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China's Premier just consulted these economists. What's their view on the economy?
Recent analysis from Liu Shangxi, Luo Zhiheng, Tian Xuan, and Huang Xianhai.
Li Qiang, the Chinese premier and a member of the Standing Committee of the Political Bureau of the Communist Party of China Central Committee, presided over an expert symposium on the economic situation on Thursday, July 6. Ding Xuexiang, Vice Premier and also a member of the Standing Committee, attended the symposium.
During the symposium, experts including Liu Shangxi, Luo Zhiheng, Tian Xuan, Huang Xianhai, Yuan Haixia, Qin Hailin, Lu Ming, and Zhao Wei spoke. The official readout didn’t elaborate on what they said at the meeting, but below are some of what they said recently about the Chinese economy before the meeting.
Liu Shangxi is the head of the Chinese Academy of Fiscal Sciences under the Ministry of Finance.
In an interview published by China Newsweek on July 6, Liu said that
It is a consensus among everyone that the recovery is below expectations. Initially, it was believed that the economy would quickly rebound after the change in the situation of epidemic prevention and control. However, it is now evident that the rebound has not been rapid. Based on some economic indicators, there have been signs of economic downturn starting from the second quarter of this year, which is April. This indicates that risks may be spreading and expanding, and there is little disagreement regarding this assessment.
Implementing an active fiscal policy and a prudent monetary policy is clear. However, the adequacy of their intensity and effectiveness is another issue.
The adequacy of the intensity should be judged based on the results. If we only consider the intensity without looking at the effects, it may backfire. First, we need to assess the effectiveness of fiscal and monetary policies. Over the years, the marginal effectiveness of these policies has been diminishing, becoming weaker and weaker. The fundamental reason is that the transmission of fiscal and monetary policies relies on a sound institutional foundation. If this foundation is flawed, the transmission will be hindered, or in other words, an incomplete or unsound system will significantly reduce the effectiveness of policy transmission.
Currently, the institutional foundation is not strong enough. For example, in the financial sector, the institutional foundation of monetary policy depends on the financial system, which requires the establishment of a modern banking system. This system has not been fully established, and the market-oriented structural reform in the financial sector has achieved some results but with limited impact. There has been progress in the reform of the fiscal system as well, but the reform of the central-local fiscal relationship has fallen short of expectations. Therefore, the current difficulties in local finances are closely related to the adjustment of the fiscal relationship between the central and local governments.
Under the current system, the tight operation of local finances may contradict the requirements of an active fiscal policy to enhance intensity and effectiveness. Even if the national fiscal deficit is expanded and the scale of local government bonds is increased, policy signals may face obstacles in transmission. In addition, monetary transmission has encountered similar problems. On the one hand, there has been a substantial increase in the money supply, with money stock growing at double-digit rates, far exceeding the pace of economic growth. On the other hand, deposit growth has outpaced loan growth, indicating a phenomenon of "idle loans" at the macro level.
Structural monetary policy relies on targeted liquidity injections, which fundamentally should be the responsibility of fiscal policy and require fiscal support to be effective. Currently, the effectiveness of the overall quantity-based monetary policy has been diminishing, making it difficult to effectively stimulate businesses and individuals. Business losses are increasing, and many companies are unwilling to take on additional loans. The same is true for individuals. Interest rate cuts have played a certain role, but for private enterprises, the cost of capital remains relatively high.
Relying solely on interest rate cuts cannot solve the root problem. The key lies in how to enhance confidence in future scenarios and stimulate the willingness of businesses to borrow. It is essential to find ways to mobilize and inspire businesses to increase their loan appetite.
Currently, there is actually a way to address the situation, mainly by relying on increased leverage at the central level. Moreover, there is room for the central government to increase leverage because the proportion of national debt to GDP is not high. Currently, the scale of local government debt has exceeded that of the central government, and the effectiveness of relying on local macroeconomic control is declining while the risks are increasing. Therefore, it is necessary to realign and return decision-making and execution of macroeconomic control completely to the central government.
From the current perspective, the regulatory policies of uncertainty need to be adjusted first. Clear negative signals need to be released, and long-term "reassurance pills" should be provided to private enterprises. The old "reassurance pills" may no longer be sufficient. In terms of property rights protection and fair competition review, specific measures need to be taken instead of vague statements. This is crucial for stabilizing expectations and boosting confidence.
Secondly, it is important for the central government to increase leverage, with a focus on promoting the urbanization of migrant workers. Investment projects should be strategically planned around urban clusters and metropolitan areas. Let the market handle what it is capable of, and the government should not crowd out market investment. Instead, it should drive social investment and undertake projects that the market is unwilling or unable to undertake.
Thirdly, it is necessary to harness the positive role of large leading enterprises, such as digital platform companies, in addressing employment issues and driving the development of small and medium-sized enterprises.
In addition to short-term emergency policies, there should also be fundamental policies. Structural reforms are needed to break the rural-urban dual structure and advance people-centered urbanization. Research shows that there is a positive correlation between urban population growth and expanded consumer demand. Only with the continuous expansion of urban population can domestic demand grow. Therefore, there should be significant investment in public services and infrastructure based on population mobility, focusing on these areas. This requires considering the spatial form and making efforts in urban clusters and metropolitan areas.
Equal access to basic public services should break the static regional benchmark. Especially in large cities, reforms should be carried out in housing, healthcare, and education for migrant workers, allowing them to enjoy the same treatment as local residents. Cities need not only low-carbon and green development but also inclusiveness, which greatly enhances social vitality and economic momentum.
Luo Zhiheng is the chief economist at Yuekai Securities. He wrote in June in 中国财政 China State Finance, a journal of the Ministry of Finance
In 2023, China's economic and social development is facing new circumstances, and there are new changes in the fiscal situation and the risks faced by the fiscal sector. Overall, there are three levels of consideration:
Firstly, there are risks in the fiscal operation itself. Maintaining fiscal balance remains a priority, and preventing and resolving the hidden debt of local governments is of utmost importance.
Secondly, economic and social risks are becoming fiscal risks. Efforts from the fiscal sector are needed to mitigate risks in areas such as real estate and finance. This will further elevate fiscal risks.
Thirdly, institutional factors contribute to fiscal risks, especially the increase in debt. Factors such as an excessively large scope of government functions and expenditure responsibilities, as well as the continued emphasis on government performance and regional competition, have not been fundamentally addressed and contribute to the rise in fiscal risks.
Risk prevention should be based on promoting high-quality development and leveraging the synergistic coordination between fiscal policy and other policies.
First, when preventing and resolving risks, it is important to strike a balance with economic development and avoid triggering greater risks in the process. The current economic situation implies that fiscal policy needs to continue exerting efforts to expand overall demand. Specific measures should be implemented to further reduce taxes and fees for manufacturing, small and micro enterprises, and individual businesses. The progress of special government bond issuance should be accelerated, and funds should be allocated to specific projects.
Second, it is crucial to establish a firewall between economic and social risks and fiscal risks. When economic and social risks such as real estate and financial risks occur, they should be addressed within the relevant sectors to prevent risk contagion.
Third, there should be enhanced coordination between economic policies and non-economic policies, as well as between fiscal and non-fiscal policies. Non-economic policies can play a significant role in boosting confidence and expectations, creating a better external environment for the implementation of economic policies. From January to May this year, private investment decreased by 0.1% compared to the previous year, and the growth rate of manufacturing investment declined. These reflect the insufficient confidence of market entities. Fiscal policy and other policies need to further stimulate microeconomic vitality and boost confidence and expectations.
Enhancing the coordination of fiscal resources, optimizing expenditure structure, and strengthening debt management.
First, it is important to coordinate fiscal resources, mobilize existing funds, and further leverage the advantages of the state-owned economy.
Second, stabilize the macro tax burden, with expenditure policies as the main focus and revenue policies as complementary measures.
Third, optimize the expenditure structure and improve expenditure efficiency. Allocate limited funds to areas that promote high-quality development, such as technological innovation, improvement of people's well-being, and infrastructure investment. Reduce general expenditures and further improve performance management.
Fourth, continue to increase fiscal transfers from the central government to local governments, from provinces to cities and counties, to alleviate the fiscal imbalance and liquidity payment risks.
Fifth, strengthen debt management and gradually mitigate the hidden debt risks of local governments. Strengthen accountability, enforce budget constraints, and prevent the accumulation of new hidden debts. For existing debt, overall risk-sharing with financial institutions can be pursued. Through market-oriented negotiations, costs can be reduced and the maturity structure can be optimized, exchanging time for space to avoid the problem of concentrated repayment and the risk of fund chain rupture. Guide urban investment platforms to transform into state-owned enterprises, establish standardized corporate governance structures, and explore new business models.
Reform institutional mechanisms to clearly define the government's functions and expenditure scale through market-oriented and rule-of-law approaches. The complexity of internal and external environments and the stage of economic development determine that fiscal risks will continue to increase, and the difficulty of preventing and resolving risks will also increase. Therefore, more reform measures should be taken to mitigate risks.
Specifically, regarding the issue of local government debt, especially hidden debt, it is necessary to further clarify the relationship between the government and the market, define the government's size and expenditure responsibilities, and prevent local governments, especially county-level governments, from falling into a state of near-unlimited liability. At the same time, it is important to establish incentive mechanisms that are more accommodating and provide due diligence and accountability for local governments.
TIAN Xuan is currently Associate Dean and Chair Professor of Finance at PBC (People’s Bank of China) School of Finance, Tsinghua University.
Before joining Tsinghua, He was a Professor of Finance with tenure at Kelley School of Business of Indiana University. Professor Tian received his Ph.D. from Boston College in 2008, M.A. from the University of Washington, and B.A. from Beijing University, China, in 2001. Prof. Tian’s articles won the 2012 Jensen Prize (2nd place) and 2019 Jensen Prize (1st place) for best paper published in the areas of corporate finance and organizations in the Journal of Financial Economics.
Tian told a public forum at the end of June that encouraging innovation requires a "tolerant" financial market
Firstly, there should be a high tolerance for failure. Venture capital funds with shorter durations often invest in mid-to-late-stage projects that have relatively stable development and clear business models, helping them go public through packaging. Funds with longer durations can invest in early-stage projects and gradually nurture and support companies, allowing them to continuously explore and experiment. Research has shown that lead venture capital investors with a higher tolerance for failure tend to result in a higher quantity and quality of innovation after the invested companies go public.
Secondly, long-term institutional investors should play a crucial role. Take institutions such as retirement funds, pension funds, and university endowments in the United States as examples. They often prioritize long-term stable cash flows over short-term returns. This "patient capital" can provide long-term funding for innovative startups and effectively monitor their development.
Thirdly, information disclosure should not be overly frequent. While ensuring that companies disclose information truthfully, accurately, completely, timely, and fairly, incentivizing innovation also means that disclosures should not be excessively frequent. This can potentially create short-term pressures for companies and lead to short-sighted management decisions.
Fourthly, more open capital markets are essential. Research has shown that when a country's capital and financial markets are opened, the quantity and quality of innovation, as well as the number of innovative companies, significantly increase. The entry of foreign institutional investors can lower financing costs, improve corporate governance, and help companies share innovation risks.
Lastly, a more stable macro policy orientation is important. Uncertainty and instability in macro policies have a significant negative impact on innovation. When entrepreneurs are uncertain about policy directions, they tend to adopt a wait-and-see approach and focus on short-term investments rather than long-term ones. Therefore, incentivizing innovation requires maintaining the continuity, stability, and targeted nature of macro policies, avoiding frequent changes.
The current global digital economic and trade rules system is presenting new opportunities, and the digital economy open models of major countries can be categorized into the US model, the EU model, and the Chinese model.
China faces challenges in terms of rules for data cross-border flow and cross-border trade in services in its applications to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Digital Economy Partnership Agreement (DEPA). There are explorations and practices carried out in Hainan, Guangdong, Shanghai, Beijing, and other regions of China in the field of digital economic and trade rules.
Since the standards of CPTPP and DEPA are much higher than the Regional Comprehensive Economic Partnership (RCEP) agreement that China has already signed, China urgently needs to take proactive actions in its institutional construction and global rules alignment. It should conduct pressure tests in free trade pilot zones that possess the necessary conditions and capabilities for pressure testing.
Three suggestions regarding strategic choices. First, actively participate in multilateral and bilateral negotiations on digital economic and trade agreements and proactively align with generally acceptable provisions. Second, accelerate domestic legislative reforms and, while ensuring national security and data privacy, accept [international] clauses with lower difficulties. Third, advocate for an open and inclusive global digital economic and trade rules system to gain buffer time for accepting more challenging provisions.
For the publicly available analysis of the remaining experts- Yuan Haixia, Qin Hailin, Lu Ming, and Zhao Wei - about the Chinese economy, check The East is Read