By Tianyong Zhou

Since the start of the 21st century, all major global economies have been experiencing a shift to a model of low consumption, low interest rate, low inflation, low growth and high debt. China is no exception. This article argues that in the high-indebtedness economic model, the proportion of committed and guaranteed debt service credit is decreasing, while the proportion of asset-backed credit corresponding to debt is on the rise; and with respect to currency stability, the role of GDP is weakening while that of land and housing-backed assets is strengthening. Therefore, to analyze the scenarios in a high-indebtedness economic model, the underlying model of Fisher’s equation on GDP-money equilibrium needs to be extended, possibly by adding such two macroeconomic variables important for the model that enables the trading and mortgage of land and housing assets and debt, and there is a substitution relationship between both GDP and assets for money supply and debt collateralization. With regards to the dependent variables for money supply, and the independent variables for the supply-side GDP and assets, two base models were respectively built to observe the equilibrium relationship between GDP and assets-money-debt. Finally, we built a base model for the turnover rate from debt to GDP and to assets, as a tool to observe the equilibrium relationship between the core pair of debt and assets. China has adopted a dual system with existing land and housing divided into two parts: non-market resources, means of production and means of living, and tradable land and housing assets. In view of future population shrinkage, downward consumer demand, slowing growth, and increased spending on pensions and healthcare, China has to rise to a trend of high indebtedness and over-expenditure. However, due to future population decrease, weakened rigid consumption and housing demand, as well as population aging, more houses will be released into the market, the supply of new residential assets in cities will shrink relatively or even absolutely, and in turn the demand for land assets out of the need to construct new buildings will also decrease relatively or absolutely. The possible results include: increasingly higher indebtedness, a growing gap in the supply of assets to secure debt collateral credit and stabilize the value of the RMB, and mounting risks to be faced by the financial and national economic system. In the author’s opinion, a necessary and preferred countermeasure to avoid risk outbreaks is to promote asset-based reform of land and housing resources, means of production and means of living, and to increase available land assets through water diversion. In this regard there is a great potential for post-asset reform and post-development of the national land in China. Simulated calculations show that, in the next 15 years, it is totally possible to ensure the security of the debt chain in general and the stability of the RMB’s value in the economic shift to a high-indebtedness model.

Source: @SSRN