David Daokui Li assembles experts to telegraph policy advice ahead of Third Plenum

The Tsinghua professor & former monetary policy advisor to the central bank highlights the urgent need for Beijing to issue debt, expand spending, and shift from investment to subsidies for families.

One week ahead of the Third Plenary Session of the 20th Central Committee of the Communist Party of China, scheduled on July 15-18, David Daokui Li, Professor and Director of the Academy of Chinese Economic Thought and Practice (ACCEPT) at Tsinghua University, held a forum in an apparent attempt to assemble a team of Chinese experts to telegraph policy advice to decision-makers.

Below is a translation of the WeChat blog by Li’s ACCEPT summarizing its forum. It was published on Monday, July 9, 2024. All emphasis is mine - Zichen Wang

On July 6, 2024, the Academy of Chinese Economic Thought and Practice (ACCEPT) at Tsinghua University, held the 47th China and World Economy Forum themed "2024 Mid-Year Macro Forum."

The speakers included

Chai Qiang, President of the China Real Estate Appraisers and Agents Association;

Da Wei, Director of the Center for International Security and Strategy (CISS) at Tsinghua University;

Hua Changchun, Chief Economist of Greater China at KKR Investment Group;

David Daokui Li, Director of ACCEPT at Tsinghua University;

Liu Peilin, Chief Researcher of ACCEPT at Tsinghua University;

Qiao Hong, Chief Economist for Greater China and Head of Asia Economic Research at BofA Securities;

Yin Yanlin, Deputy Director of the Economic Committee of the 14th CPPCC National Committee and former Deputy Director of the Office of the Central Financial and Economic Affairs Commission

Yuan Gangming, Special Researcher at ACCEPT, at Tsinghua University

LiKe Aobo, Executive Vice President of ACCEPT, moderated the forum.

During the meeting, ACCEPT researchers Lu Lin (top left), Wu Shuyu (top right), Li Bing (bottom left), and Guo Meixin (bottom right) jointly released a macro report titled "China's Economic Development Outlook for the Second Half of 2024."

David Daokui Li, Director of ACCEPT at Tsinghua University, said

First, while maintaining confidence, there needs to be an increased awareness of potential risks to prevent short-term, cyclical factors from evolving into long-term trends due to untimely policy responses, which could affect the long-term growth potential of GDP. Government departments should be more proactive in preventing and resolving systemic risks, establishing emergency management teams for systemic risks, and implementing due diligence exemptions.

Second, the core factor causing current economic problems is not real estate but the contraction of government spending. Typically, the government collects taxes from residents and businesses, borrows money from the financial sector, and supports economic construction, procurement, and regular expenditures. Over the past four years, the broad fiscal expenditure of government departments as a percentage of GDP has fallen from 41.2% to 37.4%, borrowing from the financial sector has been hindered, financing is mainly used to repay debts, and physical workload has significantly reduced. The Chinese government is a major entity in China’s market economy, a 3.8% decrease in government expenditure inevitably leads to economic contraction.

Third, to address the current issues, comprehensive reform must be deepened. The most urgent task is to stop the contraction of government spending and increase their broad expenditure. Two imminent reform measures are needed: first, re-understanding the nature of national debt by issuing more national debt to replace local debt rather than forcing local governments to repay debt, thereby revitalizing local governments' normal economic activities and creating a conducive atmosphere for comprehensive reform in the short term. If implemented quickly, this measure is expected to improve total economic demand swiftly; second, from the perspective of long-term institutional reform, the entire government's operational orientation needs to be changed by reforming the fiscal and tax systems and local officials' assessment indicators to shift government incentives from investment and project-oriented policies to policies that provide basic social welfare and help people increase disposable income to boost consumption, transforming the government from an investment-oriented government to a social welfare service-oriented government.

Li further proposed that in the second half of 2024, opportunities must be seized to launch short-term policies to boost consumption and enhance the short-term growth vitality of the Chinese economy. For example, the central government could issue consumption vouchers worth one trillion yuan during the Golden Week in October to encourage or subsidize public consumption. Based on the multiplier effect of issuing consumption vouchers, one yuan of consumption vouchers could lead to about four yuan of consumption, increasing government tax revenue. According to the ACCEPT's calculations, issuing consumption vouchers would ultimately not deplete central fiscal revenue but would boost consumption confidence, market prosperity, and the overall trajectory of China's economy. If reform policies are in place, China's economic growth is expected to be 5.1% in 2024, with continued stabilization and recovery.

Subsequently, Yin Yanlin, Deputy Director of the Economic Committee of the 14th CPPCC National Committee and former Deputy Director of the Office of the Central Financial and Economic Affairs Commission, delivered a keynote speech.

He said, this year, the government introduced a series of policies to stimulate the economy and boost confidence, resulting in overall economic stability and active new momentum in the first half of the year. The upward and positive trend is expected to continue in the second half of the year. However, he pointed out that achieving the 5% growth target is not easy. Domestic economic circulation is not smooth, effective domestic demand is insufficient, prices are low, real estate is still in deep adjustment, monetary supply is shrinking, asset prices are falling, national tax sources are significantly reduced, and fiscal revenue pressure has increased. External international circulation also faces obstacles, with the complexity, severity, and uncertainty of the external environment being apparent. Tariff increases by the US and Europe, the sustainability of export growth, and the improvement of foreign investment utilization face challenges.

He believes that the main reason for the low economic heat is that China is still in the process of establishing a new development pattern, and the mutual promotion of domestic and international circulations has not yet been formed. Policy introduction is somewhat passive, and market expectations have not fundamentally improved. To invigorate current market economic entities, he proposed eight specific suggestions:

First, ensure the consistency of macro policies to avoid offsetting effects;

second, expand domestic demand by encouraging new consumption growth points and eliminating unreasonable restrictions;

third, quickly stop the decline in real estate, vigorously release rigid and improved demand;

fourth, increase the fiscal deficit rate, issue new national debt to fill the gap caused by the decline in land transfer income;

fifth, intensify monetary policy efforts, focusing on supporting real economic growth and moderate price recovery;

sixth, enhance proactivity in opening up, creating a favorable environment to attract more foreign financial institutions and long-term capital to China;

seventh, comprehensively deepen reforms, handle the relationship between government and market well, and truly implement the decisive role of the market in resource allocation;

eighth, develop new quality productive forces tailored to local conditions, with innovation at the core, expand emerging industries, layout future industries, and focus on talent cultivation and introduction, digital empowerment, new infrastructure, and reform and opening up. At the same time, prevent local governments from rushing blindly into actions and formalism.

After the keynote speech, the meeting transitioned to the roundtable forum. LiKe Aobo, Executive Vice President of ACCEPT, posed questions to the attendees on current hot economic issues.

Da Wei, Director of the Center for International Security and Strategy (CISS) at Tsinghua University, said that the current international environment is highly uncertain, especially the unpredictable policy direction of the United States. The U.S. economy and technology status appear favorable based on data, but sustainability is questionable.

He said that the poor expectations for China's economy have become a consensus, affecting foreign investment in China and students' willingness to study in China. Da Wei emphasized that the game between China and the US is not only based on GDP but also involves competition in high technology, military, and other aspects. He noted that even if China's economic size is twice that of the US, China would still face significant challenges if the US is determined to cause trouble.

To truly boost domestic market confidence, Da Wei suggested that the government should enhance market confidence through clear political signals and stable legal systems. He also emphasized avoiding excessive interference with private enterprises, protecting their legal rights to maintain economic vitality. He believes policy transparency and stability are key to maintaining market confidence, and the government needs to set clear policy directions and ensure their sustainability.

Regarding the security situation around China, Da Wei said that people could remain relatively optimistic. In the near to mid-term framework of about five to six years, the possibility of military conflict in the Taiwan Strait is low. He pointed out that as a military and nuclear power, China has strong basic capabilities to ensure national security, and other countries are unlikely to engage in military conflict with China lightly. Moreover, the Chinese mainland’s policy towards Taiwan has not undergone fundamental changes, with peaceful reunification remaining the established policy. Although there have been some changes in Taiwan's and the US's policies towards Taiwan, these changes are not enough to trigger military conflict. On the direction of the Russia-Ukraine conflict, Da Wei believed that if Trump came to power, US support for Ukraine might decrease, increasing the possibility of a ceasefire. However, a ceasefire does not equate to peace, and long-term peace in the Russia-Ukraine conflict requires establishing a foundation where both sides feel secure; otherwise, hotspots may continue to have tensions and sporadic conflicts.

Chai Qiang, President of the China Real Estate Appraisers and Agents Association, said that the predicament in China's real estate market is primarily based on the inevitable laws of industry development. In decades of large-scale urban development and construction, the housing problem for Chinese people has basically been solved, and the transition is gradually moving towards "good-quality housing" from "basic housing." Therefore, the real estate market inevitably faces a transformation from transacting new apartments to revitalizing the market of existing ones. The previous extensive development and construction model is no longer applicable. In the past period, real estate companies indeed engaged in blind expansion, characterized by "high leverage, high debt, and high turnover" development, without timely adaptation to market changes. This led to the current predicament, dragging down the entire macroeconomy.

He said that the real estate policies optimized and adjusted last year and this year were significant, but the results were not as expected, mainly because the macroeconomy is holistic, and the effect of stimulating policies for the real estate market alone is limited. The improvement of the real estate market first relies on the overall improvement of the macroeconomy, such as employment and residents' income. Therefore, short-term stimuli cannot fundamentally reverse the downturn. From a long-term perspective, Cai Qiang expressed optimism about the future development of the real estate market because real estate primarily represents "settling down and enjoying life," it is an asset with use value and interest-bearing properties, incomparable to assets like gold or currency. From the experiences of Japan and the US, high-quality real estate will ultimately transcend economic cycles and return to its rightful value.

Liu Peilin, Chief Researcher of ACCEPT at Tsinghua University, said that China should focus on investing in people, tapping into human productivity potential, and unleashing consumer demand. China's potential growth space is still vast, and maintaining confidence, improving growth quality, and maintaining growth speed are not contradictory.

In recent years, the central government has introduced several measures to promote the development of the private economy, but the temperature of these policies has been hard to feel, possibly because policy implementation takes time. A new problem facing private enterprises is the harm to the rights of enterprises and entrepreneurs. Currently, there is an unfavorable public opinion atmosphere and behavior pattern in society, and some central policies are misunderstood or misinterpreted at the societal level, going against the central government's intentions. For example, contributing to common prosperity by enterprises should be achieved by running the enterprise well and creating wealth for society, not through the "robbing the rich to help the poor" and “third distribution” as some people think. The solution is for the central government to take the initiative to send its departments or establish routine mechanisms to conduct consistency evaluations of policies concerning private sector development, ensuring that various related policies are genuinely implemented.

Another situation is the misunderstanding of the central policy intentions by some grassroots government departments. For instance, the central government did not mention looking at companies’ tax records in the back and collect tax retrospectively , but market entities encounter such situations in reality. The reason may be due to the overall economic downturn, with local governments seeking various tax sources due to debt resolution needs. Only when the macroeconomy improves and expectations rise will this phenomenon abates.

Hua Changchun, Chief Economist of Greater China at KKR Investment Group; said that if long-term economic growth is lower than the potential growth rate, it will damage the confidence of residents and entrepreneurs, and youth employment will be sluggish, which has a huge impact on the fundamentals of development. Therefore, restoring economic momentum and demand is crucial. The early indicators for a possible emerging balance sheet recession in China's economy will lead to the disappearance of entrepreneurial spirit and a decline in economic vitality, which is a significant obstacle to economic development.

Discussing the similarities and differences between the current decline in China's asset prices and Japan's lost 30 years, Hua Changchun noted that the capital market tends to price Chinese assets as Japan's assets were in 1992. However, whether this assumption holds needs to be observed based on the results of reforms. He believes that the patterns of real estate bubble bursts in China and Japan differ: Japan's model involved a long and slow decline, whereas China's bubble level has not reached the dual bubble of Japan at that time. Additionally, the impact of technological revolution in the global environment is different for the two countries: China has advantages in the digital revolution, intelligent revolution, and energy transition.

Regarding the decline in foreign direct investment, Hua Changchun believes that geopolitical and domestic policy uncertainties are the main reasons. Despite foreign investors' confidence in the potential of the Chinese market, policy stability and predictability are needed for recovery.

Qiao Hong, Chief Economist for Greater China and Head of Asia Economic Research at BofA Securities, first agreed with the ACCEPT report's view that "the actual growth rate is lower than the long-term potential growth rate" and emphasized that the output gap [an economic measure of the difference between the actual output of an economy and its potential output] does not receive enough attention domestically. Confidence improvement should start with economic revitalization, which is particularly important for the market. Confidence management is closely related to expectations, and the current lack of confidence mainly stems from policy uncertainty and sluggish demand, which need to be addressed through policy adjustments. Stimulating domestic demand should be the top priority of current policy, and missing this opportunity will have a greater impact on the economy.

She said that current globalization is regressing, and Western countries are questioning China's industrial policies and subsidies due to national security and overcapacity considerations, increasing global prejudice against Chinese products. Chinese enterprises need to seek new strategies in the global market, such as setting up factories locally to deal with trade barriers. Regarding Chinese enterprises going global, Qiao Hong believes it is a reluctant choice in the domestic market environment. Although beneficial for profit maximization in the short term, it contributes little to domestic GDP and employment in the long term. Therefore, she reiterated the importance of stimulating domestic demand and proposed suggestions in three aspects: monetary policy, fiscal policy, and incentive mechanisms. Lowering financing costs, issuing central government bonds, and resetting incentive mechanisms can enhance policy credibility and improve the consumption and investment environment.

To restore foreign investment confidence, she emphasized that the core approach is to strengthen the legal system in relevant fields rather than relying on short-term policy guidance. She cited her experience in India, illustrating the relationship between investor sentiment and market performance, arguing that long-term efforts in legal and policy stability are more likely to gain foreign investors' trust.

Yuan Gangming, Special Researcher at ACCEPT, at Tsinghua University, first analyzed the main challenges facing the current Chinese economy, especially the impact of the continued decline in the real estate market on the economy. He believes that overall, the Chinese economy is indeed facing difficulties, particularly with the adjustment in the real estate market. Although real estate prices have declined, they have not reached the tragic levels of Japan's real estate bubble burst in the 1990s. China's real estate bubble is undergoing a reasonable decline and is expected to stabilize and recover to a certain extent.

Despite the challenges, Yuan Gangming also saw highlights in economic development, especially the rapid growth of the automotive industry. He believes that the outstanding growth of China's automotive industry is not a flash in the pan but has long-term implications. China’s automobile exports are now the world's largest, surpassing Japan's performance at its peak in the automotive industry, providing new growth points for the economy. Yuan Gangming pointed out that the automotive industry is currently the fastest-growing sector in China, with a growth rate of over 30%, far exceeding the average level, partly offsetting the more than 20% decline in the real estate industry. The rise of the automotive industry not only balances other declining parts of the economy but also offers a new development path for China's economy. Meanwhile, in the global competition of the same industry, Chinese automotive companies continue to innovate at the technology level, maintaining a competitive edge through technological upgrades, further consolidating their dominant position in the international market.