Jia Kang says big fiscal stimulus must follow monetary easing
The finance ministry's former research director says raising 10 trillion yuan through central govt bonds wouldn't be too much.
The biggest China news at the moment is Beijing’s extraordinary monetary policy intervention last week. Following that, multiple Chinese economists have said the ball is now in the Ministry of Finance’s court, as I’ve reported in Pekingnology, our sister newsletter.
Below is the translation of an interview with Jia Kang, former Director-General of the Institute for Fiscal Science (now Chinese Academy of Fiscal Sciences), the finance ministry’s in-house think tank, by The Paper, a Shanghai-based media outlet, published on Tuesday, October 1st.
All emphasis is ours, but it’s easy to tell Jia’s core message just from the title -
专访贾康:货币大招后应紧跟着财政大招
Interview with Jia Kang: Fiscal “big moves” should closely follow monetary “big moves”
The Paper: During the Politburo meeting held on September 26, what aspects stood out to you? With only three months left in the year, what signals does this meeting send?
Jia Kang: This meeting had a strong problem-oriented focus, addressing the current challenging situation with significant central guidance. A policy package characterized by extraordinary measures was outlined in the meeting's "spirit." Overall, it reflects a determination to tackle tough issues calmly, increase macroeconomic regulation, deepen reform and opening up, expand domestic demand, optimize the economic structure, and strive to achieve stability through progress with counter-cyclical regulation to boost domestic demand.
The meeting emphasized the need to "fully, objectively, and calmly assess the current economic situation." This is crucial, as while the fundamentals of China's economy—such as a vast market, strong resilience, and great potential—remain unchanged, new challenges and problems have emerged. The meeting called for "a strong sense of responsibility and urgency in economic work," signaling that there is no time to wait or hesitate; action must be taken to solve these problems. It further stressed the importance of focusing on key areas, taking proactive measures, effectively implementing existing policies, and introducing new ones. This operational focus culminates in the effort to "strive to meet the annual economic and social development goals," acknowledging that challenging issues might prevent achieving these goals, requiring efforts to strive for favorable outcomes. In short, we must introduce "big moves" with a sense of responsibility and urgency.
The Paper: The meeting called for continued strengthening of fiscal and monetary policies. While no further fiscal stimulus has been announced yet, there's a lot of market anticipation. What are your thoughts on this? Where should the focus lie?
Jia Kang: First, the meeting mentioned ensuring necessary fiscal spending and effectively addressing the "three guarantees" at the grassroots level. [Guarantee basic living standards, wages and normal operation at the grassroots level.] Currently, there are significant difficulties and challenges in this regard. I suggest using funds raised through special central government bonds, with the 国库集中支付制度 treasury payment system ensuring, for the time being, that salaries and basic operations of public employees at all levels are covered.
Another crucial point mentioned was the issuance and use of long-term special government bonds and local government special bonds to enhance the role of government investment. These are the main financial tools available now, with special long-term bonds and local government bonds providing considerable operational room by trading time for space. These funds should focus on government investment, particularly in long-term projects that address market failures but are essential for the economy's overall structure, such as infrastructure and public works, which contribute to optimizing the economy's structure and enhancing long-term growth. Projects like the construction of 两重 "two key industries" [industries in the implementation of key national strategies and in the development of security capabilities in key areas] need top-level planning and cross-department coordination. Now is the time to seize the opportunity for counter-cyclical regulation, expand domestic demand, and drive economic recovery, which will also boost private sector confidence and lead to positive expectations, ultimately encouraging private sector investments.
Government investments in these areas have specific characteristics. They cannot be judged solely by immediate returns but by their overall impact. Some projects may take a long time to break even in a direct cost-benefit analysis, but their comprehensive benefits must be fully recognized. For example, the Qinghai-Tibet Railway was justified by its broader social, political, and economic benefits.
Therefore, the key principle of incremental fiscal policy should be to focus on investment, with long-term bonds supporting the government's role in making effective investments.
Regarding the scale of fiscal stimulus, we should pay attention to its proportionate size. For instance, in 2008, China introduced a 4 trillion yuan economic stimulus plan, which amounted to more than 10% of the national GDP at the time. In 2023, China's GDP exceeded 126 trillion yuan, yet the budget adjustment plan in the last quarter of last year only issued 1 trillion yuan in additional government bonds. This year's first batch of special long-term government bonds was also 1 trillion yuan, representing less than 1% of GDP. Therefore, scaling up the bond issuance to 4 trillion or even 10 trillion yuan would not be excessive.
The Paper: How much room is left for investment into the projects you mentioned? Would this increase the government's burden?
Jia Kang: There are plenty of projects to be done in China, such as building sponge cities for disaster prevention and mitigation, which must be integrated with underground utility tunnels and comprehensive watershed infrastructure for rivers, lakes, and reservoirs, as well as basic farmland irrigation systems. Other projects include public transportation infrastructure in central areas and associated parking facilities, upgrading old residential areas, and hardware projects in rural revitalization, many of which could take eight to ten years to complete.
We have no shortage of production factors—steel, cement, labor, technical expertise, and management capabilities are all available. The government should invest in these projects to stimulate domestic demand. As these projects get underway, they will create jobs, increase income for citizens, and unlock consumption potential. There is still substantial room for infrastructure development, particularly in public transportation systems, which need significant upgrades in areas like subways and light rail.
Moreover, using public debt mechanisms properly won’t overburden the government. Long-term and ultra-long-term government bonds, with 30- to 50-year maturities, offer significant flexibility and are worth utilizing, remaining within safe limits. Take, for instance, China’s first issuance of special government bonds in 1998, which raised 270 billion yuan for 30 years to recapitalize state-owned banks. What seemed like a huge sum at the time will amount to less than 1% of total fiscal expenditure when it matures in 2028.
The Paper: What should monetary policy focus on next?
Jia Kang: Monetary policy has been strong, but some worry that after major moves, if the economic fundamentals aren’t improving, market sentiment might drop again. Our stock market is still driven by policies and news, and in the long run, we need to build real strength, starting with high-quality development of fundamentals and creating positive market expectations. The Communist Party of China Central Committee's focus on managing expectations is crucial. Economic theory and practice over the years have established a consensus that expectations are self-reinforcing. If people expect positive outcomes, positive outcomes are more likely to occur. However, we must acknowledge that confidence is still weak, and market expectations are not strong. Therefore, monetary policy should remain active, with continued rate cuts and reserve requirement reductions when necessary. However, fiscal policy should closely follow the "big moves" of monetary policy.
The Paper: The Politburo meeting also addressed consumption and linked it to improving livelihoods, calling for increased incomes for low- and middle-income groups. What’s your view on this?
Jia Kang: The goal of boosting consumption is to improve people’s livelihoods and meet their needs for a better life. When expanding domestic demand, we must focus on ensuring that low- and middle-income groups benefit.
I believe fiscal funds should be used to improve social welfare and promote harmony, making the benefits more tangible and accessible to the people, as the central government requires. For example, providing minimum living allowances to residents who have neither jobs nor unemployment benefits could be financed by special central government bonds. Using systems such as ID information or the health codes developed during the pandemic, these funds can be directly transferred to individuals. The small amount required for this would not significantly pressure bond financing, but the positive effects on social security, harmony, and government image would be considerable.
The Paper: The Politburo meeting mentioned new concepts such as "stabilizing the decline," "strictly control of new construction, optimizing stock, and improving quality” for the real estate market. What changes do you foresee?
Jia Kang: Real estate is a key focus, and the meeting clearly set the goal of "stabilizing the real estate market," indicating the government’s intention for the market to bottom out instead of a collapse. To achieve this, the government has emphasized controlling new construction, optimizing existing stock, and improving quality. It has also called for increased loans for projects on the “white list” and activating idle land stocks. Moreover, policies such as adjusting housing purchase restrictions and lowering mortgage rates need to be implemented quickly.
As of now, there are only very few places that impose restriction on buying apartments. They should consider relax or even abolish them wholesale. In some areas, where supply and demand have shifted, administrative restrictions on home purchases are no longer necessary, and relaxing or completely removing these restrictions would align better with the logic of a high-level socialist market economy.
The Paper: What role can fiscal policy play in supporting the real estate market?
Jia Kang: Fiscal policy should complement other policies to support the two-track approach to real estate. In areas like rental housing, long-term rentals, and shared-ownership housing, fiscal policy can provide targeted subsidies. There can be two forms of support for affordable housing: directed at new housing projects and directed at people, where financial support is used to optimize the existing housing stock by converting apartments on sale into rental housing and paying the rent for low-income residents. This approach achieves higher efficiency without needing massive funds for new housing construction.
The Paper: The Politburo meeting also stressed support for private enterprises and regulating law enforcement related to businesses. Why is this emphasized?
Jia Kang: These issues have been widely discussed. Some local governments, facing financial pressure, have resorted to increased penalties and retroactive investigations to generate revenue, distorting government behavior. In the first half of this year, China's GDP grew by 5%. Still, due to various factors, general public budget revenue declined, while non-tax revenue, largely controlled by local governments, increased by over 11%. This clearly includes significant distortions. The meeting emphasized that "further regulating business-related law enforcement and regulatory behavior" addresses these issues. We must help businesses overcome challenges and avoid adding to their difficulties under the guise of enhancing regulation. The distortions caused by local government financial pressures are having a negative impact on market confidence and expectations.
The Paper: What immediate actions are necessary to meet this year's economic growth goals in the remaining three months?
Jia Kang: The recent "big moves" in monetary policy were essential, and fiscal policy needs to follow closely. These are the two main levers of macroeconomic regulation and must be coordinated. Last year, in the fourth quarter, the central government’s budget adjustment plan issued 1 trillion yuan in additional government bonds, which played an important role in guiding expectations. This year, we should draw on that experience to ensure that the spirit of the Politburo meeting is fully implemented.
In addition, boosting business confidence should be a priority. Concrete actions, such as publicly addressing cases where the rights of private enterprises and entrepreneurs have been violated, can better protect and promote the growth of the private sector.