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Wednesday, April 29, 2020
Chan Kung: Two Years Needed for the U.S. Economy to Recover

On April 27, Chan Kung, founder and chairman of ANBOUND, was invited to Chang Sheng Time talk show and had an in-depth discussion on the topic of economic recovery.

Yao Changsheng: Welcome. Please allow me to pose the question to Mr. Chan Kung first. As Mr. Chan is doing "intelligence" analysis, he deduces some seemingly complicated conclusions based on known information and observed matters, but gives everyone a very direct result. In which month do you think the U.S. economy will return to normal?

Chan Kung: First of all, I want to make it clear that we do not engage in "intelligence" analysis, but in “information” analysis. If we use the incorrect word, that could result in frequent principle mistakes.

Yao Changsheng: Isn't it more advanced and mysterious if I put it that way?

Chan Kung: When it comes to the topic of the United States, there’s a lot to talk about. When will the economy recover? Everyone is very concerned about that. Two days ago, Treasury Secretary Steven Mnuchin said that the economy will soon rebound. But I think he may be speaking from Trump’s stand. The economic rebound may not be easy, especially those who do business should know that once it is shut down, it is difficult to restart. This involves a whole bunch of systems, and it is not for one person to decide. Factors such as people, property, production, supply, and marketing have to be boosted thereby keeping up with the pace of economic recovery. So, I think it might take two years.

Yao Changsheng: Two years?

Chan Kung: At normal levels, it will take two years to get back to normal. There's got to be a rebound in the short term, and it depends on what the criteria are, it will certainly be better than it is now. Nonetheless, it will take two years for the U.S. economy to return to normal.

Yao Changsheng: That’s a good issue. There are two questions: 1. That American who likes to hold the press conference every day but doesn't like the press conference very much now said that on May 4, he will let everyone out and celebrate Youth Day with the Chinese people; 2. Will the world go into a shutdown for the next two years?

Chan Kung: It’s hard to tell. Everyone is talking about to “re-opening”. There were strict restrictions initially, and re-opening means that people can go out to the streets, the restaurants can do their business, people can go to the beach, and take their kids for a walk in the park. But when we talk about normalcy, we're talking about normalcy in the economy, and that normalcy is a long way off. For example, earnings growth. Public companies have all forecast and determined what kind of standard they have to meet, thereby to achieve the standard called normalcy.

If re-opening doesn’t bring these practical actions, it's just that people can go to the streets, it’s simply martial laws getting relatively lifted, which is the current state. Nonetheless, it's very difficult even to get to this situation, because the conditions in 50 states is different, and once you can fly from a state to another, there will be virus spreading and infections. What will you do then? That's the problem.

Yao Changsheng: Some people commented that when they heard "two years", they felt that they were not far away from begging. Now, people are not ready for two years. Back to Professor Zhu Ning's topic, we talked about a lot of things we were worried about last time, including how long it will take for China to get back to normal if it takes two years for the United States?

Yao Changsheng: After Mr. Chan came up with a "two year" recovery period, people in the chat room were petrified and responded: Two years? We can't get over it.

Yao Changsheng: Here’s a question, what is the topic you are most concerned about now? What are the most crucial topics in the process of economic recovery?

Chan Kung: Let me start with the question of recovery speed. Follow up on what Mr. Zhu said, the International Monetary Fund (IMF) predicts that the economy will recover in about a year and a half. The first thing to be sure is that the judgment on this issue varies from place to place and country to country.

Another point is that the pace of recovery is not the same, the world is now in a state of severe disorder that reminds us of the Great Depression, and a lot of things that happened between 1929 and 1933. There was a reason why the Great Depression lasted four years.

Therefore, we are now optimistic about this issue. I don’t think it is a very cautious view. The mutual involvement and constraints have moderated the strength and extent of the rebound. The economy is recovering very well. As Chang Sheng said, the pandemic in China ended early and it appeared that many things could be done normally, but it turned out this is just now the case.

But judging from the speed of the rebound, just as the IMF stated, countries will face slow growth this year, China 1.2, Europe, the United Kingdom, and the United States are all in the state of negative growth, i.e. -5, -7, -9. I am afraid that even the positive growth of 1.2 in China is not easy. These growths are far from past performance. So, the rebound is de facto a big problem.

In addition, under this situation, there may be relatively high growth in 2021 due to the low base figure. It will go up very high (from the figure), maybe to a 7% or even a 9% rebound. Is this a real rebound? I don't think so. It's just high growth from a low base. So, it is not going to return to normal in 2021, neither normal pace nor normal track; it will still be in chaos. For the problem I worry about the most, it is the chaos caused by order. When can we get back on a normal and healthy track?

Moreover, the disruption of the pace is not only reflected in the economic aspect, but also the legal aspect, in the cultural aspect, in the pluralistic aspect, like international trade, politics, relations, etc. A professor at the University of Oxford said the other day that he felt extremely pessimistic and disappointed about the future world, because Atlanticism in the past was the leadership of the United States, and everything depended on the leadership of the United States. What has the United States led during this outbreak? It's about to collapse on its own, and that's it, it's a mess, as Stiglitz said, “just like a third world country.” How can it be expected to lead the world under such circumstances? Those who believed in Atlanticism after World War II felt extremely pessimistic and disappointed. Perhaps the most serious problem is the lack of consensus about what the world will look like in the future.

Chan Kung: Regarding consumption, it is one of the key points when we talk about the future, economic crisis, and the Great Depression. The scale of the market is where people put their hope in; the bigger the market, the better. People think that if they gain more with more production produce, they will be able to make up the loss. But where is the market for things that are produced? Someone has to consume, in other words, a person who is constantly eating but does not have the digestive function is something that is impossible to exist. The digestive function is like consumption, and the market depends on consumption to exist.

Now, consumption is indeed a problem. Since 2012, the role of consumption in the Chinese economy has become more and more important, it can be reflected in the ratio of consumption to GDP. However, the important role of consumption in GDP is actually due to the fact that the share of investment capital has declined a little bit, and the economy as a whole has fallen a little bit, thereby the share of consumption has shown up.

In fact, what we can see from this outbreak is that the utility and other infrastructure sectors are said to be in the state of inactivity, and what people do is simply eating, drinking, and sleeping. We can see that the proportion of eating, drinking, and sleeping is too large in the consumption of Chinese people, which really plays an important role. As soon as the restaurants are closed, the impact is very obvious. The same is true in the United States, which is opening its restaurants first and solving the problem of eating first, so that consumption can rise slowly. Compared with China, the United States accounts for a higher proportion of consumption, which basically determines whether its GDP and economic growth can be sustained. China also has investment and new infrastructure to think about. In general, I think it's going to take a little bit of time for it to make economic sense.

Yao Changsheng: Does the "depending on the time" you mentioned mean that you are not optimistic about consumption, especially after the pandemic is stable; will there be retaliatory consumption after the reopening of the economy? I don't see anyone judging that there's going to be retaliatory spending right now. That's the first topic.

Second, we just mentioned about the fundamental of China's economic base, even if our expectations for consumption are great, the overall stimulus of consumption is not as good as the stimulus of investment in the past, and no matter how much hope is placed in the investment, I am afraid it is not as good as the stimulus of real estate investment. It is basically decisive at first glance; maybe we can discuss these topics: How can real estate position itself well this time? Will it return to its old "great container" position? Or will it re-position itself?

Chan Kung: I remember the IMF produced a report in 2019, and there was a very important sentence in it, saying that all governments may be facing the problem of diminishing policy space, and it repeatedly warned about this. In fact, in 2019, many countries and people, including me, have ignored this sentence. I did not expect it to be so important. That is to say, once the crisis or other problem occurs in 2020, the space of policy resources (for countries, including China, the United States, and other countries) is relatively small, and this is a problem. Unfortunately, we ran into a major crisis in 2020, and now only the Federal Reserve seems to be able to ease monetary policy freely, while the policies of other countries are relatively restricted, and they cannot do the things they want to do.

Back to real estate, the real estate is a Chinese “belief”, we have the tradition of house worship and property worship, and we hope to be able to do it well and to be able to return to a normal pace. But there is a "restriction" in the real estate market, that is, “housing should be for living in, not for speculation.”

Yao Changsheng: That’s the limiting condition.

Chan Kung: From both a regional and a local point of view, there is tremendous pressure everywhere. In fact, we had discussed investment properties of real estate, property, and assets many years ago, if there are certain investment properties in the real estate, so we should moderately relax such restrictions. At present, the largest consumption in China is still housing. If the housing sector is restricted, even if somebody tries to avoid this restriction, there is still tremendous pressure and risk. Under these circumstances, even if the market rebounds, it will be quite limited. Investors are taking a lot of risk on it, and the government is opening up the market, so any effort is also taking a risk. Therefore, this is a big problem and requires policy determination. Once the policy is made, it may not be impossible, China's economy would recover and the endogenous impetus for recovery may be released.

But if we continue to look at it this way, I think this is a big problem. Of course, I personally hope that relevant departments of the government can take some targeted measures from the post-crisis perspective in light of the current crisis. From this policy point of view, we should re-examine and redefine the important role of China's real estate to the national economy, so as to set a new target, do some things and carry out some operations so that the potential of consumption can be released. I think this is the most important point in the future.

Yao Changsheng: Professor Chan talked very peaceful, but his words carried a lot of points. After every economic downturn in China, starting real estate is a very “mature action”, and this action has been repeated several times, and every time it worked, added up to the results we see now. At present, there is a "restriction", and there are also various room and space. I think no one dares to let the market follow the previous action, neither a local government can make such a determination. If we don't follow the action, it’s also not adaptable, because the such action is too mature. It is a pity if we can't utilize this to meet the demand for consumption, release needs, identify the investment properties, control housing prices, and boost the economy. But to achieve this effect, there is no good prescription now.

Chan Kung: I have written an article before, trying to find a simple way for ordinary people to get rich. We can’t expect everybody to be like Elon Musk and make some high-tech stuffs like satellite, falcon rocket. This is simply unrealistic. As a populous country with hundreds of millions of people who only received rural primary school education, there must be a simple way for people to make fortune.

An easy and reliable way to get rich is investing in real estate, the new things such as remote video, blockchain, Big Data, artificial intelligence are too new for old fashioned people like me.

As an aging country, there are about one or two hundred million old folks like me, and it is not easy for us to get involved in such new things. So, this is a problem, it becomes the opportunity for a small number of people that understand the cloud services or high-tech. Thus, as I mentioned, the key is to provide majority of common people a simple way to get rich.

In a nutshell, we must have a redefined thinking about the current situation. This is something that must be done in the post-crisis era. We cannot follow the same way as before the crisis. After a period of major depression, we must establish a "post-crisis awareness" and redefine many issues, so as to ensure that China will continue to maintain its international status in the world with a real recovery.

Yao Changsheng: So, what do you think should be done for the economic recovery? Where shall we start?

Chan Kung: In fact, before the outbreak, there were many discussions about the phenomenon of massive easing in the domestic economic community. There are plenty of people who are deeply concerned about the continued slowdown in China's economic growth since 2012. Of course, I am one of them. But it turned out that it didn't work either. There were a lot of countervailing and opinions from all sides, and everyone wasted their time in these discussions and refuted each other. In the end, the problem is not solved, and then the pandemic came, suddenly we enter into a depression.

We always talk about depression and economic austerity, because this is a big issue. I always want to talk about this issue. I can even describe it as a century of depression. We haven’t encountered such a scale of depression for a long time after World War II. Think about it, in a country like the United States alone, more than 22 million people have lost their jobs, and there were long lines on the street all looking for jobs and unemployment benefits. When I was small, I saw black-and-white pictures of people committing suicide in Wall Street during the Great Depression, and what we are experiencing now is something worse. In the face of such a major crisis, we cannot say that there is a system problem, but there must be a turning point in the system, otherwise there will be no way to explain this phenomenon.

The whole world has become unknown to us, and this is the reality that is now placed in front of us. It's unfamiliar and what we see is surprising. It’s completely strange and uncertain. Anyone who studies finance should know that it is hard to find an authoritative book on the history of financial crises nowadays. There must be a lot of financial history, but few has written about the history of financial crises, because financial crises are so variable and they have so many effects. Someone may have written about the financial crisis, but it is hard to see an authoritative statement and a systemic framework.

Yao Changsheng: Let me ask Mr. Chan, I can understand what you said just now. With my understanding of you, I can understand the seriousness of what you just said, and I hope everyone can feel it too.

If this is something you haven't seen, and someone just said, and you said you were going to reposition yourself, what is your future plan for yourself? You are still so young.

Chan Kung: if you're an old folk like me, it's our pleasure to go off in a corner and watch the younger generation grow up. Now the most important thing is that you should give up any optimistic mood and step forward, engage in real business rather than fancy things, this is my advice to you. I think it is too far away to make another dream, because the situation is getting severe. Therefore, if we do not seek truth from facts, the consequences for this nation and our younger generation will be unbearable and unacceptable. So, we must work hard, and there is no other way.

Yao Changsheng: Well said, countless people praise you in the backstage, your comments were very constructive and useful. Thank you, Mr. Chan, for a good start today that we are able to comment serious things peacefully and calmly. I look forward to inviting you again.

Let me summarize a few points:

1. We need a dream, but more importantly, we need to get back to reality.

2. We must be experiencing a major turning point in history that we have not seen, and it is very likely that we will not be able to go back, now everything is very different from before.

3. There is a lot of “mature actions”, but only those who have the ability can implement them.

4. It will be a test for the policy planners to decide what they can do.

5. Speaking is an art. This is the most important one.

That's all. Thank you, Mr. Chan Kung for coming.

NetEase

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