(Image source: Visual China)
As 2023 is coming to an end, the Political Bureau of the CPC Central Committee held a meeting to analyze and study the economic work in 2024. The meeting set the tone for next year's economic work ideas, emphasizing the need to "adhere to the principle of seeking progress while maintaining stability, promoting stability with progress, and establishing first and then breaking down", releasing important signals. What is the current macroeconomic situation on the mainland, and what difficulties and challenges are it facing? Where will the fiscal policy be strengthened next year? What kind of monetary policy should be implemented to adjust aggregate demand? How can the risks of real estate and local government debt be resolved more prudently?
On this occasion, Blue Whale Finance has launched a series of articles on economic review and outlook, inviting macroeconomic research experts to discuss the "shape" and "potential" of the economy and explore the new momentum of economic growth.
In this issue, Blue Whale Financial Reporter has an exclusive conversation with Zhang Bin, senior researcher of the China Finance 40 Forum (CF40) and deputy director of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences. Zhang Bin has been researching China and the global macroeconomy for a long time, focusing on China's economic structural transformation, China's macroeconomic and financial market fluctuations, RMB exchange rate and foreign exchange management policies, and global macroeconomics.
(Photo source: Courtesy of the interviewee)
"Whether it's expanding consumption or expanding investment, the key is credit growth. Credit goes up, there is more money in the pockets of residents, businesses and governments, expenditure and income go up, profits and investment go up. ”
"At this stage, there are two main bases for expanding credit, one is to reduce interest rates, and the other is to borrow from the government. ”
"For monetary policy to achieve its policy objectives, real interest rates need to be lowered. ”
Zhang Bin pointed out that the most conspicuous challenge facing the mainland's economic operation lies in the lack of demand, which is manifested in the low level of inflation. In order to stabilize aggregate demand, monetary policy and government expenditure must be strengthened, improve quality and efficiency, enhance the efficiency of fiscal revenue and expenditure, and increase government expenditure by increasing government debt, which will have an immediate effect on expanding domestic demand.
Zhang Bin believes that in 2024, a more active monetary policy should be implemented, the policy interest rate should be adjusted more sharply, and the real interest rate should be significantly lowered in front of the market. There is no policy more precise than this. ”
Macroeconomic policies must give the most prominence to "stability."
Blue Whale Finance: The Central Economic Work Conference has made systematic arrangements for economic work in 2024. The meeting proposed that it is necessary to effectively enhance economic vitality, prevent and defuse risks, and improve social expectations, further emphasize the relationship between "increasing vitality, reducing risks, and strengthening expectations", and "seek progress while maintaining stability", "promote stability with progress", and "establish first and then break through", and demand more positive requirements for the general tone of economic work. How do you view the current economic situation on the mainland, and what is the meaning behind the new formulation of the meeting?
Zhang Bin: Although the epidemic has passed this year, the difficulties and challenges facing economic operation are still very prominent. The most prominent challenge is the lack of demand, which is manifested by the low level of inflation, in November this year, the mainland's CPI and PPI both grew negatively, CPI was -0.5%, and PPI was -3%.
A low price level will bring a series of reactions, including a lot of pressure on corporate income and profitability, a significant weakening of the incentive for companies to invest and recruit new employees, greater pressure on government tax revenues and household income, and an increase in the bad debt ratio of financial institutions. The current problems faced by the economy, such as overcapacity, weak social expectations, and many hidden risks, are highly related to insufficient demand, and are largely manifested in the environment of insufficient demand.
The Central Economic Work Conference put forward the idea of "seeking progress while maintaining stability", "promoting stability through progress", and "establishing first and then breaking down". This line of work emphasizes more additions and the resolution of contradictions and problems in the course of development.
At present, the mainland is in the stage of economic restructuring and upgrading, with new growth forces, and many industries and capital are also facing the pressure of being eliminated. Overall, the new growth force has not been fully unleashed, and investment is not enough to fully absorb savings and bring enough high-income jobs.
If the old one is broken and the new one is not enough to stand up, the economy will face unbearable labor pressure, and there is also a risk of falling down and not being able to get up. This requires that macroeconomic policies must put "stability" in the most prominent position, and this "stability" should specifically refer to economic growth and employment, and it is necessary to be as close as possible to the potential economic growth rate and achieve full employment as much as possible.
To achieve the goal of "stability", it is necessary to pursue "progress" and "promote stability through progress" in policy. If there is no policy in the general environment, the macro economy may not be stabilized. In terms of policy, it is necessary to pursue "progress", not to do everything, but to have priorities. The principle of sorting is to do more addition, do addition first, and then consider subtraction under the premise of stability, "first establish and then break".
Blue Whale Finance: Judging from the current situation, it can basically be judged that the mainland's annual economic growth rate is more than 5%. But more importantly, can the mainland's economic growth rate be stabilized in the next three to five years? Many international organizations are not optimistic about next year's global economic growth forecasts.
Zhang Bin: The goal of economic growth should be close to the potential growth rate of the economy. It is difficult to give very precise results on the basis of economic models as to what is the current potential growth rate of the continental economy. What is clear, however, is that the current rate of economic growth is much lower than the potential rate of economic growth. This judgment is based on the fact that the current inflation rate is very low, with negative CPI and PPI in November and a negative GDP contraction factor. If the CPI can reach a moderate inflation level of about 2%, the economic growth will be much higher than it is now, about 2-3 percentage points, which is probably the potential growth rate of the current Chinese economy.
We need to adopt more active aggregate demand management policies to achieve a higher rate of economic growth. This is not to pursue the economic growth rate per se, but to make full use of the current economic resources to achieve full employment, and at the same time to enhance confidence and expectations in the Chinese economy. This is in line with the requirements of optimizing resource allocation and high-quality growth.
The global growth forecast for next year is not optimistic, but this is not a reason for us to lower our expectations and adjust our economic growth target. Persistently under-potential growth is an unhealthy economic state that we have been in for a long time. Next year, we need to set a higher economic growth target, and use this target to guide a more aggressive policy to expand demand, and we are fully capable of achieving a higher growth target.
A more active fiscal and monetary policy should be pursued next year
Blue Whale Finance: The economic development of the mainland is facing four pressures: insufficient effective demand, overcapacity in some industries, weak social expectations, and still many hidden risks. Among them, the lack of effective demand may be the most important contradiction in the short term. In order to push the economy out of the shortage of effective demand, what should be the focus of future policy efforts? What are your policy expectations for next year's economic work?
Zhang Bin: In the past two years, the mainland's fiscal revenue growth has been under pressure, with local governments' land sales revenue falling sharply, and local governments facing a sharp decline in their disposable financial resources. As a result, local government spending has also fallen sharply, which is one of the key reasons for the current lack of demand.
To get out of the situation of insufficient demand, we must strengthen the financial side, and it is best to improve quality and efficiency. "Afterburner" should refer to increasing the growth rate of fiscal expenditure, which should not be lower than next year's GDP growth target, and must achieve this growth target in a real way so as not to drag down aggregate demand. Improving quality and efficiency is to enhance the efficiency of fiscal revenue and expenditure, which is a long-term project that needs the support of many reform measures.
I believe that in order to achieve the goal of fiscal strengthening next year, we must not rely on revenue to determine expenditure, but must increase government debt and increase government spending by increasing government debt. The government's increase in debt and expenditure, while at the same time bringing about an increase in the level of revenue and financial assets of the non-governmental sector, will have an immediate effect on expanding domestic demand.
The main constraint on the government's increased debt is inflation. At present, there is no inflationary pressure on the mainland, but there is pressure that the inflation level is too low, and the willingness of the private sector to save is much greater than the willingness to invest. This means that there is a lot of room for the government to borrow, and the government can make fuller use of resources by borrowing to expand spending, which can improve the cash flow of the private sector, and it is also a crowding out effect on the private sector.
Monetary policy adjustments are also crucial to getting out of the lack of demand. The mainland's policy interest rate and credit rate have fallen this year, but the decline is less than the decline in inflation, and from the perspective of real interest rates, real interest rates have risen rapidly. This is a big constraint on raising the level of aggregate demand.
For monetary policy to achieve its policy objectives, real interest rates need to be lowered, and only when real interest rates are lowered can a monetary policy environment conducive to private sector investment and consumer spending. Personally, I believe that next year's monetary policy should be more active, the policy interest rate should be adjusted more aggressively, and the real interest rate should be lowered by a large margin ahead of the market. Lowering the policy rate is the aggregate policy, and it is also the most precise policy, which is to allow hundreds of millions of investors and consumers to choose how to expand their spending through a financial environment that is more conducive to investment and consumption. There is no policy more precise than this.
It should be noted that at present, the mainland's consumption demand and investment demand are on the weak side. In an environment where demand is insufficient and resources are not fully utilized, increasing consumption is good for investment, and increasing investment is also good for consumption.
Whether it is to expand consumption or investment, the key must be to implement credit growth. Credit goes up, there is more money in the pockets of residents, businesses and governments, expenditure and income go up, profits and investment go up. At this stage, there are two main bases for expanding credit, one is to lower interest rates, and the other is to borrow money from the government. Judging from international experience and historical experience, as long as these two policies are sufficient, credit can go up, and consumption and investment can go up.
To resolve the risk of local bonds, it is necessary to "establish first and then break down" and change the debt structure and financing structure
Blue Whale Finance: In order to promote the smooth operation of the real estate market, the mainland government has launched a lot of policies, what are your thoughts and suggestions on promoting real estate risk resolution and building a new real estate development model next year?
Zhang Bin: The current situation of the real estate industry is not optimistic, and it still brings serious drag to macroeconomic stability. In the past, various relevant departments have issued some policies to try to help resolve the risks of real estate companies, but at present, it is not enough. Real estate companies are still at risk of thunderstorms, and real estate sales and investment are still at risk of further decline.
Stabilizing the financing cash flow of real estate enterprises is a top priority, which requires the efforts of enterprises themselves and policy support. Policy support requires both supply and demand to exert force at the same time, as soon as possible. On the demand side, we can consider further reducing the policy interest rate to drive down the mortgage interest rate, encouraging the competition of bank housing loan interest rates to drive down the mortgage interest rate, lifting the purchase restriction and loan restriction policies in stages, and adopting subsidy policies for the first home of low- and middle-income groups. On the supply side, it is mainly through selective asset acquisition or other forms of government credit endorsement to help real estate companies return to the financial market for financing.
In line with the principle that a house is for living. At present, the most conspicuous problem of "housing" is that it has been difficult for migrant workers in megacities to live in their places of work, and the housing of low- and middle-income groups has not been improved. To build a new real estate model, we should start from these most prominent contradictions and help these people who do not live well. The foothold of solving the problem is to increase affordable housing and use affordable housing in some cities, and to reduce housing prices in metropolitan areas. Of course, the characteristics of each city are different, and we cannot generalize, and we must give full play to the policy positioning of "one city, one policy".
Blue Whale Finance: In fact, preventing and resolving systemic risks has always been an important task of the mainland government, and local government debt risks are a key area. What is your view on the issue of local government bonds, will it be a relatively big trouble for us, and how can finance support the resolution of local government debt risks?
Zhang Bin: From different perspectives, the perception of local government debt will vary greatly.
From the point of view of some local governments, the burden of hidden local debts is very serious, and it is a great risk that they cannot repay their debts. From the perspective of the central government, even if the vast majority of the hidden debts of local governments are assumed, China's government debts are not too much. Especially in the current situation of insufficient demand and low inflation, the government has more room to borrow than before, not less. There is also no question of the sustainability of government debt.
From the perspective of investment corresponding to local government debt, most of the investment is infrastructure investment, and a lot of money is spent on supporting industrial development. Proponents argue that these investments, which have underpinned China's rapid urbanization over the past decade or so, have supported the construction of transportation, levels, water conservancy, and various urban facilities, and that these investments are generally flawed, if they are inefficient. Opponents argue that there is too much waste in these investments and a lot of corruption in them, which is not good for future economic growth.
In my opinion, it is a very correct choice to change the debt structure and financing structure of local governments through debt swaps and special bonds. In this process, it is very important to "establish first and then break". If it is "broken first and then established", it will not only be the hidden debts of local governments, but also the investment expenditures of local governments, and even the normal operation of some local governments will be affected. This will further exacerbate the situation of insufficient aggregate demand and exacerbate financial risks, all of which are contrary to the original intention of resolving financial risks. "Establish first and then break", which is to establish more standardized, lower-cost, and longer-term funds for local government-led investment and other kinds of support. It can be special bonds, treasury bonds, or bonds of policy financial institutions, and the financing of commercial financial institutions should be reduced as much as possible. (Blue Whale Finance, Li Danping, [email protected])