In order to stabilize prices, some degree of economic recession and an increase in unemployment must be tolerated. Therefore, last year was an accepted economic recession. Looking at the situation of the Chinese economy, even with stimulus measures, they are unable to recover. This is referred to as a liquidity trap; they have already fallen into a liquidity trap. Now that the era of interest rate hikes has begun, since the U.S. is doing it, China has also lowered interest rates. By lowering the benchmark, they are trying to stimulate the economy. Korea is also expected to follow suit. While lowering interest rates is good, there are still voices suggesting that it may not be beneficial. The reason for lowering interest rates is that the economy is gradually cooling down. This does not mean that lowering rates will immediately revive the economy; it means that the brakes are not being released.

Starting off, isn't it possible that the cooling could become more serious? Then, isn't the interest rate cut ultimately a bad signal? There are discussions like this. How do you see it? Let me explain in two parts. Let's ask this question: It's raining outside, right? What have you prepared? You would say an umbrella, right? Conversely, if you prepare an umbrella, it rains. To be honest, from my perspective, that question seems to overlook the mechanisms of monetary policy. I'm not claiming that I'm right, but as someone who has studied the mechanisms of monetary policy, I believe this interpretation somewhat disregards those mechanisms. What do I mean? It rains, so I use an umbrella; does that mean I use an umbrella because it rains? Yes, it's true that I use an umbrella every time it rains. When it rains, I use an umbrella, so it’s correct that they go together. However,

Can we interpret that it rains because we use an umbrella? No, that's not it. Let’s take a look at some data. The global financial crisis occurred in 2008 and 2009. During the financial crisis, interest rates were drastically lowered. Similarly, in 2020, the pandemic economic crisis hit, and interest rates were also significantly reduced. So, what’s the difference between saying that the pandemic came because of the interest rate cut and saying that the financial crisis came because of the interest rate cut? It's quite similar. A crisis came, and interest rates were lowered because of that crisis. Now, what’s different about the current big cut? For example, it was the same in 2008 and during the pandemic in 2020. There’s an FMC meeting this week; it’s scheduled for Thursday, just four days away. However, suddenly, an emergency meeting is called on Sunday, and it's chaotic.

You see, there are 12 participants in the interest rate decision, and it's not just the 12 members of the Bank of Korea. There are also observers, such as regional Federal Reserve presidents, who attend the meeting. It's not just a few people who come; they all gather, likely flying in from different places. This is an urgent meeting that is being held on a Sunday, not in Korea, but in a country like the United States, which is in a state of emergency. In a nutshell, this situation is similar to what happened during the financial crises of 2008 and 2020. Moreover, they even held an emergency meeting and implemented a big cut, and then just four days later, at the regular FOMC meeting, they made another big cut. This is a big cut in an emergency situation. However, if we interpret this big cut as an emergency measure, why would they wait until the September FOMC meeting? They would not have waited; they would have held an emergency meeting.

And how can we wait until November? We have to raise interest rates again in October. That's exactly it. So right now, due to the mechanism of monetary policy, we are experiencing a rate hike because of the economic crisis. I believe it is somewhat excessive to conclude that the economy is improving just because rates have been raised. Currently, Powell's decision to raise rates is different from the past because, compared to the target rate set by the Federal Reserve, it was excessively high. Now, it is in the process of being adjusted to a more appropriate level. This can be interpreted as such. This is what the term pivot refers to. The discussion around the pivot indicates that Japan is pursuing its own monetary policy normalization by raising rates. European countries are also pursuing their own forms of normalization; the Eurozone is working on its own, as are the UK, Switzerland, Sweden, Canada, and Mexico.

The current interest rates are too high and restrictive. We need to find an appropriate rate for our economy and aim for a neutral rate to shift our monetary policy. As I mentioned earlier, the economy is experiencing a sharp downturn, and if we leave it as is, it will become extremely cold and frozen, just like being left out in the middle of winter. When we talk about lowering interest rates, what does that mean? It means we are pouring warm water back in. Since it seems like it’s going to get cold, we have preemptively decided to lower interest rates, which is like pouring warm water back into the situation. Therefore, while it is true that we are experiencing an economic downturn and cooling off, we are at a stage before it collapses. Lowering interest rates is like introducing warm water into the system.

I believe the economy will not reach a situation where it either tightens or freezes. For example, if the unemployment rate was just around 3% and we were in a state of full employment like now, would the Federal Reserve have lowered interest rates? I don't think they would have. Even with the inflation targets, they still haven't acted. The reason is that, as of the date of this recording, the confirmed core PCE inflation rate is 2.6%. This means we are still not at the target of 2.34%. However, it's interesting that the last week of September is when the PCE inflation will be announced. But the PCE inflation that will be announced is based on August's data, while the inflation data we are currently looking at is from July. So, did the Federal Reserve make their judgment based on July's inflation data?

No, based on the July prices, decisions were made with the assumption that prices would be like this in August, September, October, November, and December. Right? Yes, it was a prediction. However, that prediction could be wrong, so we cannot have greater confidence. As long as the labor market is solid, it means that demand is being supported, which raises concerns that price stabilization could be delayed as long as demand is sustained. Therefore, the current cooling of the labor market is described as a normalization. If, for instance, the head of the National Assembly were to say that the unemployment rate is rising and that this is a normalization process, then due to negative public opinion, they would have to close their office. If a member of the National Assembly or policymakers refer to the increase in unemployment as a normal situation, they would likely face impeachment.

It's a situation of impeachment, right? But the reason we can say that the increase in unemployment is a normal phenomenon is precisely because of the concept of the Phillips Curve that I showed you earlier. To ensure price stability, we must endure a certain degree of economic recession and an increase in unemployment. So, last year, I referred to the forecast for 2024 as an accepted economic recession. What does that mean? If the U.S. unemployment rate is maintained at around 3%, can interest rates be raised? Yes, it can happen. At that time, if the actual inflation rate, not just the projected rate, were to be around 2.3%, we could have complete confidence in price stability. If employment is also good, then we could say that both goals have been achieved.

So, as soon as the U.S. raised interest rates, China also lowered its rates. From China's perspective, this was a relief; they could have been in serious trouble. If the U.S. had not lowered rates and continued to maintain high rates, China's economic downturn would have lasted much longer, and they wouldn't have been able to implement any stimulus measures. This could have led to a more significant crisis. However, by easing the pressure now, China has the opportunity to lower interest rates and implement stimulus measures, which could help revive its economy. This raises concerns about what would happen to global prices if China's economy rebounds. Would inflation rise again? There are discussions about whether this could lead to stagflation. That's correct, given that premise.

If China's inflation rate rises again, there is a high possibility that it could lead to a second wave of inflation. This is because both interest rate cuts and supply factors are starting to take effect. In a situation where prices are not fully stabilized and considering factors like base effects, the inflation rate could drop until 2024. However, if we take into account the base effects of the lowered inflation rate in 2024, we may need to prepare for a second wave of inflation in 2025. If we assume that scenario, the current state of the Chinese economy suggests that even with stimulus, it is unable to recover fully. This is referred to as a liquidity trap. The economy has already fallen into a liquidity trap, and it is being assessed as vulnerable to deflation.

The term vulnerability refers to the current situation, which does not mean that we have fallen into deflation, but there is a high possibility that we could enter a deflationary phase. Once we fall into deflation, it is difficult to recover. Japan is the most representative example of this, with its lost 30 years being a clear case. If we look at the degree of vulnerability to deflation, we can see China's PPI has been negative since mid-2022. This is serious. Since PPI is a leading indicator of consumer prices, it is reasonable to conclude that no matter what measures are taken in the short term, it will be challenging for consumer price inflation to rebound strongly into positive territory soon. Of course, we need to consider the effects of interest rates and other factors moving forward, but as of now, that is the situation. The consumer price inflation rate has been consistently around 0%, and there have even been instances of negative rates.

At this point, we can assess the vulnerability to deflation. However, there is one thing we should not overlook: our country's inflation target is 2%. The United States also targets 2%, while China targets 3.5%. This means that the difference between China's target inflation rate and the current inflation rate is about 3.5%, assuming the current rate is 0. If our country maintains a 0% inflation rate, then the difference from the target inflation of 2% would be 2 percentage points. Considering this, we might say that we are currently in a deflationary situation. If we think about the Chinese economy, it means that even if China implements stimulus measures enthusiastically, prices will not rise for a while. This could be described as a liquidity trap. Therefore, we can determine that China is vulnerable to deflation. The IMF diagnoses countries every year.

Consulting has its limitations. In the recent report, it was mentioned that there is an index held by the IMF, known as the deflation vulnerability index. This index is a diagnostic tool to assess how vulnerable a country is to deflation. If the index falls below zero, it indicates a diagnosis of deflation. There is a significant background to this deflation situation, which is very important to understand. 

To summarize, one of the key backgrounds is the real estate slump. Real estate prices are falling, sales are declining, and the number of new housing starts is decreasing. All of these factors are related to the real estate industry. In fact, the real estate-related sector in China is estimated to account for about 30% of GDP. Even if the rest of the economy grows, this shrinking of the real estate sector reflects the current state of the real estate slump. Moreover, according to British media reports, it is said that there are over 10 million vacant homes in China.

According to some media reports, there are about 60 million unsold housing units in China, and it appears that the cancellation of these units is not being resolved. As you can see, whether in Yishin City or Yiseon City, many other cities are also accumulating unsold housing units. This is a sign of a real estate recession. So, why does this real estate recession lead to deflation? It’s obvious. Just think about a building: it contains bricks, steel, and cement, and requires a tremendous amount of labor. This leads to an increase in unemployment rates. It's not just labor costs; it also affects furniture and appliances. This is a phenomenon where the overall supply decreases. In China, the method of transferring ownership is not about transferring ownership rights but rather usage rights, due to its communist system. You could say that they are trading usage rights.

Of course, to increase the utility value, we need to completely change our home appliances and furniture. This continuous stagnation makes us vulnerable to deflation, placing us in a cycle of deflation. 

Secondly, the domestic recession is very serious. The consumer sentiment index in China has completely leveled down. The blue line indicates that the value has fallen significantly below the baseline of 100 and has not recovered. Interestingly, the willingness of the Chinese people to save is very strong, as indicated by the red line. It’s quite fascinating that even when interest rates are lowered, their willingness to save remains high. This is a curious phenomenon, suggesting that there is nowhere else to invest their money. Given the uncertainty about the future, they prefer to save rather than consume. This indicates how severe the domestic recession is, which relates to the real estate slump I mentioned earlier.

From the perspective of businesses, new construction investments, demand for home appliances, and raw materials are declining. This contributes to a decrease in producer prices and consumer prices. The domestic recession is causing a slowdown in consumption. In China, approximately 55% of GDP is linked to consumption data, which creates a deflationary situation. In this scenario, pouring liquidity into the economy will not lead to increased consumer spending; instead, the money will just circulate back out without being utilized. This is the core issue. Consequently, only asset prices will soar. What will happen then? That is the crucial point. As mentioned, we are in a deflationary situation, facing a real estate slump and a domestic recession. Additionally, there is the issue of factory relocations. We can confirm the relocation of factories through net outflows of foreign direct investment. However, as you can see...

The actual value, the black line, has been going down for a long time, especially during 2021, 2022, and 2023. The net foreign direct investment has drastically decreased, and only net outflows remain. In other words, many companies around the world are not building factories in China, and even Chinese companies are building factories overseas. This is where net outflows occur. Foreign direct investment is impacted by one last factor: government debt. Government debt is an important factor because when we look at the total government debt in China, it includes both central government debt and local government debt. Among local government debts, a significant portion is attributed to LGFVs, known as shadow banking. This is shadow banking. To explain briefly, local governments borrow money, and with that money, they invest in infrastructure construction. However,

Why is this important? China is the target. The government even presents economic growth rate forecasts. But is it only China that presents these growth rate targets? The reason is that once a target is set, we must achieve a 5% growth. Then the central government allocates how much should be increased, and local governments are assigned specific targets. They ask, How much infrastructure construction did you do last year? If it was 100, they say, You need to achieve 5%, so you need to add 5 more. This creates a system where they encourage growth through loans. However, the problem now is that no matter how much infrastructure is built, it doesn't yield profit because there are no buyers, leading to unsold properties. Therefore, the structure only works when houses sell well. This means that they end up unable to repay their debts to the banks, and since the debts are substantial, now what?

We are now in a situation where we need to stop the 12 attempts at infrastructure construction and focus more on debt relief. This shift is also causing a slowdown in domestic demand and has led to a policy response for crisis management. As you mentioned, there has been a significant injection of liquidity, with major interest rate cuts and expansive monetary and fiscal policies. Even with measures like subsidies for purchasing cars and home appliances, we cannot escape the deflationary environment. Despite implementing these extraordinary measures, we are still trapped in a debt trap. As I mentioned earlier, the Chinese economy is caught in a quagmire of deflation, a debt trap, a slowdown in domestic demand, the relocation of factories, and a real estate slump. No matter how hard we try, we are entangled in these issues.

Even if liquidity is supplied expansively, if it cannot find its place, this is called a liquidity trap. Listening to this now, it sounds just like the discussion about Japan from 30 years ago; that is what I am trying to convey. In the case of China, if you look at the graph here, there is the potential growth rate of China, which I will say is around 6%. However, in 2017, the potential growth rate did not reach 6%. This results in a negative output gap, as shown in the bar graph. In 2018 and 2019, the growth rate continued to fall below the potential growth rate. This means that the potential growth rate itself is being leveled down. One of the various effects of this is the decrease in demand in the public sector of China. This brings limitations to China's economic growth. I am not saying that China is doomed or that it has come to an end.

High growth has ended, and we have now entered an era of low growth. That's right, that's exactly it; it's a matter of growth. However, if you ask why China seems to be stuck in low growth despite all the factors mentioned, I will address that. Up until now, most of my comments on the Chinese economy have focused on the old economy; I haven't discussed the new economy. Recently, when I was forming this outlook, I came across a phrase that I really liked. This phrase appeared when the minutes of the July FOMC meeting were released, around mid-August. There was a significant sentence: the monetary policy does not determine interest rates based on any particular point, but rather takes into account the totality of the situation.

We consider various factors comprehensively. What I'm trying to say is that, despite the negative aspects I've mentioned so far regarding the old economy, if we look at the new economy, it doesn't seem like the Chinese economy is collapsing at all. For example, in terms of technology, China is leading in artificial intelligence. We have to acknowledge that they are ahead in electric vehicles, solar energy, and battery technology. Without a doubt, they are catching up in wind power, facial recognition technology, and industrial robotics. When we look at these new economic sectors, major countries around the world are feeling the pressure, and we are also feeling it in our country. In South Korea, Chinese SUVs are set to enter the market in 2025. They are currently establishing distribution networks and after-sales service centers, including pre-service. This is significant for our country because of the Chinese electric vehicles.

Consider an SUV costing 25 million won. However, sometimes people ask, Aren't electric cars only for the premium market? No, there are tiers of people who buy premium electric cars. For instance, those who need to use them for business or sales purposes often opt for cheaper models so they can quickly turn them over and minimize depreciation. Additionally, if you think about the Chinese population living in South Korea, their numbers are not insignificant. Even if we lower prices in our country, as we learned from Tesla, the entire value chain is mostly in China. Without sourcing parts from there, we cannot manufacture them. Right? That's correct. This means there will be a journey of market penetration, moving from 0 to 10. This implies that the structure will shift from monopolizing the entire market to sharing it, similar to the automotive version of Alibaba.

Taebo is coming in, right? Yes, but it's not just our domestic market; there are doubts about whether Chinese electric vehicles can actually penetrate the global market. However, in the U.S., the figure has now risen to 88%. This means that even with tariffs imposed, it is still possible to supply vehicles produced in ways that do not rely on production in China. So, how should we view the Chinese economy? Some say it has collapsed and is finished, while others claim it is experiencing explosive growth. What should we think? I believe we need to look at the overall picture. The red line represents opinions regarding economic growth rates. This is the forecast for economic growth. Japan's technological capabilities have been on the rise during its 30 years of stagnation, and while its market share has increased, the country's...

Economic growth, or rather the appearance of it, seems to have hit rock bottom. It's an appropriate metaphor. Japan went through its lost 30 years, but it didn't mean Japan was finished or disappeared after experiencing an economic crisis. Look at Toyota; it's still going strong. Therefore, Japan talks about a growth rate that is almost zero. However, the situation with the Chinese economy is somewhat different. Japan was a developed country that faced stagnation, while China is experiencing a slowdown in growth before reaching that status. This might be what we call the middle-income trap. Once you fall into the middle-income trap, there can be various side effects later on. There are indeed many, such as political conflicts, like those in Kim Boo's era. We can see that the old economy and the new economy are completely divided. In some regions, there are calls for additional infrastructure projects, while in others, there are different approaches.

적극적으로 인프라를 구축하면서 양극화가 심해지는 현상이 많이 발생하고 있습니다. 그만큼 고성장 국면에 지어놓은 인프라들이 존재하는데, 예를 들어 공장이 있습니다. 그런데 공장 가동률이 줄어들면 기존 인력들은 계속 일할 수 있지만, 청년들은 일자리를 구하기가 어려워집니다. 가동률이 줄어들기 때문에 청년 실업률이 유독 힘든 상황입니다. 기존 인력들이 실업자로 바뀌는 것이 아니라, 청년들이 대학을 졸업했음에도 불구하고 실업자가 되는 것입니다. 예를 들어, 기계공학과를 졸업했는데 공장 가동률이 줄어들고 개발자로 가라는 식이 되는 것입니다. 이런 실업 현상은 명예 퇴직이 되거나 나이가 많아지거나 계약 기간이 끝나서 자연스럽게 실업이 발생하도록 유도하는 추가적인 채용이 필요합니다.

Without going that way, we can say there are many opportunities. However, when looking at the whole of China, it is a challenging environment, but there are still companies within it that can grow. We need to view these as separate entities. This is the conclusion we should reach.

금리 인하해도 증시 안 떨어집니다(ft.김광석 교수 3부)

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