total volume mean? If we could reach the per capita income level of Malaysia, Brazil, or Argentina today, our total economic output would definitely be the world's first, because we have to multiply by 1.4 billion people. If China's per capita increases by one yuan, that is nearly 1.4 billion US dollars. If we could reach the per capita level of Taiwan or South Korea, China's total would be twice that of the US. Why was Japan the second-largest economy in the world? Because Japan is the most populous single OECD country after the US, with a huge domestic market; not all countries can easily catch up. With the emergence of advanced production technologies, if there are no institutional constraints, there will always be a process of per capita income convergence among countries. But there are exceptions, such as African countries that have remained poor. Some Asian countries, including Singapore, South Korea, and Japan, when they began to catch up, their policies were not necessarily correct and they encountered many lessons. But there are some basic policy features that are the same as our past thirty-plus years: a relatively open market, at least very open on exports. In addition, the entire political system is very friendly to entrepreneurs and the private economy. China's current development level is equivalent to a certain period in Japan, South Korea, or Taiwan. These countries and regions maintained 8%-9% high-speed growth for a long time. What we should study is not their present, but the policies, experiences, and problems of their earlier development stages. First, the statement that monetary policy cannot solve but only amplify structural problems is true in both directions. It amplifies structural problems during inflation and also during deflation. So the best thing monetary policy can do is maintain price stability. Do not hope to use monetary policy to solve our structural problems. What is our biggest and most frightening structural problem? Many say it is the excessively high investment ratio. Behind investment, there is an identity: investment equals savings. And our high investment has not relied on foreign debt. The equations written here are identities. If we think China's investment-to-GDP ratio is 47%-48%, and the current account surplus is 2%-3%, once reaching 10%, then together China has a savings rate of nearly 50% of GDP. What does this mean? If our GDP is 10 trillion US dollars, we have 5 trillion in savings each year. These 5 trillion will eventually become investment, either domestically or abroad. If monetary policy tightens and the economy is bad, if I cannot invest domestically, I will sell abroad, and the surplus will expand. Another point: when investment changes, it is either in the form of debt, equity, or corporate profits. During economic downturns, profits shrink, equity market financing is definitely not active, and the final outcome must be an increase in the debt-to-GDP ratio. On the leverage ratio issue, from 2000 to 2010, if we use the debt-to-GDP ratio as the leverage standard, the average annual increase in leverage was 3%. After 2010, there was a consensus to deleverage. From 2000 to 2010, the average annual increase in the leverage ratio was 8%-10%. How is it that the more we try to reduce it, the higher it goes? Regardless of academic debate, the final result is completely opposite to the direction. I think we really need to think carefully about what is fundamentally causing this. In global economic research, savings is an economic variable with strong stickiness, strong structural characteristics, and very small annual changes. Demographic structure and economic growth determine the savings rate. Which part of China's savings rate is very high? There is a consensus that Chinese households have a very high savings rate because they need to buy houses, see doctors, provide for old age, and educate the next generation. However, our research was surprising: Chinese households have been borrowing to buy houses over the past decade or so, so by definition, savings are declining. The part of the savings rate that is rising rapidly is the government's collection of high "five social insurances and one housing fund" because the government worries that people do not have enough money for retirement, medical care, or education. As the number of laborers paying into these funds increases, this part's growth rate far exceeds GDP. It is very strange that the largest components of our "five social insurances and one housing fund," namely pensions and housing provident funds, are mainly deposited in bank deposits, possibly because the government has not thought it through. In previous years, we used tight monetary policy, not allowing banks to lend to enterprises, and raising interest rates a bit. The final result of such policies was a higher debt-to-GDP ratio because GDP deflated. If we do not change the current savings situation and the extremely underdeveloped equity financing market, trying to use monetary policy and short-term interest rate policies to adjust structural problems will definitely backfire. Now look at high debt and high deposits. China's debt-to-GDP ratio is 250%-280%, the highest in the world. I think this statement is correct. But have we considered that debt must have corresponding assets? People worry about high debt ratios. If we use this debt to support the purchase of other assets, whether real estate or stocks last year, if those assets depreciate, there will be big problems. In all other countries, this is an unquestioned assumption: the assets on the other side of the debt are illiquid and have maturity mismatches. But we have never seen China's direct counterpart being cash. Before 2012, banks' cash exceeded their loans. This was partly due to wealth management products. China's interest rates are not low, and there is a high interest rate spread. The money people deposit in banks used to earn one or two percentage points, and in the past two years a bit higher, while borrowing costs are five, six, or seven percentage points. This chart shows that we cannot just look at the red line. Another line is: if there are always so many deposits in banks, and banks do not lend them out, what happens? Who is the cause and who is the effect? This is a company's balance sheet. Would you think it is about to go bankrupt? Why doesn't it repay its debts? Many companies borrow at seven, eight, or nine percentage points and still hold cash. Is it a misallocation? Or are there some institutional barriers that force them to hold so much cash? From an economic perspective, the first concept is to avoid a hard landing, meaning the company is not about to go bankrupt tomorrow. But certainly, this is an extremely inefficient enterprise; the CEO should have been fired long ago. We calculated: a three-percentage-point spread on 200% of GDP. If you borrow at six points and return only two points, what are you doing? Distribution of savings. Corporate debt has risen relatively faster in the past few years, household leverage is gradually rising, and government leverage is a bit lower. Looking back at the 2008 four-trillion stimulus, why didn't government leverage rise? If we subtract deposits, we see that households have become net creditors, and our government also has so much cash. Interestingly, even if corporate debt falls from 160% of GDP to 100%, roughly half of China's deposits are from households and half from non-households. Of the non-household half, half is corporate and half is government. This is a study we did at the end of 2014. Household leverage can rise, central government leverage must rise, and corporate leverage must fall; this is correct. Of course, household leverage should rise slowly, not go into the stock market, and assets should not be too expensive. Before 1998, Chinese households had basically no leverage, and the Chinese government also had basically no leverage. How corporate leverage is exchanged is also important. We need to see what is going on with Chinese enterprises: why are they borrowing money while also depositing money? Later we discovered that cash management is a big problem. Look at the US Treasury: the Fed holds $5 billion in deposits, and the government spends $4-5 trillion a year. The government can spend first and settle later. Our fiscal deposits at the central bank still amount to 4 trillion RMB today, and they are not managed. In the past, it was thought that Chinese corporate savings were high because private enterprises could not access more financial services, so they had to save enough to invest. This was a view from 2003 to 2008. At that time, the development of capital markets, including multi-level markets like PE/VC, was highly promoted. But now this is not the main problem. The main problem is that enterprises hold a large amount of demand deposits, which earn only 0.36% interest, not the two or three points from wealth management products. Borrowing costs at least seven points, so there is a huge spread. In terms of liquidity management, there is no place for enterprises to obtain short-term liquidity, including listed companies. Although China has short-term financing bills, when they can be issued and who can issue them requires approval. Households now basically do not keep cash at home because of Yu'ebao and Alipay, which allow immediate withdrawal. But for enterprises, why keep so much cash? Because if an enterprise has a payment tomorrow, it does not know where to raise funds. If it wants short-term financing, the central bank might not approve it. There has been a recent change. To join the SDR, the Ministry of Finance promised to issue three-month fiscal bills and treasury bonds every Thursday. US Treasury bonds have various maturities, many short-term, and the government knows its payment schedule, so there is no need to hold so much cash long-term. The Premier has held many State Council meetings emphasizing that money should not sit idle in accounts, becoming zombie deposits, because our budget and fund management have huge problems. If capital market construction and short-term bill market construction are not in place, enterprises will hold large deposits to guard against risks, which is very inefficient. Looking at historical data over thirty-plus years, what is the relationship between China's leverage growth rate and GDP growth rate? It is negatively correlated. The worse China's economic growth, the faster leverage rises; the better the growth, the slower leverage rises. A period of relatively stable leverage was 2003-2008; after 2012, the rise became very fast. The last time it rose quickly was during the deflation of 1998-2012. This fluctuation is small, with a structural one-way rise. Historically, there have been a few adjustments: in 2005, new GDP was discovered, adjusting the numerator and denominator. Also, between 2003 and 2006, some bank restructuring, including debt-to-equity swaps, stripped some debt, affecting the data. If more debt-to-equity swaps occur, the data will change. Earlier I said savings equals investment, and investment is ultimately financed by debt, equity, or corporate earnings. If we achieve an economy of 60-70 trillion RMB a year, and if savings are indeed 30-some trillion, with new loans of over 10 trillion, bond issuance of 2-3 trillion, and stock issuance of several hundred billion, it seems like we would be crying for help every day. If this state does not change, with households liking to save and high economic growth, the conversion efficiency is poor, and the resulting capital structure is biased toward debt and away from equity. In my personal opinion, China's stock market reform has no choice but to move forward. Despite last year's turmoil, the system is continuously improving, and major breakthroughs are necessary; otherwise, the so-called structural high debt problem cannot be solved. In recent years, household deposit growth and proportion have not changed much; financial enterprises have declined somewhat; corporate profits are poor, and cash flow is tight. But deposits of government agencies and organizations have been rising all along, up 15% last year, while nominal GDP growth was only 6%, and fiscal revenue growth was only 6%-7%. So why are agency and organization deposits continuing to grow at 15%? We found that this data, called "agency and organization deposits" in the central bank's report, amounts to over 20 trillion. We do not know the specific breakdown. What we do know is that it includes "five social insurances and one housing fund" and some deposits of public institutions. It is definitely not corporate or household deposits. Agencies and organizations include many public institutions, many of which are semi-profit-making. Their money is neither taxed, nor distributed as dividends, nor invested, because various regulations keep it in banks. This is the biggest problem. Why is there such a strong call to reduce the "five social insurances and one housing fund"? Because if you include them, the tax burden on China's corporate sector reaches 50%-60%. Now, the "five social insurances and one housing fund" has become the main cost for small and medium-sized new service enterprises that rely on labor. Many taxes are exempted, but if you formally hire an employee, you must pay the "five social insurances and one housing fund," and our contribution rate is very high. The bigger problem is pensions. According to regulations, enterprises pay 20%, individuals pay 8%, totaling 28%, while internationally it is usually 10%-12%. This is a heavy burden on enterprises. Another point with Chinese characteristics is that this money is placed in bank deposits. Since it is pension money, cannot it be invested? Cannot it earn some returns? Due to an incident in 2004, a regulation was issued that all local social security pension funds can only be placed in bank deposits and government bonds, nothing else. The housing provident fund is basically also left as deposits. Last year there were many encouraging changes. First, local social security pension funds can now invest in capital markets, which requires legal amendments. If invested in higher-return areas or projects, the national social security fund can achieve returns of about 9% annually. Local social security can only be in banks and government bonds, with returns of 2%. Currently, legal and implementation arrangements are being made; let's see if it can be operationalized this year. The provident fund now has about two to three trillion. In previous years, to control housing price increases, this money could not be touched and could only be used for buying houses. If you already bought a house, you could only use it after retirement, with various restrictions. Now, first, the provident fund has started paying interest; second, the investment scope has been expanded to some extent; third, and most importantly, you can now withdraw the provident fund for renting or home renovation. I think the management of the provident fund will eventually become more similar to other market-oriented countries. It cannot continue to just accumulate money like this; it is a very inefficient forced savings. Fundamentally, these reforms will be very effective. Reducing the "five social insurances and one housing fund" is a "one stone, multiple birds" approach: reducing forced savings and letting people save or spend as they wish is the most effective. Second, even if savings are reduced, can there be diversified investment? With stocks, bonds, and capital markets, rather than turning it into deposits. If it becomes deposits, banks have no choice but to lend it out as debt. Third, change the structural arrangements for short-term financing so that enterprises do not need to hold so much cash. Fourth, state-owned enterprise reform. SOEs currently do not pay dividends; the money stays and can only be reinvested, and these investments may not be effective. Compared to the amounts I mentioned earlier, SOE profits are a very small amount; the large amounts are social security and the provident fund. China's M1 to M2 ratio is also the world's highest; no one holds such large amounts of cash. Now let's discuss the real estate issue. This is a problem that has been going around in circles for over a decade without solving the real problem, and the result is that housing prices have been adjusted higher and higher. So, is real estate oversupplied or undersupplied? To judge the real estate problem, it is important to understand how much inventory there is, and to include first-, second-, third-, and even fourth-tier cities in the statistics. Last year, housing sales were poor. Some people talk about China's demographic structure and aging population, believing that the golden age of real estate will never return. What is our urbanization rate? The term is "urbanization rate," not "township rate." Towns account for 40% of the 56% urbanization rate. This is similar to our non-agricultural household registration rate of 37%, meaning the true urbanization rate is no more than 40%. Compared with other countries, we are only halfway up the mountain. It is said that a recent adjustment is good, with Dongguan and Yiwu being upgraded. Foreign urbanization rates are a concept of population density, while Chinese cities are an administrative concept. The classification of first-, second-, third-, and fourth-tier cities is unclear. Globally, urbanization has a major trend: if people can decide where to live and work, eventually 70% to 80% will live in cities, and more than half of them will live in large cities. Even today, Tokyo's population is still growing, and New York's population is still growing. In terms of population and land endowment, for cities with a population of over one million, many numbers in China should fall between the US and Japan. If we do well, we will be like the US; if not, more like Japan. For example, population density will not be as high as Japan's, but definitely higher than the US. So, cities with over one million population: half of the US, one-third of Japan. Cities with over five million: still half of the US, one-fourth of Japan. We currently have cities with a population of ten million or more, including Chongqing, making five. If 70% of 1.4 billion people live in cities, and more than half of those live in cities with ten million or more, China lacks at least 10 to 15 large cities with ten million people. Unlike other countries, our population cannot move freely because you cannot get a household registration locally. The Third Plenary Session of the 18th Central Committee and the 13th Five-Year Plan have many statements. In my view, the most important signal is that there should be a significant breakthrough in household registration reform. By 2020, the residence permit should be the only document identifying Chinese citizens; there should be no distinction between agricultural and non-agricultural household registration, only a residence permit. Allowing people to move freely and choose where to live and work is a global trend. The shortage of real estate supply is mainly in large cities. Over the years, we have always tried to combat so-called speculative demand in real estate. In fact, China's housing demand is mainly from urban residents improving their housing and rural residents moving to cities. What is rigid demand? Strictly speaking, rigid demand is when people have no housing. China's residential land is the world's largest, with rural housing land accounting for over 95%. Even before reform and opening up, no one slept on the streets. After urban housing reform, why have people continued to buy houses for many years? The purpose is to improve living conditions. Many of our houses are not really suitable for living. Many urban houses were built long ago; about 25% lack independent toilets and kitchens. Therefore, once people have the ability to buy, they must move to new houses. According to the fifth and sixth population censuses, from 2000 to 2010, the homeownership rate in Chinese cities declined. Chinese people like to save, and when they save a bit, they want to improve their living conditions. We always say we should build more 80-90 square meter houses; this policy is terrible. In reality, the best-selling homes for improvement are around 120 square meters, where a family of parents and children can live together. I am not worried about China's real estate at all. In 2014, real estate transactions were 8 trillion RMB, of which 85% were first homes and 15% were second homes. The normal number should be half and half. That is, many purchase restrictions have squeezed out improvement demand. As long as we dare to relax purchase restrictions, demand will emerge. China's real estate market is much more terrifying than the stock market; household leverage is too low. A few hundred billion in down payment loans compared to a 10 trillion annual transaction volume is very small and irrelevant. Most Chinese people have a house, and basically no one sleeps on the street. In a sense, our payment ability is much stronger than that of general developed countries. Our housing price-to-income ratio is high, which is not contradictory. The US mortgage-to-GDP ratio and mortgage-to-disposable income ratio are not as high as ours. Housing inventory may be the most important information for judging real estate trends. But whether inventory data is valuable depends first on its cycle and whether it matches the price signals I can find. If inventory is high, prices will not rise; if inventory is low, prices will rise. This is the sellable housing area we have compiled from various cities. There is a red line called 12 months: if inventory is below 12 months, prices start to rise; if far above 12 months, prices fall. First-tier cities have single-digit inventory for more than half a year, second-tier cities around 12 months, and third-tier cities around 15 months. Look at the prices here: last year, first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen naturally soared, and now they have only three to four months of inventory. Second-tier cities reached 10 in March this year. Third-tier cities should also be seeing positive growth. We are a bit surprised because these numbers did not just appear today. The cities that recently imposed purchase restrictions had already seen this six months ago. We have had major judgment errors in the past on steel and cement inventory, industries with severe overcapacity. The main reason is that many futures investors have scattered and inconsistent inventory data. This is data since 2007. Are there differences in the trends of first-, second-, and third-tier cities? There may be differences in levels, with first-tier rising to higher peaks and second-tier rising 6%, but the direction of fluctuations is the same. How are high housing prices formed? It is like the blind men and the elephant: touching the tail says it is a rope, touching the leg says it is a pillar. What we touch is that China's land supply is strictly controlled by the state, and land use is strictly regulated. The amount of residential land used is known. This is a table. Urban residential land as a share of national land area and urban construction land as a share of national land area. China's numbers, whether compared with the US, Japan, or Hong Kong, are pitifully low. In the past decade or so, local governments attracted investment by providing large amounts of cheap or low-priced industrial and commercial land, squeezing residential land. From the distribution of land prices in China, rural land cannot be touched; in a sense, it is priceless, or it is small property housing. According to the sixth census, if we exclude small property housing, the urban housing vacancy rate is 0. Now, large cities rely heavily on small property housing to supplement supply; Shenzhen has the most. Beijing has recently demolished many small property houses, and housing congestion will rise sharply. Commercial land and industrial land are definitely more abundant. Building steel plants and cement plants contributes to GDP; if land is expensive, enterprises will not come. Local governments attract investment by selling land at low prices. Why do Beijing, Shanghai, Guangzhou, and Shenzhen supply very little land, while fourth-tier or remote cities sell more residential land? Because in terms of local government tax sources, provincial capitals or first-tier cities have many other tax sources, so they can spend enough by selling a little land, but fourth-tier cities have to sell more to cover several years of expenses. The land supply system is the most basic reason for China's high housing prices. If the 1.8 billion mu red line cannot be touched, and currently half of Beijing and Shanghai's urban area is farmland, the remaining land will definitely be expensive. In 2015, total commercial housing sales were 8.7 trillion, with land transfer fees accounting for 37%, other taxes 20-some percent, totaling 62%. The most expensive part of housing prices is land, followed by taxes and fees. Last year, the profits of listed real estate developers were actually quite poor. We usually think real estate is a lucrative industry, but profits have fallen sharply in the past two years. Land is expensive, and they cannot finance, forcing them to borrow at high interest rates, and after building, they cannot sell, so many developers are eager to transform. For real estate regulation, purchase restrictions do not work, loan restrictions do not work, and tax increases do not work. In the late 1980s, Japan's marginal tax rate reached 80%, but it did not stop housing prices from rising. Because when supply is insufficient, after a period of suppression, prices rise again with income. Residents spend most of their income and expenditure on housing, causing extreme deterioration in wealth distribution and poor social mobility. Purchase and loan restrictions are very bad policies. In Hong Kong, over the past three years, a 10 million HKD house requires a 50% down payment, mainly due to limited supply. If you can afford the down payment, you enter the club and enjoy land price appreciation. Those who cannot afford it are left outside, worsening wealth and income distribution. What policies work? Increase land supply. Finally, there is good news that Beijing and Shanghai will increase land supply. In the future, I hope to see the restoration of cross-province land swaps, which were stopped in 2004. To protect farmland, why does this farmland have to be next to Chongqing, close to the suburbs? Can I swap it for land farther away? Even if the 1.8 billion mu red line requires farmland for agriculture, why use half of Shanghai or Beijing for farming? Can we swap it with Northeast or Shanxi? Cross-province land swaps were tried before and stopped in 2004. Especially in the northwest and northeast, some cities have difficulties with SOEs; land swaps might be a potential solution. We should care greatly about protecting farmland and food self-sufficiency, but can cross-province swaps also improve land use efficiency? More than half of Beijing and Shanghai's land is still farmland. For example, Beijing is a water-scarce city, yet 70% of its water resources are used for agriculture, raising many questions about efficiency and carrying capacity. We emphasize food self-sufficiency, at least 80% self-sufficiency. A recent new policy promotes potatoes as a staple food, which is also a good approach. Because it is difficult to be self-sufficient in rice and wheat; our grain prices are 50% higher than abroad, but potatoes might be promising. The underlying message is that land is relatively scarce. If some land cannot be touched for certain reasons, such as Japan's farmland protection policy, it not only worsens income distribution and affects intergenerational mobility, but more importantly, it makes cities lose competitiveness because land prices are too high, housing prices are too high, and labor costs are too high, ultimately causing the city's competitiveness to decline. If someone is cheaper than you, you lose competitiveness. Behind us are India, Southeast Asia, and African countries. If we make ourselves expensive, we will lose competitiveness. Now, hiring an employee or a nanny in Beijing is outrageously expensive. Why? Their housing is a huge problem. Under such a land supply system, can the government do better? The government takes such a large piece of land; does it have to take it all at once? After selling land, can it build public rental housing or low-rent housing? Chongqing's GDP growth rate is the fastest in the country, and housing prices have risen only 12% in the past five years, the lowest. Moreover, Chongqing is the only city that has never imposed purchase restrictions, attracting a large number of non-registered residents. As a country, to achieve "housing for all," the government can play a significant role in the real estate market. Whether low-rent or public rental housing, Beijing and Shanghai have built too little. Chongqing's experience has solved a considerable part of demand, and the government's finances are also doing well. Singapore also has ready-made experience. If we continue like the past decade, imposing purchase restrictions, loan restrictions, and tax increases whenever prices rise, prices will definitely be adjusted higher and higher. People will feel that missing a purchase is missing an opportunity, which is not a good phenomenon and will eventually lead to problems. I once said that we need to have some imagination about China's housing prices. China's housing prices are similar to the stock market: when supply is limited, they are expensive, and relatively expensive houses are of poor quality due to limited supply. Media reports say Beijing's housing prices have surpassed New York's. Have you bought a house in New York? In American big cities like New York or Manhattan, if you drive out for an hour, housing prices can differ tenfold. Compared with the Midwest, New York is another tenfold difference. But the gap between our cities is not large enough. Whenever I mention this, I get scolded. Currently, suburban housing prices are too expensive, while core urban areas are not expensive enough. In the stock market, blue chips and large caps are not expensive; it is the small, new, and innovative stocks that are expensive. The reason is that when supply is limited, low-priced items are relatively expensive, but this is unreasonable. As long as China's overall economic growth continues, no country can bring down the real estate industry when domestic demand is strong. Last year and the year before, we were very worried about economic growth. Does China really lack demand? Has it really fallen into the middle-income trap? Has it really entered an aging society? Housing purchase restrictions, car purchase lotteries, and not allowing childbirth—these do not sound like a lack of domestic demand. Our policies and economic appearance do not add up. Saying car purchase restrictions are due to insufficient roads—if roads are insufficient, that is exactly an opportunity to invest in road construction. Whether in Japan or Europe, many old cities evolved from the automobile era. We should learn from these experiences instead of imposing car purchase restrictions when roads are congested. We need to improve the comprehensive design capacity, carrying capacity, and management capacity of large cities. In any case, we must solve problems while maintaining the fundamentals of economic growth. **Dr. Liang Hong joined Goldman Sachs Asia Pacific in September 2003 as Executive Director of the Asia Economic Research business unit, later promoted to Chief Economist and Managing Director. During her time at Goldman Sachs Asia Pacific, she focused on research on mainland China's economic activity. **In 2008, Dr. Liang Hong left Goldman Sachs Asia Pacific and joined China International Capital Corporation (CICC), where she served as Managing Director of the Capital Markets Department and is currently the head of the Research Department. On October 10, 2014, CICC announced the appointment of Liang Hong as Chief Economist of CICC.