(East-West Question) Xing Ziqiang: The "black swan" of the Russian-Ukrainian conflict is flying, and the global inflation is getting deeper and deeper?

　　China News Agency, Beijing, March 9th: Xing Ziqiang: The "black swan" of the Russian-Ukrainian conflict is flying, and the global inflation is getting deeper and deeper?

　　China News Agency reporter Xia Bin

　　After the outbreak of the new crown epidemic, the bottomless money printing in developed economies such as the United States is triggering a global inflation.

Data show that in January 2022, the global commodity price index rose by 46% year-on-year.

In January 2022, the U.S. consumer price index (CPI) rose by 7.5% year-on-year, a record high in 40 years, and has exceeded 5% for nine consecutive months.

　　Given the tortuous development of globalization and the increasing number of risk points in the world, how long will the global inflation last?

Will the Russia-Ukraine conflict fuel global inflation?

How should China build a firewall?

　　Xing Ziqiang, chief economist of Morgan Stanley China, said in an exclusive interview with China News Agency's "East-West Question" recently that the major shift in Western economic trends at this stage may be the underlying cause of long-term structural inflation in the future. The supply of geopolitics Shocks will push up inflation, and China's achievements under the steady progress of RMB internationalization, coupled with conditions of abundant foreign exchange reserves and flexible management policies, will play a role in offsetting external risks.

The following is a summary of the interview transcript:

China News Service reporter: Judging from the current data and performance, has the global inflation come?

Xing Ziqiang:

To answer this question, it cannot be limited to a short-term stage, nor can it be "seeing mountains as mountains and water as water".

This is related to the "changes that have not been seen in decades".

A long-term structural comeback of global inflation is doomed, and it may not be a flash in the pan.

　　The main reason for the high inflation now is that in the early stage of the epidemic, countries released watermarked money, and the fiscal stimulus was a bit excessive. At that time, it was aimed at preserving the economy.

But a more critical and deeper problem is that there has been a major shift in economic thinking in the West.

　　In the past 30 to 40 years, such as the Reagan administration in the United States and the Thatcher administration in the United Kingdom, the four characteristics of small government, low tax rate, deregulation, and globalization are very obvious.

But now it has basically undergone a great correction and reversal, and has entered an era of increasing government functions, improving welfare, de-globalization, improving income distribution, and strengthening economic supervision of technology enterprise platforms.

This is already evident in the United States.

　　Why was inflation low then?

Income distribution is more favorable to capital. The rise of the entire new Internet platform has increased productivity, but it has intensified the gap between the rich and the poor. The proportion of workers’ wages in the entire distribution of the cake has been reduced in the Western world as a whole, which of course curbs inflation. But the problem has had a definite general flare-up in recent years.

Therefore, such a change in economic thinking may bring about long-term structural inflation.

In May 2020, people receive relief food in Los Angeles, California, United States.

Photo by China News Agency issued by Lingo

China News Service: Will the recent Russian-Ukrainian conflict deepen global inflation?

Xing Ziqiang:

Geopolitical supply shocks have brought oil prices up and pushed up inflation.

However, the impact on China is limited, because China's current inflation starting point is low, China's current account balance is generally in the central bank's comfort zone, and the real interest rate spread is at a multi-year high.

This provides a better buffer for digesting the impact of rising oil prices.

According to data released by the American Automobile Association on March 8, the national average gasoline price rose to $4.173 per gallon that day, breaking the record set in July 2008.

The picture shows a gas station on March 8, local time in New York.

Photo by China News Agency reporter Liao Pan

China News Service: Now, how big is the debt pressure of European and American countries?

Xing Ziqiang:

At present, we are not worried about the sustainability of the debt of developed countries.

Because this round of debt is mainly due to the leverage of developed country governments during the epidemic, that is, sovereign debt, and whether government debt continues depends on the relationship between its economic growth rate and interest rates.

　　If the economic growth rate is higher than the interest rate, it usually needs to be 0.5% higher to ensure that the annual economic growth and fiscal revenue can still be paid with interest.

Because sovereign debt rarely needs to be repaid, which is the case in all countries, especially developed countries, it actually depends on the sustainability of interest payments.

　　After the US interest rate hike, the real interest rate is close to 0, and the real GDP growth rate is expected to remain at least around 2%. The buffer space provided by the two is higher than 0.5%, and interest payment is not a problem.

Therefore, after the stimulus provided by the rise in overseas leveraged sovereign debt in the past two or three years, it is unlikely that a debt crisis will form.

China News Service: Under such circumstances, what impact will the Fed's monetary policy shift have on developing countries?

Xing Ziqiang: In

the face of the Fed's policy change, countries must be worried about the crisis of "global emerging markets benefit when water is released, and emerging markets fall one after another".

　　Generally speaking, it depends on the "internal strength" of emerging markets at this time.

This involves macro stability - such as whether the current account and capital account are healthy and not overly dependent on external debt; another example is domestic inflation, whether it is forced to raise interest rates quickly.

　　Things are looking better now than they were in 2013.

At that time, the Fed's policy shift did have a big impact on emerging markets, leading to a series of chain reactions.

Why is the impact on emerging markets smaller this time?

The main reason is that emerging economies represented by China and even the Asian region maintain good macro stability.

For example, China's capital account has been reformed in recent years, and its performance has been very stable, and the internationalization of the renminbi has also attracted overseas investors to allocate Chinese bonds.

　　Benefiting from a large number of exports, China is the only "safe haven" for the industrial chain during the global epidemic, providing the world with daily necessities.

Some other Asian countries have also improved relative indicators compared with 2013, and the Asian region is relatively safe.

In December 2021, a foreign trade company in Tangshan rushed to make clothing orders for export to France, Spain and other countries.

Photo by China News Agency reporter Ren Haixia

　　Individual developing economies in Latin America and Central and Eastern Europe were not forced to follow the Fed to raise interest rates.

Some countries have already started raising interest rates in the second half of last year, and the domestic economy is also recovering.

So overall, although there will be some impact this time, and risks need to be actively guarded against, the situation may be better than that in 2013.

China News Service reporter: Will the differences in economic models and systems between China and the West lead to different manifestations of "inflation" in different countries, or have different impacts?

Xing Ziqiang:

In the past 20 to 30 years, the overall global interest rate has fallen with inflation.

Now that inflation is making a comeback, after this round of Fed rate hikes, the final interest rate center level is likely to be higher than the average of the past 20 years.

Global financial markets have become accustomed to low interest rates, and now the central interest rate level is going to return to a stage that is compatible with a higher inflation hub.

　　When global interest rates are too low, people will seek out some venture capital opportunities that do not make money now, but make money in the long run. For example, many people flock to the U.S. stock market.

But now facing the challenges brought by the recovery of the interest rate center, the volatility of the US stock market will increase in the future, and the stock risk premium will rise.

January 2022, New York Wall Street New York Stock Exchange.

Photo by China News Agency reporter Liao Pan

　　China is another situation.

In the medium and long term, the potential growth rate of China's economy may decline to a certain extent, and it will turn to a new era of development, from focusing solely on growth speed in the past to balancing speed and quality now.

In this process, China has made up for its shortcomings. Whether it is education, medical care, the Internet, or real estate, it will bid farewell to the disorderly expansion phase of the past.

　　In this process, China's actual monetary policy can be more relaxed, and it will not face changes in the investment framework brought about by the rise of interest rate centers like overseas. These are two completely different scenarios.

China News Service: How do you think China's "Great Firewall" should be built?

Xing Ziqiang:

Now that China's sovereign currency is getting stronger and stronger, and its status as a reserve currency continues to improve worldwide, it is increasingly affected by the trend of US dollar interest rates and global capital flows.

　　In the past few years, there has been a lot of progress in the internationalization of the RMB. The opening of the A-share market, the opening of the bond market, the addition of various international indexes, Shanghai-Hong Kong Stock Connect, etc., the next step should be to create a more functional RMB offshore center, so that these financial products can be more easily available. Allocating among global investors and providing corresponding risk management products is an important measure to further enhance the RMB's ability to resist the impact of overseas risks.

　　At the same time, during the epidemic, China's exports were strong, its market share in the world increased, and a large trade surplus was accumulated. Many companies and banks have seen a significant increase in US dollar deposits in recent years, which is equivalent to a second "moat".

In November 2021, in Lianyungang, Jiangsu, large machinery is hoisting containers on the China-Europe train.

Photo by Wang Chun issued by China News Agency

　　In addition, China also has some flexible management policies under the capital account and current account, which can play a role in offsetting overseas risk resonance.

(over)

Interviewee Profile:

　　Xing Ziqiang, Director of China Chief Economist Forum, Managing Director of Morgan Stanley, Chief Economist of China.

He graduated from the School of Economics of Peking University with a bachelor's degree, a master's degree in economics from the National University of Singapore, and a doctorate in economics from the Chinese Academy of Social Sciences.

He joined Morgan Stanley's Asia-Pacific macro research team in 2016 as managing director and chief economist for China.

Prior to joining Morgan Stanley, Mr. Xing served as an executive director in the investment management department of Goldman Sachs (Asia).

In addition, he was Head of China Macro Research at SAC Capital and an Economist at CICC.

The main focus is on academic research in macroeconomics.