Beware of a Cliff-Edge Economic Collapse After the Olympics
Author: [Mu Zi]
Source: [Fund Analysis]
Article type: Recommended article
Published: 2008-8-15 10:24:45
Column: Expert Perspectives
Macro-control — a term that has been endlessly invoked over the past thirty years, worn utterly smooth — yet how many people truly understand it? Even the regulators themselves are often beside the point and hopelessly muddled. What is true macroeconomic regulation? At its root, it is the regulation of the human heart. If this is hard to appreciate in an economic system where the real economy holds absolute dominance, then as the proportion of the virtual economy steadily increases, this point will become ever more obvious.
Some people — particularly the fundamentalists of Western economics — insist on sanctifying, deifying, and reifying the market economy. In their view, humans become slaves and puppets before the market. In reality, the so-called market is nothing more than an economic materialization of human relationships. Market economics, at its root, is nothing more than the resultant of all human hearts. Without people, where would there be any market economy? Without people, wouldn't terms like "investment" and "demand" be empty words?
The human heart is the root of everything in the market. Of course, on moral grounds, we can use the strongest language to condemn the market economy's alienation of the human heart. But such words are futile and unenlightened. The reality of the market is the present-moment manifestation of the collective human heart's resultant force. Where is any alienation here? It simply is as it is.
The heart is where things gather — and where opportunities lie. Those who jostle in the market economy are all just opportunity-seekers who flock together. Regulating such creatures through suppression or even repression is useless. Those who do nothing all day but drone on about this being overheated and that being overheated are merely bookworms who've read themselves to death. Their ambition is even more extreme than suppression — they're playing the game of remaking human beings, trying to reform opportunity-seekers into their idea of qualified products. Unfortunately, such ambitions can only ever remain ambitions.
Everything is the resultant of all human hearts — the collective karma of all participants in the system. Market economics is no different.
Regulation, whether macro or micro, is merely one component force among the resultant, one condition among the aggregate of conditions. If regulators lack clear understanding of this, they will forever remain blind men feeling an elephant.
Though regulators are but one component force, they are one with enormous influence. Though they cannot change medium-to-long-term trends, they can create massive short-term chaos. This strictly demands that regulators harbor no personal biases or preferences. If someone with a dislike of the stock market is especially harsh on it, while someone with interests in real estate is especially lenient toward it, things will inevitably go sour. And this is often unintentional — people's likes and dislikes manifest in subtleties they may not even be aware of themselves.
However, none of this is most important. Upright and forthright people often commit foolish acts — though somewhat more endearing than those who play dumb while knowing better, aren't they still agents of harm? Only a thorough, root-level understanding of regulatory matters combined with wisdom in execution will suffice.
Whatever it may be — as long as it is an actually existing thing or phenomenon rather than an imagined one — is nothing more than a convergence of conditions, subject to the process of arising, abiding, decaying, and ceasing. That is to say, nothing can remain hot forever. When the energy of ignorant aggregation is exhausted, conditions end and things disperse. Yet while this aggregating energy remains unexhausted, no amount of forced regulation or frantic suppression will have any effect. The 5.30 midnight regulation was so severe it became an eternal classic — and the result? It still went to 6124. At 6124, conditions dispersed and all the opportunity-seekers scattered like birds and beasts — far more effective than 5.30's heavy-handed suppression. Later, when they tried to rescue the market, the result was even more violent decline. Why? The conditions for a rebound could not yet fully aggregate — wishful thinking counts for nothing.
All regulation is merely about guiding, within the rhythm of arising-abiding-decaying-ceasing, the rhythm that the regulatory force desires. Like a crowd of opportunity-seekers dancing wildly to a frenzied tune, you cannot stop the frenzy by cutting the music during a market boom. Because even without music, in a trending situation, all the dancing continues by inertia — cutting the music only creates greater frenzy. The only correct approach is to attract them with a new tune. This attraction naturally goes through its own arising-abiding-decaying-ceasing. Naturally, more and more dancers will join in. The old tune may still play, but to those reveling in the new one, isn't it the same as playing to empty air? Fickleness is human nature — if you don't exploit such nature, what business do you have regulating human hearts?
Market economics is where human nature is infinitely amplified. Regardless of how immoral it may be, to regulate hearts without going with the grain of nature is merely wasted effort. Suppression can only suppress nature, and the result is that the enthusiasm of market economics disperses. To gather it again would take twenty or thirty years. Everyone is now talking about the so-called Japan-style crisis, but how many truly understand that crisis was nothing but a man-made disaster caused by reckless regulation?
Then there's another type — those whose brains have been read to death by Western economics textbooks — who proclaim the market's divinity. Since it's God, of course regulation is impossible, giving rise to the fallacy of laissez-faire. This approach merely lets human nature run completely wild. The result is dancing to one tune until death — everything cyclically arising, abiding, decaying, ceasing. To still be infatuated with such tricks today is truly a case of brains rotted by books.
China's current state is actually most suitable for regulation, because the dual-track economic structure is naturally born for regulation. Alternating between overheating and overcooling is China's economic chronic ailment. The reasons are twofold: first, too few sectors that can become hotspots; second, retail-investor-style regulators who are trend-followed by trends rather than trend-making trends.
The ultimate measure of regulation is whether the overall Chinese economic trend remains stable. Since the economic structure was born from a purely planned economy, the marketization progress across different sectors of the commonly-owned economic structure is completely unbalanced. Moreover, the sectors unique to market economics — especially those specific to the virtual economy — have mostly not been effectively established even to this day. Under such conditions, how can there be enough hotspot sectors? An economy where everything heats up together and cools off together is only natural.
As for "retail-investor-style regulators who are trend-followed by trends rather than trend-making trends" — that's a euphemistic way of putting it. To be blunt, they're not even as good as retail investors. Participants in the market, through the vicissitudes of life, simply follow their nature and vision, and as long as they operate within the law, any behavior is perfectly legitimate. But those who aren't even as good as retail investors have an innate urge to reform retail investors. And among them, many are themselves victims of schemes to remake people. To turn around and play such tricks themselves is probably the natural manifestation of humanity's compensatory instinct.
A regulator who does not completely abandon the tricks of remaking people will never be qualified or capable of being a competent regulator. In the market, the only entity that can truly err and cause irreversible damage is the regulator itself. The one that most needs risk education is the regulator itself. Market participants' own mistakes are punished directly by the law and, even more so, by the market itself. Before the market, the so-called investor risk education is like a joke — who could possibly be more qualified and efficient than the market itself at giving participants the most direct, most profound education? The key question is not how well investors have been educated, but how much progress our paternalistic regulators have made under the market's merciless tutelage — that is the key of all keys.
Only a regulator who has completely abandoned the tricks of remaking people is qualified to face the problem of "retail-investor-style regulators who are trend-followed by trends rather than trend-making trends." For market participants, following trends to maximize profit is natural, justified, and legitimate. The only market force that must violate this market commandment is the regulator itself. A truly qualified regulator must act counter to trends. In more detail: when the market has no trend, guide the needed trend; when a trend is formed, only supervise the hot sector — don't regulate it. The regulatory force should be applied to guiding new sector hotspots and trends. This is the sounding of a new tune to achieve the self-regulation and self-control of old hotspots — this is the true laissez-faire, the true "trend-making trends."
The most basic common sense any regulator must possess: 1) Under the premise of human regulation, the rotation of different sector hotspots is the only sustainable means of maintaining the overall economic system's thermal equilibrium. 2) A sector that has been a hotspot will, during the cooling period before it can become a hotspot again, experience net outflows of surplus capital and other hotspot-able resources — these hotspot-able resources are the most precious resources for maintaining overall economic development under thermal equilibrium, and must absolutely not flow out of the total economic system. They must be kept rotating between different hotspots within the total economic system. In plain language: even if the meat rots, it must rot in the big pot of the total economic system. 3) For the meat to willingly rot in the big pot, China's total economic system must become a sustainable new engine of capital globalization, where hotspots constantly rotate within this total system, new hotspot-able sectors constantly emerge, and old sectors generate new momentum after natural adjustment to become hotspots again. Only such a virtuous cycle will attract more and more meat willing to rot within it. 4) The ultimate evaluation of the overall effect of economic regulation ultimately comes down to whether the meat willingly rotting in it is steadily growing.
China's economic hope lies in the fact that we still have so many potential hotspot sectors that need building. Our big pot still has astonishingly large expandable space. Everyone is now discussing how China's old unsustainable economic development model has reached its end. This merely means the short-cycle contraction of hotspot-able space in old sectors. To wait passively for old sectors to trade time for space and adjust into new hotspot-ability would be waiting to die. Now is precisely the perfect time to vigorously advance new sector construction. While this work should have been done long ago, it's still not too late. Otherwise, if something like the ChiNext board gets endlessly dragged around with no end in sight, what hope is there?
As for how to create more hotspot-able sectors, there really is nothing to say. If everything is handled like 3G and ChiNext — endlessly going back and forth for ultra-long periods amounting to mere lip-flapping — then what is there worth saying? As for the obstacles to creating hotspot-able sectors — or more directly, the obstacles to further deepening economic structural reform — there's even less to say. Because as long as one's conscience hasn't been fed to the dogs or one hasn't directly become a dog, even a blind person would know where the real problem lies. And what is there to say about that?
As for the fact that up to this point, this article seems to have wandered infinitely far from its title — that is merely an illusion. All the above content relates to the title. Only by analyzing the most fundamental things clearly can we truly face the problem posed by the title. From the perspective of market trends, if those laughable and lamentable so-called regulatory measures continue, then the phenomenon described in the title will inevitably occur. A massive, nearly one-sided market expectation has already formed an enormous market force. At this point, the only force that can turn the tide is the regulatory force that need not be trend-followed — of course, the prerequisite is that this force has correct understanding and method. Otherwise, it will at any time become the catalyst for a market cliff-edge collapse.
A clear-headed understanding must include: for such an immature system as China's market economy, even a sector as deplorable as real estate, from a macro-economic standpoint, still has enormous development potential and room. The current real estate price, viewed from a historical perspective, remains a continuation-level price within a major bull market trend. The key question is simply whether the current adjustment is completed in cliff-edge or platform fashion.
A clear-headed understanding must include: for such an immature system as China's market economy, before the basic economic framework matures, there can be no such thing as excess liquidity. So-called excess liquidity is merely the net flow of surplus capital and other hotspot-able resources — China's economy's most precious resource. The problem lies in whether we have enough hotspot-able sectors and corresponding rotation, not in having too many resources. Until this is corrected as soon as possible, there can never be good macro-control.
A clear-headed understanding must especially include: a cliff-edge adjustment's damage to the overall economy is enormous, requiring equally enormous time and resources to heal. A qualified regulator, while unable to make adjustments artificially disappear, can choose the form of the adjustment. A platform-type final adjustment is currently the best choice for China's economy. Readjusting our steps during a platform adjustment, catching up on what needs to be done — this is the only correct choice at present.
As for the inflation everyone is hotly debating, it is merely the heat dissipating because the economic system has not been effectively built and the operational regulation isn't smooth enough. Treating inflation as the disease is only looking at the surface. The root lies in the construction and operation of the economic system. Failing to address this while trying to forcibly suppress inflation will ultimately lead to the dead end of high inflation with low or even negative growth — and then people will know what true sorrow tastes like. What we have now — that's nothing.