Chinese economists were pleading for govt action
Chinese economists were pleading for govt action
Ren Zeping's almost frantic call one week ahead of Beijing's dramatic loosening of monetary policy
Before the People’s Bank of China’s unusually bold, if not unprecedented, big bang last week to boost investor sentiments, the frustration with Beijing’s apparent lack of urgency in aiding the world’s second-largest economy grew increasingly apparent.
One of the signs was an article by Ren Zeping in the week before, where Ren listed a long list of economic woes and sounded almost as if pleading with Beijing to take action - if you know how to read between the lines.
To those unfamiliar with how public discussions on China’s public policies are conducted these days, the first paragraph of his cautiously-titled “Reflections on Objectively Understanding the Current Economic Situation and Boosting Market Confidence” prompts the question of why he had to write the piece at all. Equally interesting is his last paragraph of going overboard to profess optimism. His brief 2022 ban from Chinese social media for proposing a two-trillion-yuan aid to cushion China’s falling birth rates, reported by the Global Times at the time, probably taught him a lesson or two on how to deliver policy advice publicly, even on something most would say is apolitical and technical.
Ren started his career as an economist at the Development Research Center of the State Council and then worked for non-governmental employers. His past positions include chief economists at leading domestic securities brokerages and Vice President and Chief Economist of the now defunct China Evergrande Group. Ren has a vast following on Chinese social media.
关于客观认识当前经济形势、提振市场信心的思考
Reflections on Objectively Understanding the Current Economic Situation and Boosting Market Confidence
China has made notable advancements in several domains, particularly in infrastructure development, renewable energy, and productivity, leading to its ascension as a leading global force. Concurrently, the country has achieved commendable results in regulating housing prices, reducing leverage, and addressing local government debt. These actions have effectively resolved real estate bubbles and financial risks. The government has demonstrated remarkable determination and courage by confronting numerous intractable historical challenges, thereby establishing a robust foundation for sustainable high-quality development.
However, the short-term economic outlook remains bleak, with a continuous decline and even extraordinary adjustments in economic performance. The Producer Price Index (PPI) has experienced over 20 months of negative growth, while the Consumer Price Index (CPI) hovers around zero—an exceptionally rare occurrence, indicating significant deflationary pressure. The stock and real estate markets have declined for nearly three years, with major stock indices, excluding banking shares, experiencing drops of over 50%, and the ChiNext index plummeting by more than half. From January to August, the area of newly sold commercial housing fell by 18.0% year-on-year, with average housing prices in first- and second-tier cities dropping by around 30%, and prices in suburban and third- to fourth-tier cities halving. Residents' assets have significantly shrunk, leading to a downgrade in consumption.
Local governments are confronted with significant fiscal challenges, with non-tax revenue, comprising fines and confiscations, exhibiting atypical growth. In the context of a national decline in tax revenue of 5.4% over the period from January to July, non-tax revenue has demonstrated a notable increase of 12%, reaching a total of 2.44 trillion yuan. Delayed wage payments among local government employees have become a common occurrence, and numerous small and medium-sized enterprises are owed payments by local governments, resulting in waves of layoffs and salary cuts. More significantly, market confidence has been eroded, engendering a sense of insecurity among businesses and precipitating a prolonged period of negative growth in private investment, concomitant with the ascendance of a "lying flat" culture.
As indicated by data from numerous universities, the employment landscape for recent graduates has been markedly challenging over the past three years, largely due to economic downturns and corporate restructuring. This has led to a vicious cycle of elevated unemployment rates and constrained consumer spending.
A notable divergence exists between macroeconomic data and microeconomic perceptions. On one hand, statistical data is influenced by survivor bias, as metrics such as industrial production and corporate profits pertain primarily to large-scale enterprises, obscuring the reality of many small and medium-sized enterprises' bankruptcies. The precipitous decline in new business registrations and the concomitant increase in deregistrations provide corroboration for this assertion. On the other hand, due to concerns about accountability, certain departments and localities report only positive developments, contributing to the distortion of macroeconomic statistics regarding the actual operational state of the economy.
The challenges stem from a lack of confidence and inadequate domestic demand, largely attributable to the persistent decline in the real estate market, the significant capital outlays associated with local governments' debt management, and the continued implementation or intensification of certain contractionary measures.
In light of the evident de-leveraging of real estate bubbles, significant reductions in financial leverage, and the Federal Reserve's shift toward interest rate cuts, favorable conditions for fiscal and monetary policy adjustments have emerged. This represents a crucial opportunity to implement comprehensive measures with the objective of enhancing market confidence.
Introduce 4-5 trillion yuan in local bonds or special treasury bonds to alleviate local governments' fiscal difficulties and reduce the burden on owed enterprises. Simultaneously, formulate a nationwide comprehensive debt management plan, ensuring that local governments, financial institutions, and other stakeholders share responsibilities. Establish regulations and administrative measures to create a local government asset trading mechanism, allowing local governments to use assets to resolve existing debt. Ultimately, achieve the reforms outlined in the Third Plenary Session, compiling balance sheets for governments at all levels and leveraging local people's congresses to control the generation of new debt.
The issue of hidden debt among local governments is a pressing one that demands careful consideration. While the necessity of addressing this debt is clear, the most appropriate methodology for doing so is a matter that warrants further reflection. In recent years, the recurrent deficit of local governments has reached 4.2 trillion yuan, and their financial resources have been severely constrained. It is therefore impractical to expect local governments to address their hidden debt independently. Many local governments are unable to repay the interest on their debts, let alone the principal, due to the constraints of their existing financial resources. The dual pressures of mounting debt and reduced local revenue have compelled these governments to explore avenues for revenue enhancement, including the diversion of confiscated revenue and the implementation of salary cuts and arrears. The fiscal contraction of local governments has contributed to the lack of domestic demand.
Launch large-scale economic stimulus measures to significantly expand domestic demand, stimulate employment, and ensure that adjustments are gradual while urgent interventions are made to stabilize the market. Promote substantial investments in green power stations and new energy systems to absorb excess capacity in renewable energy sectors, expedite the achievement of China’s carbon peak and neutrality goals, and greatly reduce the costs of green energy, enhancing China's competitiveness in the global green economy. Provide childbirth subsidies for families with two or more children to boost birth rates and consumption. Implement a comprehensive package of market confidence-boosting measures exceeding 10 trillion yuan, including local debt management, new infrastructure, consumption subsidies, fertility subsidies, and housing banks. It is also recommended that tools such as special treasury bonds, ultra-long-term national bonds, and central bank re-loans be employed in order to guarantee a sufficient scale, low capital costs, and robust public sense of gain.
Expand the size of the consumer trade-in subsidy to more than 1 trillion yuan, and no longer specify the type of consumer goods, so that the subsidy can be used for the purchase of durable goods (automobiles, household appliances, furniture, computers, cell phones, etc.) in order to maximize the effect of the subsidy and reduce administrative costs.
Establish a housing bank with a scale of 3-5 trillion yuan to acquire local government inventory land and developers stock housing, for government-subsidized affordable housing, addressing the initial housing needs of new graduates and urban residents. This approach can alleviate fiscal pressure on local governments while easing cash flow pressures on developers and mitigating liquidity risks, addressing public concerns about paid-for but undelivered, incomplete apartments.
Optimize real estate regulatory policies to promote a soft landing for the real estate market. Facilitate financing needs for private real estate companies, thereby reducing credit risks and restoring normalcy to the market. Lower interest rates on existing mortgages to relieve residents' burdens and use rate cuts to offset the interest margin losses of commercial banks. Previous restrictions on purchases, loans, sales, and pricing that were implemented during periods of market overheating should be loosened, and a market-driven approach should be adopted. This process should begin with the easing of restrictions in suburban and large-unit apartments in first-tier cities.
The real estate sector plays an important role in the economy, contributing significantly to GDP and supporting a wide range of related industries. The purchase of a residence encompasses not only the property itself but also the costs associated with renovating the property, purchasing appliances, furnishing the property, and decorating the property. The persistent decline of the real estate sector represents a significant contributing factor to the current state of insufficient domestic demand. As of 2023, China's urbanization rate stands at 66.2%, indicating substantial potential for demand in areas such as basic needs, improvement demands, and urban renewal.
Review contractionary policies and non-tax revenue measures. The considerable rise in non-tax revenue, comprising fines and confiscations, has a deleterious impact on the business environment, thereby deterring private investment. It is imperative that this be regulated with haste, with due consideration being given to the centralization of such revenues under the purview of the central government. The excessive rigidity of accountability mechanisms has resulted in local governments exhibiting a reluctance to act, while retroactive punishment has been employed with undue frequency, thereby engendering an atmosphere of insecurity for private enterprises. It would be prudent to prioritize institutional and systematic approaches over abrupt, intensive measures.
Rebuild the capital market to support the development of new productivity. In recent years, venture capital has sharply contracted and been monopolized by local government guidance funds, which is a primary reason for the decline in the number of unicorns in China. The stock market is experiencing a period of stagnation, with initial public offerings (IPOs) effectively on hold, which is impeding the exit channels for [early funders of] innovative enterprises. Firms in a new industries, defined by their capacity for new productivity, confront significant financial challenges and an increasingly unfavorable environment for innovation. It is imperative to establish a dynamic ecosystem for multi-tiered capital markets to ensure uninterrupted support for innovation-driven, high-quality development.
China's economic potential is considerable, though the obstacles to its realization are significant. However, these challenges are not insurmountable and can be overcome with the appropriate strategies and policies. There are a greater number of solutions than difficulties. By implementing a range of substantial measures, the process of economic recovery can be reinitiated, thereby enhancing confidence across a broad spectrum of stakeholders. The promotion of robust economic growth and employment is the crucial foundation for countering U.S. strategic containment, enhancing the quality of life for citizens, and establishing a robust foundation for high-quality development. We firmly believe that China's economic development will flourish in the long term!
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