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Lu Ting, Chief Economist of Nomura Securities China, Director of China Chief Economists Forum

In view of the current economic situation in China, economists have formed two seemingly unquestionable consensuses: interest rate cuts and money distribution. Some scholars believe that as long as interest rates continue to fall sharply, all economic problems can be solved, while some economists firmly believe that as long as money or consumer vouchers are distributed to all people, consumption can be stimulated and domestic demand can be boosted, and the economy can finally be fully revived. We will discuss the issue of interest rate cuts later. This article will first discuss the topic of money distribution. We believe that the best opportunity to distribute money or consumer vouchers to all people has been missed, and it should not be a basic option for the central government. If "money distribution" is to be done, it should be targeted at specific groups, mainly to encourage childbirth and provide basic social security and medical insurance for vulnerable groups in society. This subsidy can take into account stimulating consumption, promoting fairness and enhancing future economic growth potential. It is necessary to govern the soft budget constraints and excessive debt of local governments, but from a macro perspective, in order to stabilize economic growth, it is also necessary to increase the implementation of expansionary fiscal policies. At present, promoting the clearing of the real estate market through "guaranteed delivery of houses", rebuilding the credibility of developers and confidence in government supervision, and boosting domestic demand while maintaining the basic rights and interests of home buyers may be one of the best ways for the government to spend money.

Types of “giving out money” and prerequisites for effectiveness

Policy calls for "giving out money" can be divided into two categories: one is to give money to all people on average, and the other is to give money to specific groups. So far, the suggestions in this regard are mainly to encourage childbirth. Giving out consumer vouchers is similar to giving out money, and can be understood as "giving out money" with a certain period of use and conditions. Recently, some scholars have proposed to give out 1 trillion consumer vouchers during the Golden Week, and some scholars have suggested that 10 trillion consumer vouchers be distributed to all people in installments, both of which belong to this category.

Whether giving money is good or not has specific prerequisites and cannot be generalized. The author believes that there is a key prerequisite for giving money to all people, or to all residents of a specific area, that is, the economy and society suffer extremely severe external shocks. Whether from a humanitarian perspective or from the perspective of maintaining total demand, it is reasonable for the government to give money to residents who have been severely impacted. When the epidemic broke out in 2020, the author also called for indiscriminate cash subsidies to residents in Wuhan and certain areas of Hubei that were under lockdown. From 2020 to 22, Hong Kong has directly distributed cash to adults several times, and also subsidized employers to pay wages. The United States enacted the largest $2 trillion stimulus package in history at the beginning of the epidemic in March 2020, including $1,200 in subsidies for each adult with an annual income of less than $75,000, and assistance for small business employees. In April of that year, the Japanese government announced that it would give each citizen a 100,000 yen (about 6,500 yuan) economic subsidy, with no income restrictions, and non-Japanese residents could also receive it. These cash distributions stabilized employment and consumption and settled people's livelihood. It can be said that they played a key role in the economic and social stability at the time and the post-epidemic economic recovery.

Why is it effective to distribute money in this special context? This is because such shocks are exogenous, not inherent internal problems; such shocks are generally temporary and will not last too long. For the government, it is necessary to quickly distribute money or daily necessities to residents when such exogenous events occur, so as to protect basic people's livelihood and maintain the basic operation of the economy, and prevent the spiral decline between supply and demand caused by sudden shocks, thereby causing secondary damage to the macro-economy. The public will also understand that distributing money is an occasional behavior under special circumstances, and the economy will return to its previous normal situation after the shock, so they will not expect normalized distribution of money. When facing such external shocks, the government only needs to do a good job of relief and maintaining stability, and does not need to rush to solve internal inherent problems. From the perspective of stabilizing demand, under sudden shocks, the proportion of cash used in the current period is also relatively high.

However, in the absence of a severe external shock, we must be extremely cautious about "giving money to everyone". There are several reasons for this. First, if there is no external shock, the sluggish domestic demand must be caused by some internal factors. Giving money to everyone may stimulate some consumption in the short term, but it may not be enough to alleviate the situation, let alone solve the deep-seated problems that lead to the economic downturn. For example, the primary factor causing the current sluggish domestic demand is the huge contraction of the real estate industry in the past three years. At present, housing prices are still falling, and there is still a long way to go to ensure the delivery of houses. Local finances are very tight. In this case, giving everyone a few thousand yuan in the country will have little effect on clearing the real estate market. Even if this method of giving money can play a role in stimulating some consumption in the short term, the chronic diseases in the economy will not disappear automatically like some external shocks. Once the government stops giving money, a "fiscal cliff" will occur, and consumption and economic growth rates will plummet, forcing the government to continue to increase the intensity of giving money to avoid a second economic bottom.

Giving out money may delay the resolution of practical problems. Some people would say that as long as inflation does not occur, money should be given out continuously until the economy is on the right track. But the economic and social operations of the world are much more complicated. Giving out money is a complex process in itself. Giving out money to all people without distinction seems to save some identification costs, but it may not be that simple to distribute cash to every citizen efficiently, honestly and on time. Not every citizen has a bank account, especially the elderly in rural areas. According to the seventh national census bulletin, among the national population in 2020, there were 376 million floating population, 125 million inter-provincial floating population, and 251 million intra-provincial floating population. Giving cash to these people without leakage is actually a complex system engineering, which will consume a lot of administrative resources. In this process, it is also possible to cause a certain degree of corruption and rent-seeking, and consume additional social resources. We also need to consider the crowding-out effect. Even if the government has seemingly unlimited financial resources through printing money, the government's capacity and energy are limited. Once it embarks on the path of continuously distributing money to the entire population, it is likely to delay other matters, including a number of key issues that urgently need to be dealt with in a timely manner, and it may also undermine efforts to promote structural reforms. In the end, distributing money not only fails to truly and sustainably increase demand and put the economy into a virtuous cycle, but may instead delay necessary reforms and market clearing, causing the economy to enter a vicious cycle to some extent.

Giving out money, especially consumer vouchers, may also increase government monopoly. Continuous universal money distribution will also significantly increase government spending and deficits, expand the size of the government, and cause further state-owned enterprises to retreat. Even if local governments can distribute money in an honest and efficient manner, and keep the money within the family, they have a strong motivation to limit the use of funds, especially the use of consumer vouchers, to their own regions. This will affect the formation of a unified national market and even cause a certain degree of marketization regression. Local governments may also try their best to guide the use of the funds or consumer vouchers issued to various platforms and other enterprises owned by local governments, thereby eroding the space for private enterprises.

Finally, the inflation risk of distributing money to everyone cannot be completely ignored. When inflation is extremely low or even deflation occurs, continuous distribution of money may not lead to inflation in the early stages. However, if a society's resources are increasingly used for distribution and rent-seeking, once people's expectations change and they believe that the government is only using the simplest printing of money to cope with the current economic difficulties, inflation may suddenly break out. In fact, there are countless examples of developing countries in Asia, Africa and Latin America in the past few decades that have led to hyperinflation due to the large-scale increase in government spending in conjunction with printing money. Developed countries also have lessons in this regard. A recent example is the inflation in the United States after the epidemic. The $2 trillion bailout plan launched by the US government when the epidemic broke out in 2020 can be said to be reasonable and appropriate, and the deficit rate of 14.9% that year was also understandable. However, after the Biden administration came to power in early 2021, it launched a $1.9 trillion stimulus plan, resulting in the US deficit rate still as high as 12.4% that year, and in the first quarter of that year, the USGDPThe growth rate has rebounded to 1.6%, and soared to 12.0% in the second quarter. It can be said that the excessive stimulus that was not stopped in time directly led to the subsequent high inflation.

In short, the government must think twice before giving money to all citizens. Unless it is to deal with sudden and severe exogenous shocks, it should not be a policy option to boost the economy. Scholars who suggest that the central government should also be cautious when giving money to all citizens. Scholars can cite several examples of good results of giving money during the epidemic, but it is also necessary to know that these examples almost all occurred in developed countries or economies, and they are special policies under extremely special external shocks such as the outbreak of the epidemic. Even in these successful examples, some countries did not reduce the scale of fiscal spending in a timely manner after the epidemic, and what awaits them is high inflation starting in the second half of 2021. Apart from the epidemic, there have been few examples of large-scale money distribution to the entire population in the past few decades. Some developing countries have done something similar to giving money, increasing welfare spending by printing money and large-scale deficits. The final outcome is nothing more than hyperinflation, economic collapse, and even national collapse.

There is no serious external shock to the current Chinese economy. It has been a year and a half since the end of the epidemic; natural disasters did occur, but they were local after all. The global economy is performing well. my country's exports grew by 3.6% year-on-year in the first half of the year, and as high as 8.6% in June. External demand is stable or even strong. The challenges facing my country's economy at present obviously come from domestic demand, especially the sharp decline in real estate in recent years. The shrinking real estate market and some other factors have also led to weak consumption. In June, the year-on-year growth rate of retail sales was only 2%; the new three types of investment, which grew rapidly in the past two years, began to decline this year; local governments have significantly increased taxation and fines, which may also lead to insufficient confidence among entrepreneurs, thus affecting private investment; the decline in the stock market has also led to a sharp decline in stock market financing, which in turn hurts primary market financing. my country's market interest rates have fallen sharply, the ten-year treasury bond interest rate has fallen to around 2.1%, and the financing interest rate of state-owned enterprises has reached a new low. There is not much room to boost credit demand by lowering the benchmark interest rate. In this case, what kind of policy can boost the economy?

How can we boost the economy and how can we “distribute money”?

Under the current situation, combined with the characteristics of my country as a middle-income country in transition, we believe that from the perspective of fiscal and financial, taking into account both short-term stimulus and long-term structural adjustment, the following points can be considered. First, there is both protection and pressure. While strictly controlling the excessive debt of some provinces and cities, the overall fiscal stimulus should be increased. Second, while stabilizing the real estate market, considering the huge impact of the shrinking real estate industry on local finances, while hardening budget constraints, we must be determined to promote tax reforms such as consumption tax, moderately increase the tax sharing ratio of local governments, optimize the transfer payment system, and closely link transfer payments with indicators such as local population inflow, household registration number and school enrollment. Third, grasp the bull's nose and stabilize the real estate market. The core is to protect the basic interests of home buyers as creditors, concentrate central financial resources to do a good job in guaranteeing the delivery of houses, let the real estate market clear, restore the most basic market confidence and order, and do a good job in the supply of affordable housing in the process of guaranteeing the delivery of houses. Fourth, there is selective distribution of money. One focus is to optimize the social security and medical insurance systems, significantly improve the protection level of basic pension insurance for urban and rural residents, and pay a higher proportion of basic medical insurance costs for some people. This will not only increase the income of nearly 170 million low-income elderly people, but also alleviate the worries of 290 million migrant workers and increase their willingness and ability to consume. Another focus is for the central government to directly subsidize childbirth in the form of cash payments.

Because this article discusses "giving out money", we will mainly talk about the last two points. The shrinkage of the real estate industry is the main challenge currently facing the Chinese economy. This industry has already fallen too much, and the impact on China's economy, finance and fiscal affairs has not yet been fully reflected. Some risks have been covered up and will erupt, so it is necessary to take active measures to prevent the real estate industry from falling into a downward spiral. "Guaranteed delivery of buildings" is the basis for supporting the real estate industry and a practical handle. The issue of "guaranteed delivery of buildings" deserves repeated emphasis and is a very critical step in the clearing of the entire real estate industry. Real estate sales in my country are mainly new home sales, and new home sales are mainly pre-sale sales. Pre-sale sales are the futures market, and delivery is the core of the normal operation of this market. Properly solving the problem of guaranteed delivery of buildings is the key to rebuilding market confidence and government credibility, and is a prerequisite for stabilizing and expanding domestic demand. The central government should speed up the investigation and research of the "guaranteed delivery of buildings" problem in various places. In view of the severe financial situation of local governments,commercial BankThere may be great difficulties in promoting the whitelist system. Developers currently find it difficult to raise funds on their own to guarantee the delivery of properties. Therefore, the central government needs to directly provide special funds for "guaranteed delivery of properties" and set up special institutions to promote related work. According to our conservative estimate last year, the funding gap for guaranteed delivery of properties is around 3 trillion yuan. The central government's additional expenditure in this regard is the best economic policy at present from the perspective of protecting the basic interests of home buyers as creditors, maintaining social fairness and justice, accelerating market clearing, and stabilizing economic growth.

The best time for all people to receive money has passed, but it is still necessary to give money to certain specific groups of people. This money should be understood as a policy adjustment and structural reform. The first is to increase the basic pension insurance for vulnerable groups. my country's pension system can be divided into three layers. According to the data in 2022, at the top are retired personnel from government agencies and institutions, with a total of 21.13 million retirees and a monthly average pension of 7,320 yuan per person; in the middle are enterprise employees, with a total of 115.31 million retirees and a monthly average pension of 3,778 yuan per person; at the bottom of the pyramid are urban and rural residents, most of whom are farmers, with a total of 164.64 million people receiving pensions, far exceeding the sum of the first two categories, and a monthly average pension of only 246 yuan per person. It is worth mentioning that at this year's Two Sessions, the State Council increased the monthly pension for this group of people by 20 yuan. Of course, rural elderly people still have some income from land, but it is negligible. In order to cope with future pensions, nearly 300 million migrant workers in my country can only live frugally and dare not consume. Therefore, to encourage consumption of more than half of the population, the most efficient and fair approach is to significantly increase the pensions of this group of people. In the past, Chinese farmers have made great contributions to the country because of the "scissors gap". During the reform and opening up process, several generations of migrant workers have also dedicated their youth to urban construction. Increasing their pensions will also help to promote common prosperity and social equity. According to our calculations, if each person increases by 300 yuan per month, the central government will spend an additional 600 billion yuan per year, which is about 0.5% of GDP; if each person increases by 600 yuan per month, the monthly pension income will increase to 866 yuan, and the central government will spend an additional 1.2 trillion yuan, which is close to 1% of GDP.

The second is to subsidize basic medical insurance for vulnerable groups. my country's medical insurance system is divided into two parts: employees and residents. In 2023, the number of people participating in urban and rural residents' basic medical insurance was 962.93 million, accounting for 68% of the 1.4 billion people, including most farmers and minors. In recent years, residents' medical insurance contributions have steadily increased in various places, and the pressure on payment by rural elderly people has increased significantly. In some places, there has even been a phenomenon of abandonment of insurance. We estimate that if the central government exempts urban and rural residents under 20 and over 60 from medical insurance contributions, it will increase expenditures by about RMB 230 billion each year.

The third category is cash subsidies used to encourage childbirth. In 2022, my country's total population decreased by 850,000, the first decline in 60 years, and the decline widened to 2.08 million in 2023. The number of newborns in my country has fallen sharply since 2018, with only 9.02 million in 2023, a 45% drop from the annual average of 16.36 million from 2003 to 17, and an average annual decline of 9.4% since 2018. At present, my country's total fertility rate may have fallen to 1.0%, far below the 2.1 required to maintain population replacement. The decline in the total population and the proportion of young people are an important reason for suppressing domestic demand. From the supply side, it will also reduce the overall vitality of my country's society and suppress my country's potential growth rate in the future. How to subsidize childbirth, whether there should be a difference between the first, second and third births, and whether to subsidize babies and minors who have already been born, there have been many discussions in academia and industry, and there are many controversies. The policy design will definitely be very complicated. But one thing should be clear, that is, under the condition of limited overall financial resources, it is better to subsidize childbirth in a targeted manner rather than giving money to all people indiscriminately. We believe that in the next few years, an additional fertility cash subsidy of approximately RMB 1 trillion per year could be considered.

In summary, in the next two years, if the central government allocates 1.5 trillion yuan per year for guaranteed housing (a total of 3 trillion yuan), 600 billion yuan per year for urban and rural residents' pension subsidies, 230 billion yuan per year for urban and rural residents' medical insurance subsidies, and 1 trillion yuan per year for birth subsidies, the additional annual expenditure of the central government is 3.33 trillion yuan, which is about 2.5% of this year's GDP. Two years later, the guaranteed housing project is completed, the economic growth rate stabilizes, and this expenditure is terminated. The urban and rural residents' pension subsidies will increase to 1.2 trillion yuan per year, the urban and rural residents' medical subsidies will increase to 400 billion yuan, and the birth subsidies will increase to 1.4 trillion yuan, with a total of 3 trillion yuan. Considering GDP growth, these three subsidies will be about 2% of GDP in the future. We believe that such "giving money" can not only stimulate current domestic demand, but also clear the market, stabilize demand, take into account fairness, and improve future economic growth potential.