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if there is a package of plans to expand domestic demand of sufficient scale, coupled with monetary policy, then we should have enough confidence in the stabilization and recovery of china's economy.

article | "finance" reporter zou biying

editor | wang yanchun

after the central bank introduced its new monetary policy, the meeting of the political bureau of the cpc central committee received unusual attention.

on september 26, the political bureau of the cpc central committee held a meeting to analyze and study the current economic situation and plan the next economic work. the meeting pointed out that it is necessary to effectively implement existing policies, step up efforts to launch incremental policies, further improve the pertinence and effectiveness of policy measures, and strive to complete the annual economic and social development goals and tasks. according to this year’s two sessions, the economic growth target in 2024 is about 5%.

the politburo meeting’s statements on fiscal policy, monetary policy, and real estate policy include: it is necessary to issue and use ultra-long-term special treasury bonds and local government special bonds to better play the role of government investment in driving. it is necessary to lower the deposit reserve ratio and implement a strong interest rate cut. to promote the real estate market to stop falling and stabilize, we must strictly control the increment of commercial housing construction, optimize the stock, improve the quality, increase the loan supply for "white list" projects, and support the revitalization of existing idle land.

previously, monetary policy had taken the lead. on september 24, pan gongsheng, governor of the central bank, announced three major supportive monetary policy measures at a press conference of the state council information office. the first is to reduce the total reserve requirement ratio and interest rates, including lowering the deposit reserve ratio by 0.5 percentage points. the second is to support five policies for the real estate market, including guiding commercial banks to lower existing mortgage interest rates. the third is to create two major tools, "securities, funds and insurance company swap facilities" and "special re-lending for stock buybacks and increase holdings" to support the stock market.

space for china's monetary policy is opening up. since march 2024, economies such as sweden, switzerland, mexico, canada, the united kingdom, and the eurozone have successively announced interest rate cuts. in the early morning of september 19th, beijing time, the u.s. federal reserve announced that it would lower the target range of the federal funds rate by 50 basis points, marking the first rate cut in four years since the covid-19 outbreak. according to outside analysis, the interest rate gap between china and the united states has narrowed and exchange rate constraints have weakened, and the constraints on the monetary policies of other countries will also be reduced accordingly.

the ensuing discussion is whether china's macroeconomic policies can open up more room for stimulus. on september 24, liu shijin, former deputy director of the development research center of the state council, suggested at the china macroeconomic forum (cmf) to mainly raise funds through the issuance of ultra-long-term special treasury bonds. the scale of economic stimulus is 100 million yuan. the total gdp in 2023 will reach 126 trillion yuan, and the scale of the stimulus plan can be determined based on 10% of gdp (gross domestic product).

the series of measures released positive signals, and the chinese stock market soared accordingly. the csi 300 index and the hong kong hang seng index rose sharply in the past few days, and the shanghai stock exchange index recovered 3,000 points. scholars interviewed said that boosting market sentiment and public confidence is the key at the moment, and what is even more critical is the implementation of the measures while handling some challenges that may arise during the implementation process.

look at the current economic situation objectively and calmly

according to data from the national bureau of statistics, china's gdp grew by 5.3% year-on-year in the first quarter and 4.7% in the second quarter. the cmf quarterly report predicts that the growth rate in the third quarter will be around 4.7%.

at present, macroeconomic data is not optimistic. taking the daily consumption of residents as an example, the growth rate reached 10.1% in november last year, and then the number continued to decline, hovering around 3%. in august, total retail sales of consumer goods increased by 2.1% year-on-year. at the same time, prices are still hovering at low levels. in august, the national consumer price index (cpi) increased by 0.6% year-on-year.

the investment enthusiasm of private capital and foreign capital is sluggish. according to data from the ministry of commerce, china's actual use of foreign capital dropped by 31.5% year-on-year from january to august 2024. from january to august, the growth rate of private investment in fixed asset investment was negative, at -0.2%.

corporate profit growth slowed. from january to august, the total profits of industrial enterprises above designated size nationwide increased by 0.5% year-on-year. at the same time, the latest unemployment rate data by age group released by the national bureau of statistics showed that the unemployment rate of the labor force aged 16-24 excluding school students rose by 1.7 percentage points to 18.8% in august, the highest level since the data was released in december 2023. the highest point.

economist ren zeping's team analyzed that ppi has been experiencing negative growth for more than 20 consecutive months, and cpi has been hovering near zero, which is rare. the stock market and real estate market have continued to decline for the past three years. major stock indexes, excluding bank stocks, generally fell by more than half, and the gem index fell by more than half. from january to august, the sales area of ​​newly built commercial housing fell by 18.0% year-on-year, and the average price drop in first- and second-tier cities was 30%. house prices in outer suburbs and third- and fourth-tier cities have even halved. china's short-term economic performance is not optimistic.

according to teng tai, president of wanbo new economic research institute, compared with 2008 and 2009, the economic challenge we face this time is not external shocks, but structural insufficient domestic demand - on the one hand, due to industrialization and urbanization the peak has passed and investment has been excessive; on the other hand, residents' income growth is slow and residents' consumption is insufficient.

teng tai pointed out that economic growth is declining year by year, prices are low, real estate investment is negative, the stock market has been falling for a long time, the unemployment rate among young people is high, the debt burden of local governments is increasing, and the fiscal expenditure gap is widening. these conditions have brought about greater challenges than in 2008. perhaps the external shock in 2009 will be more severe.

teng tai pointed out that in order to allow young people to have better employment and development prospects; to boost consumption and enable companies to sell their products better; to resolve real estate risks, boost confidence in the stock market, and allow families to have more property income ; in order to avoid the risk of deflation and reverse the decline in corporate profits or even losses; in order to change the recession trend of corporate and household balance sheets, and to improve the gap in local government fiscal revenue and expenditure as soon as possible, a large-scale plan to expand domestic demand should be launched as soon as possible.

in fact, in recent years, the chinese government has introduced a series of measures to expand domestic demand, including fiscal, monetary and other boosting policies.

taking fiscal policy as an example, during the special period in 2020, the deficit rate increased from 2.8% to more than 3.6%, and the deficit increased by 1 trillion yuan compared with 2019, reaching 3.76 trillion yuan. in 2020, 1 trillion yuan of special treasury bonds will be issued, and in 2023, an additional 1 trillion yuan of treasury bonds will be issued (for special treasury bond management). in 2024, the national two sessions decided to issue ultra-long-term special treasury bonds for several consecutive years starting from this year. this year, 10,000 yuan will be issued first. billion. in addition, there are trillions of tax and fee reduction preferential policies every year.

many policies to expand domestic demand, in addition to consumer vouchers in various regions, also include the central government's measures to boost the private economy, encourage private investment, issue work-relief measures for central investment, support large-scale equipment updates, and promote the replacement of old consumer goods with new ones.

in recent years, china's monetary policy has been more cautious than that of developed countries, but changes in recent days have far exceeded market expectations.

zhu haibin, chief economist of jp morgan china, pointed out that the central bank’s latest policy can be said to be the most comprehensive easing policy since 2015. while individual measures are not surprising (e.g., interest rate cuts, rrr cuts, mortgage financing, lower down payment requirements for second-home mortgages), the overall intensity is higher than j.p. morgan’s forecast (e.g., rrr cuts, policy rate cuts, down payment requirements for second home mortgages), while adopting a package of comprehensive measures clearly aimed at restoring market confidence.

signals released by stronger stimulation

experts interviewed said that the thinking of decision-makers has begun to change, which is a very good opportunity to boost market confidence.

real estate and consumption are one of the key sources affecting the lifeblood of china's economy. according to the new policy of the central bank, the interest rate of existing mortgage loans will drop to near the interest rate of new loans, and the average decrease is expected to be around 0.5 percentage points. this will benefit 50 million households and a population of 150 million, reducing the average annual household interest expense by about 150 billion yuan.

zhu haibin believes that the impact of this measure on promoting consumption remains to be seen. first, beneficiary households may choose to save, especially when income and employment expectations are weak; second, falling deposit interest rates and stable net interest margins indicate that this is actually a cross-subsidization of household savings to mortgage borrowers, so it the net impact on consumption is likely to be limited.

it is worth noting that the central bank’s new policy also announced that the minimum down payment ratio for second home loans at the national level will be reduced from 25% to 15%, and the minimum down payment ratio for first and second home loans will be unified. in this regard, zhu haibin analyzed that the central bank had previously created a 300 billion yuan re-lending mechanism to support affordable housing, providing 60% of bank loan principal to regional state-owned enterprises to purchase unsold houses. it is worth noting that as of the end of the second quarter, only 12.1 billion yuan of the 300 billion yuan re-lending quota had been used. home sales in september were lower than expected, and traditional demand-side easing measures (easing mortgage policies and home purchase restrictions) are difficult to solve problems such as weak income and house price expectations and concerns about home delivery.

not limited to the housing market, yu yongding, a member of the chinese academy of social sciences, suggested in a recent interview that the government should announce a large-scale, comprehensive stimulus package to send a strong signal to the market, enhance confidence and boost morale. “if it’s too late to do it this year, then do it next year. we can’t act too hastily, but we can’t delay the release of policy signals.”

yu yongding believes that judging from the current situation, it is quite difficult to achieve an economic growth rate of 5%. under the current "quasi-deflation" situation, the role of monetary policy is limited. in the next step, fiscal expansion must be significantly increased. according to the calculations at the beginning of the year, if the consumption growth rate in 2024 is 5% (synchronized with the planned gdp growth rate), and the real estate and manufacturing investment growth rates are the same as in 2023 (-9.6% and 6.5%), it will be necessary to achieve a gdp of 5% as for the growth rate target, the growth rate of infrastructure investment should reach double digits and the scale should reach more than 20 trillion yuan.

liu shijin suggested that the economy should be driven back to the expansionary growth track through a package of stimulus and reform economic revitalization plans. different from 2008, the focus is on making up for shortcomings in basic public services, with investment in human capital as the focus. it is recommended to focus on driving consumption at the micro level, and at the same time drive investment in real estate, infrastructure, service industries and other industries to a certain extent to substantially expand domestic demand.

liu shijin believes that insufficient macroeconomic aggregate demand is a basic fact, which is almost uncontroversial. it is also common sense to adopt stimulus policies when aggregate demand is obviously insufficient. however, it is necessary to distinguish the problems caused by insufficient aggregate demand from the causes of insufficient aggregate demand, and in particular, it is necessary to clarify what factors lead to insufficient aggregate demand. otherwise, even if stimulus policies are adopted, they may not be effective, and may even aggravate the problem instead of solving it, and even delay favorable opportunities.

the 10 trillion stimulus scale mentioned by liu shijin has two major breakthrough directions. first, we will vigorously improve the level of basic public services in affordable housing, education, medical care, social security, and elderly care for new citizens, mainly migrant workers in cities. the short-term focus is for the government to acquire unsaleable housing and convert it into affordable housing to provide it to new citizens. housing improvement drives consumption of decoration, furniture, home appliances, etc. family reunions drive demand for education, medical care and elderly care. improving social security can reduce worries.

the second is to accelerate the construction of small and medium-sized towns within the metropolitan area and drive china's second wave of urbanization. he pointed out that based on international experience, core cities within urban agglomerations and metropolitan areas usually account for about 30% of the urban population. there is still huge room for development in small and medium-sized towns outside core cities, which can accommodate more than 60% of the urban population; they are also suitable for the agglomeration of manufacturing and mid- to low-end service industries. within this scope, there is still room for development in real estate, infrastructure, etc.

however, many economists are wary of large-scale economic stimulus, especially the continued expansion of infrastructure investment. li daokui, dean of the institute of chinese economic thought and practice at tsinghua university, pointed out that china’s economy does not need strong stimulus. it is like a weak patient who takes a lot of supplements when he is very weak. on the contrary, they will not have the effect and are more likely to cause new problems.

li daokui believes that china's economic infrastructure is already quite complete, and continuing to invest in infrastructure will bring bigger problems. of course, the level of social services of local governments needs to be improved, but if a large amount of money is suddenly spent to improve social welfare and social public services, subsequent financial resources may not be able to keep up, leaving long-term hidden dangers. the current problem of china's economy is that there is no flow and congestion. the real economy is extremely short of cash flow. on the other hand, banks have accumulated a large amount of funds. issuing long-term treasury bonds is the answer. only when financial institutions purchase long-term treasury bonds and the central government replaces local government bonds with long-term treasury bonds can the cycle be opened up.

li daokui believes that the infrastructure cycle superimposed on the real estate cycle has led to a cold economy. the infrastructure construction that has lasted for nearly two decades has led to increased pressure on short-term debt repayments, and the upsurge in urbanization and real estate construction has come to an end. it is recommended that the state issue bonds and banks use the money to buy central long-term bonds to offset the impact of the cycle and allow local governments to restore their due economic vitality.

boost confidence and reverse income distribution pattern

economists said that the stimulus plan is mainly to "inject liquidity into the market" and then predicted that china also needs "a package of reforms to fundamentally reshape the economy and release the potential for consumption growth." reforms are urgently needed to improve income distribution and improve residents' consumption.

wang xiaolu, deputy director of the national economic research institute, remains vigilant about expanding infrastructure investment. wang xiaolu said that according to keynesian theory, when effective market demand is insufficient, the government should adopt expansionary fiscal policies, and the government should directly expand investment, or use expansionary monetary policies to stimulate investment to expand aggregate demand and maintain economic stability. increase.

wang xiaolu believes that keynesian policies are only suitable for short-term policies under certain special conditions. blindly stimulating investment will lead to higher and higher investment rates, lower and lower consumption rates, and excessive expansion of production capacity. it is better to focus government expenditure on solving people's livelihood problems and alleviate worries about social security. this will play a positive role in improving income distribution and boosting consumer demand. in the 1930s, during the great depression of the united states, roosevelt's new deal promoted economic recovery mainly through policies to improve people's livelihood and stabilize the financial system, such as unemployment relief and the establishment of a social security system.

wang xiaolu said that roosevelt’s new deal was misunderstood as a keynesian macro policy. in fact, government investment during roosevelt's new deal was limited and monetary policy was very restrained, which was fundamentally different from keynesian expansionary policies.

wang xiaolu recalled that during roosevelt’s new deal (1934-1940), the u.s. government’s social welfare expenditures grew at an average annual rate of 10.2%. in 1932, public welfare expenditures accounted for 34.6% of government expenditures, and in 1934 this proportion rose sharply to 45.5%. increased welfare expenditures during the crisis, especially unemployment benefits, were later diverted to the establishment of social security systems. the proportion of many other expenditure items has declined. this means that during the new deal, the government expenditure structure was adjusted to focus on improving people's livelihood. with these measures, the u.s. economy began to recover strongly in 1934, with an average growth rate of 7.0% from 1934 to 1940.

liu shijin also pointed out that the basic situation in china at this stage is that the middle-income group roughly accounts for one-third, or about 400 million people; below this there are more than 900 million low-income groups, accounting for two-thirds. the gini coefficient has remained above 0.4 for many years, and some studies suggest it is at 0.45 or higher. the current lack of demand is directly related to this demand structure.

liu shijin analyzed that from international experience, economies that maintain medium-speed growth for a long time generally have a relatively low gini coefficient (below 0.4). a larger middle-income group can release larger-scale, longer-term demand and support medium-speed growth for a longer period of time. on the contrary, if the income gap is large and the size of the middle-income group is small, when the demand potential of this group is generally released, growth is likely to slow down significantly, leading to a dilemma of low speed or even stagnation.

liu shijin pointed out that after world war ii, dozens of economies began to industrialize, but very few economies entered the high-income stage from the middle-income stage. the only large economies were japan and south korea. around us$10,000 is a special unstable node. more countries have relapsed or retreated at this node, falling into the so-called "middle-income trap." it is recommended to take the implementation of the economic revitalization plan as an opportunity and strive to increase the population of the middle-income group from 400 million to 800-900 million in about ten years.

wang xiaolu pointed out that improving social security is a top priority at present. there are approximately 460 million urban workers in china, a quarter to half of whom are not covered by urban social security. based on statistics on the number of urban employees, the proportion not included in the basic pension insurance for urban employees in 2021 will be approximately 25%, the proportion not included in the medical insurance for urban employees will be approximately 24%, and the proportion not included in unemployment insurance will be approximately 51%. on the basis of market allocation of resources, the government should maintain good rule of law and assume more responsibilities to solve people's livelihood problems.

teng tai also said that if there is a package of plans to expand domestic demand of sufficient scale and coupled with monetary policy, then we should have enough confidence in the stabilization and recovery of china's economy. a few decades ago, china had no technology, talent, or manufacturing capabilities. chips and industrial software were created from scratch. the current difficulty is just to boost demand and smooth the economic cycle.