Starting from the second quarter of last year, China's nominal economic growth rate has been slower than its real GDP growth rate, with the GDP deflator being negative for five consecutive quarters. Among the three thermometers used to measure the temperature of a market economy, the GDP deflator is the most extensive price indicator. If the GDP deflator is negative, it indicates that the problem of insufficient domestic demand has become very serious. Why did this start from the second quarter of last year? A key reason is that housing prices in China's first-tier cities began to fall in the second quarter of last year.

Here is another indicator, M1 (narrow money supply), whose main component is the demand deposits of enterprises. The demand deposits of enterprises mainly come from their revenue. This indicator has plummeted this year, marking the largest drop since 1997 when this indicator was first recorded. Some say the decline in M1 is due to the elimination of "water," and there are even opinions that we should ignore this indicator. This is obviously self-deception. In fact, the rapid decline and negative growth of M1 are behind the negative growth of social financing, mainly due to the negative growth of real estate sales by tens of percentages year-on-year. House prices and M1 are highly synchronized. In 2021, M1 reached its peak, and with the introduction of the "three red lines," the prices of second-hand houses began to fall, and M1 started to adjust. It is important to note that from 2015 to 2016, we can see that the rise in house prices drove M1 to soar because the industrial chain driven by real estate is very long and extensive. When house prices rise, real estate companies have revenue, and the upstream and downstream companies of real estate companies also have revenue, so M1 will definitely rise.

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House prices and CPI. We know that the largest component of CPI is food, accounting for about 30%, followed by housing prices, which account for 20%. In the core CPI excluding food and energy, housing prices are the first. So we see that if house prices rise and housing CPI rises, it will definitely drive the core CPI to continue to decline. Our core CPI has been below 1% for more than a year. According to international standards, this can basically be identified as a serious deflationary pressure.

House prices and consumer spending. Since January 2021, when the consumer willingness index reached a phased high, it has been continuously declining, and this year it has turned downward again. The current question is how long will the real estate market adjustment take? In December 2021, in third-tier cities, in March 2022, in second-tier cities, and in June 2023, in first-tier cities, the prices of second-hand residential houses began to decline. My wording is the adjustment of the real estate market, not a crisis. The key difference between market adjustment and crisis is that a crisis is the simultaneous decline of all house prices.

Although it is not a crisis, we compare it with the two famous real estate market crises that have occurred since World War II. From 1990 to 1991, the real estate market bubble in Japan burst, and in 2008, the real estate market bubble in the United States burst. These are two very famous real estate market crises. The background of the crisis was first weak economic growth, followed by monetary and financial stimulation. The background of this round of house price adjustment in China is also similar. This round of house price increase originated in 2014. From 2012 to 2016, China's PPI declined for four consecutive years, with PPI deflation and a very difficult economy. In July 2014, the central bank provided 1 trillion to the National Development Bank for shantytown renovation, and since then, the scale of re-lending provided by the central bank to commercial banks has expanded by 4 trillion. Compared with monetary policy stimulation, a larger-scale fiscal stimulus occurred after 2014. The broad local governments increased by 5 trillion that year, and one year later, it increased by 10 trillion. With monetary stimulation and an even larger-scale fiscal stimulus, land transfer fees rose after 2015, and local government debt also rose. By 2021, land transfer fees began to decline, but local government debt continued to rise.

How did the real estate bubble burst? It's the same, the central bank that always pricks the bubble. Taking Japan as an example, after the Hiroshima Agreement, Tokyo land prices tripled, and the Bank of Japan began to raise interest rates. After two years of interest rate hikes, the real estate bubble burst, and house prices fell. There is a very important lesson here: monetary policy has a lag, implementation has a lag, and the effects also have a lag. Taking Florida in the United States as an example, after the burst of the information technology bubble in 2000, the Federal Reserve began to lower interest rates. After the interest rate cuts, house prices began to soar, and house prices in Florida doubled. Later, the Federal Reserve realized there was a problem and began to raise interest rates in May 2004. After three years of continuous interest rate hikes, house prices finally plummeted.

The adjustment of China's real estate market originated from the "three red lines" in January 2021. Why did the "three red lines" have such a great impact? Behind the rise in house prices after 2015 was the presale of houses far exceeding the sale of existing houses. Before 2014, presale was about 4 times that of existing house sales, and by 2021, it was equivalent to 10 times that of existing houses.

Looking at the changes in house prices after the crisis, it is a mean reversion. Taking Japan as an example, the more it rises, the more it falls. For example, Tokyo and Osaka rose far beyond the average level of Japan during the rise, and fell more. Small places like Nagoya rose less and fell less. In 2011, Japan's house price index fell back to the level of 1981. The United States is also the same. In the 2008 global financial crisis, Ohio, an area with a declining manufacturing industry, rose less, so it fell less, and it must be a mean reversion.

The first three are the same, and now let's look at the differences. Many people say that the surge and plummet of house prices during the U.S. subprime mortgage crisis were weaker than those in Japan, but in fact, they were not. Taking the house price of the crisis year as 100, we can see that 10 years before the crisis, the house price in the United States was 54, and Japan was 56, which means that the house price in the United States at that time rose more than that in Japan. Looking at the crisis, four years after the crisis, the house price in the United States was 80, and Japan was 88, which means that the house price in the United States fell more severely after the crisis. The U.S. subprime mortgage crisis in 2007 and 2008 fell more, rose more, and was much more severe than the Japanese bubble crisis. Where is the difference? It lies in the fifth year of the crisis, when the house price in the United States stopped falling and rebounded. Nine years after the crisis, the house price in the United States has returned to the level of the 2007 crisis, while Japan's house price fell for 20 years in 1991. One is a short-term real estate crisis, and the other is a long-term crisis.

What are the macroeconomic consequences of short-term and long-term crises? The difference is very large. Taking Japan as an example, after 1991, Japan's house price index CPI basically stagnated, starting a long-term deflation and long-term insufficient domestic demand. The CPI in the United States fell sharply in 2007 and 2008, and then rose, leading to inflation. Which is better, deflation or inflation? It must be inflation, because inflation shows that you are still a healthy body, a young person who will catch a cold and have a fever. Deflation is a cold body. Long-term crises and short-term crises will have such consequences on the demand side. The demand side will definitely affect the supply side. If an economy has long-term insufficient total demand, who will produce even if there are more new qualitative productive forces? Who will produce so many new technologies such as artificial intelligence? So the demand side will eventually affect the supply side, and the potential GDP growth rate of the supply side will definitely decline.Why are there such significant differences? A major backdrop is that Japan is experiencing a decline in birth rates, an aging population, and negative population growth. Since 1995, Japan's working-age population has been in negative growth, entering a society with severe aging. The United States, on the other hand, is a relatively young country in terms of population age. The Third Plenary Session of the Central Committee of China clearly stated that China's population issues are characterized by both a decline in birth rates and aging. Apart from population issues, let's look at monetary policy; the entity that can save the market after a crisis must be the central bank. Comparing the Bank of Japan and the Federal Reserve, first, let's examine conventional monetary policy interest rate policies. Taking February 2007 in the United States as time zero and March 1991 in Japan as time zero, comparing the central bank interest rate adjustments 36 months before and 60 months after time zero, we can see that the Bank of Japan and the Federal Reserve's interest rate adjustment steps are completely in sync. However, by the 21st month, the Federal Reserve in the United States had reduced its interest rates to zero, that is, a zero interest rate. The key difference lies in the Bank of Japan's interest rate policy, which has been inconsistent. In the 12th, 18th, 24th, and 36th months after time zero, the Bank of Japan always wanted to pull the interest rates back after a period, always wanting to return to the so-called normal situation. This inconsistent interest rate policy made the market doubt whether the central bank had the determination to save the market, which is a key difference.

In terms of conventional monetary policy, looking at China, with last June as China's time zero, the personal housing provident fund loan interest rate has not changed, the LPR has been reduced by 20 basis points, and it was reduced by 10 basis points half a month ago, totaling only a reduction of 30 basis points in a year. Compared with the unhurried People's Bank of China, both the United States and Japan reduced their rates by 240 basis points within one year after time zero.

Now, let's look at unconventional monetary policy, also known as quantitative easing. Unconventional monetary policy creates money on the liability side and must purchase assets on the asset side. After the crisis, the Federal Reserve significantly purchased toxic assets, which are mortgage-backed securities (MBS). In the first year after the crisis, the first round of quantitative easing saw the Federal Reserve purchasing 30% of asset-securitized MBS. After the fourth round of quantitative easing in 2014, the Federal Reserve held over 60% of MBS and purchased more than 20% of government bonds. The Bank of Japan was slow to react and did not start large-scale expansion until 2012, when Abe推行d the so-called Abenomics. The result was a 20-year stagnation from 1991 to 2011, and it was not until 2012 that Japanese housing prices began to stabilize and rise. Of course, there is a question that can be seen from the housing price-to-income ratio and the housing price-to-rent ratio in the United States from 1970 to last year; both of these indicators are now at historical highs. So, will this monetary policy go too far this time? With housing and stock prices so high in the United States, there might be a significant change. The reason is simple: monetary policy has a lag effect, and further rate cuts in September will bring significant uncertainty.

The base money provided by the People's Bank of China consists of three parts: cash, currency issuance, excess reserves, and required reserves. Which one is the liquid money provided by the central bank? As of the second quarter of this year, there are still 12.63 trillion yuan in required reserves provided by the central bank that banks cannot use, so in fact, it is not the true liquid money provided by the central bank. The reserve money excluding required reserves has been continuously declining since August 2022. From this indicator, the central bank is actually contracting liquidity; we are implementing a tight monetary policy, which is completely inconsistent with the requirements of the Central Economic Work Conference and the Financial Work Conference. Looking again at the year-on-year growth of excess reserves and the overnight lending rate. In March 2020, the year-on-year growth of excess reserves increased significantly, and during the first round of the pandemic, we can see that the overnight rate dropped significantly, so it had an immediate effect. Of course, from March to June of this year, the year-on-year growth of excess reserves has been negative, so the interbank market interest rates have also remained at a relatively high level.

We have always relied on foreign exchange assets to inject liquidity, but there has been a significant change after 2014. After 2015, we relied on re-lending to inject liquidity, and this method is the key to restricting the efficiency of the central bank's monetary policy. In 2014 and 2017, the real estate market rose, and the central bank injected a large amount of liquidity through loans, causing the housing market to rise. But recently, we can see that the year-on-year growth of re-lending is as high as 15.38%, but the growth rate of the central bank's assets is less than 5%. Why can't re-lending drive assets? The reason is simple: there are two problems with re-lending. First, the term is short, and the commercial banks that borrow money bear liquidity risk. Second, re-lending is the central bank lending money to commercial banks, allowing commercial banks to take the lead in saving the real estate market, and commercial banks bear credit risk. These two reasons have reduced the speed and efficiency of asset expansion driven by re-lending.

The Third Plenary Session was an exciting meeting. I read the more than 20,000-word "Decision" carefully several times. There are 653 words in the Third Plenary Session about financial system reform. Among these 653 words, the General Secretary talked about a financial powerhouse with six strengths and six systems, and only emphasized the central bank, saying to accelerate the improvement of the central bank system and unblock the transmission mechanism of monetary policy. Why only emphasize the central bank? The reason is simple: the original currency issuance mechanism dependent on the US dollar is no longer sustainable. Secondly, the current real estate market adjustment urgently needs monetary policy to play a role in stabilizing the economy, but the transmission channels of monetary policy are not unblocked. It's not just a monetary policy issue because monetary policy, through the purchase of assets and the injection of liquidity, the assets purchased by the central bank must be the liabilities of a certain department. Now, only the central finance can bear liabilities. What does the central finance borrow money for? The "Decision" of the Third Plenary Session has already made it very clear. It has unprecedentedly proposed that China is facing population issues of a decline in birth rates and aging, so it is necessary to build a fertility-friendly society and to effectively reduce the costs of childbirth, upbringing, and education. We should not only target the real estate market to save the real estate market; we must learn to surround Wei to save Zhao.