Wu Ge: Take precautions to deal with global downward risks and set targets to establish reasonable e

May 6th,The Tsinghua PBC School of Finance Chief Economist Forum focused on "Global Financial Turmoil and Economic Outlook in 2023".The forum, themed "Finance and Economics Research at Tsinghua University's PBC School of Finance," was held at Tsinghua University's PBC School of Finance. Hosted by the PBC School of Finance and organized by the Center for International Finance and Economics Research (CIFER) at Tsinghua University's PBC School of Finance, the forum combined online and offline participation, with live streaming in both Chinese and English, and was shared globally.Chief Economist of Changjiang SecuritiesWu GeAttending the second roundtable discussion at the forum“Global financial turmoil and China's financial market”Share your views.

Wu GeSpeech transcription:

To prepare for global downside risks, set targets and establish reasonable economic expectations.   

Wu Ge

The two speakers have already covered everything comprehensively. The pressure will only increase as we go on, and the greatest pressure should be on Dean Zhang. I always feel that our research on overseas issues, for various reasons, seems somewhat superficial. Perhaps it's due to my limited access to information, or perhaps it's because we're based in China. I often think about how we can be smarter than overseas researchers and stay ahead of Wall Street analysts.

After so many years of effort and exploration, I personally feel it's quite difficult. The information we receive is often passive. No matter how bearish we are on the US, does it really develop in our direction afterward? Frankly speaking, if everything were transparent, I think it might be manageable. The key is the things happening behind the scenes, or new indicators, or the fact that finance is stable here, and overseas markets are stable here—what impact do these have on China? Let me discuss two questions:

The first question is, even if the Federal Reserve stops raising interest rates today, even if the banking crisis in Europe and the US stops here, and everything is okay, what does it really mean for China? Does it mean we're already facing a bright future with spring in our lives? No, because we know that every policy and every event has a cause and a result, and the result is a further cause of what happens later. Therefore, in our research, we emphasize forward-looking predictions rather than hindsight. Looking at various forward-looking indicators, even if the Federal Reserve stops raising interest rates now, and central banks in Europe and the US stop raising rates, the impact on the global economic cycle will be at least six months, or even more than a year. We often learn in textbooks about the delayed effects of policies.

Whether it's the subsequent impact of the Fed's interest rate hike or the contraction of national credit caused by the banking crisis, which also played a role in the Fed's interest rate hike, it means that in the next six months to a year, China can see the prospects of the global economy from across the Pacific. In the next six months to a year, the downside risks may far outweigh the upside risks, so I think this is something we have to prepare for in advance.

The second question isn't just about the immediate struggles; it's about a more philosophical and idealistic perspective. It's not about whether the stock market is up or down, or whether the economy is hot or cold; it's about the inner workings of people's minds, about expectations. This is something the central government frequently discusses, including the weakening of expectations. When we were children, we often heard the story of "The Boy Who Cried Wolf." Even as children, if adults told the same story and it didn't come true, we would doubt it. For a country's government, a country's central bank, if your judgments are constantly proven wrong by the market, will people still trust you? We are all adults; do we still believe in this "boy who cried wolf" fairy tale?

As everyone has sensed, the Federal Reserve, in particular, has faced this drastic challenge in recent times. As you know, the US has been attempting to explore forward guidance—as a voting member of the Fed, I periodically release my views on the future, forming a dot plot outlining future interest rate hikes. However, this forward guidance, or the initial assumption that inflation was temporary, has been repeatedly proven false by reality. After multiple failures and multiple rounds of debate, people have lost faith in it. This loss of trust is a very dangerous thing.

In our past research on central banks and monetary policy, we believed that the highest level of monetary policy wasn't about aggressive tactics like adjusting interest rates and credit in the open market. Rather, it was more akin to the concept of "subduing the enemy without fighting," as emphasized in Sun Tzu's Art of War. It was like Zhuge Liang standing on a city wall; seeing him, you believed he hadn't made many mistakes before, and you naturally retreated. If he said inflation was temporary, we believed him, and as a result, people stopped panic buying food, and indeed, inflation proved to be temporary. Therefore, establishing this credibility is crucial.

Both Dr. Guan and Dr. Shen have touched upon the issue of the significant discrepancy between market expectations and the Fed's expectations. For example, the consensus expectation from Wall Street's Brookings, as Bloomberg just mentioned, is that the Fed has increased its rate by 25 basis points, which may level off in the coming months, with a more consistent expectation emerging in the second half of the year that the Fed will cut rates three times. However, Powell, at least based on his statements, doesn't seem to think so, implying that a rate cut is unlikely. We haven't seen such a large divergence between the market and the Fed in many years. What does this large divergence mean? Either the market follows the Fed, or the Fed ultimately follows the market; overall, it leads to volatility. This high degree of skepticism and uncertainty about the future, I think, is actually more critical.

What I'm saying, though we're talking about across the ocean, suddenly reminds me of the so-called weakening expectations in China. I think this is also crucial for Chinese policymakers. Whatever is set, achieving it, no matter how many difficulties are encountered, I expect and believe that in the near future, the goals set by China, including economic growth and high-quality growth, will indeed be achieved. The weakening of public expectations is primarily based on trust in the government and the words and actions of officials. Thank you.