Wu Ge is the Chief Economist of Changjiang Securities and a director of the China Chief Economist Forum
Key takeaways:
1. The economy has inertia and is powerless not to change. In the face of insufficient effective demand, fiscal policy is one of the standardization measures. However, since the beginning of the year, the slow pace of special bond issuance, the increase in non-tax revenue, and the moderate consumption subsidies may reflect different characteristics from the past. Financial strength not only affects the annual economic growth target, but also is related to whether the dilemma of negative price growth can be reversed.
2. Recently, local consumption subsidies and infrastructure investment have been significantly constrained by the gap between fiscal revenue and expenditure. The continued widening of the gap is mainly due to the sharp decline in property-related income in the past few years, and partly due to the significant increase in expenditure on health care. Even if we take into account the increase in central transfer payments and the rise in non-tax revenues, it will still be difficult to make up for the shortfall in the short term. Local people's livelihood expenditures such as the "three guarantees" are indeed rigid.
3. The early issuance of local bonds, especially special bonds, is often an important way to alleviate the gap between fiscal revenue and expenditure. However, a stricter accountability system and a mechanism for back-checking debt problems do constrain the progress of relevant debt borrowing in the short term. In addition, the coordination of monetary policy, especially interest rate policy, is also an important support for fiscal force, but the current interest rate reduction is also subject to many constraints of internal and external equilibrium.
4. Looking ahead, although external demand is resilient in the short term, domestic demand such as real estate and consumption is still slowing down. If we want to achieve the GDP target of around 5%, incremental policy tools may be needed in the second half of the year. In addition, from the perspective of international experience, it seems that if we want to completely get rid of low prices, we will need to continue to "overshoot" economic growth upwards for a period of time to fill the accumulated gap caused by exogenous shocks over the past few years.
Body:
In the face of insufficient effective demand, fiscal policy is one of the standardization measures. However, since the beginning of the year, the slow pace of special bond issuance, the increase in non-tax revenue, and the moderate consumption subsidies may reflect different characteristics from the past.
Figure 1. A different kind of finance than in the past
Source: WIND, the author calculates
Note: The issuance progress is the same as the cumulative issuance progress of local new bonds; Non-tax revenue refers to the proportion of local non-tax revenue after excluding state-owned capital operating income to local fiscal revenue at the same level.
1. What are the financial constraints?
The continuous widening of the gap between local fiscal revenue and expenditure is mainly due to the sharp decline in real estate-related income in the past few years, and partly due to the significant increase in health and other expenditures. Even if we take into account the increase in central transfer payments and the rise in non-tax revenues, it will still be difficult to make up for the shortfall in the short term. Local people's livelihood expenditures such as the "three guarantees" are indeed rigid.
Figure 2. Where does the gap come from?
Source: WIND, the author calculates
Note: The gap is the local broad fiscal revenue + the central government's transfer payment income to local governments - local broad fiscal expenditure, which deviates cumulatively from the historical trend. Real estate income refers to land transfer and real estate-related taxes, and other expenditures are non-real estate-related expenditures in the local broad sense of fiscal expenditure.
The early issuance of local government bonds, especially special bonds, is often an important way to alleviate the gap between fiscal revenue and expenditure. However, a stricter accountability system and a mechanism for back-checking debt problems do constrain the progress of relevant debt borrowing in the short term. In addition, the coordination of monetary policy, especially interest rate policy, is also an important support for fiscal force, but the current interest rate reduction is also subject to many constraints of internal and external equilibrium.
Figure 3. How do fiscal and monetary policies work together?
Source: WIND, the author calculates
Note: The project income is calculated based on the financing principal and interest coverage multiple; The policy rate is the 7-day reverse repo rate.
Second, will the government exert force?
Although external demand is resilient in the short term, domestic demand such as real estate and consumption is still slowing down. In order to achieve the annual GDP target, incremental policy tools such as fiscal may be needed in the second half of the year. In accordance with the requirements of "ensuring timely repayment and no risk", the probability of expanding and increasing the size of localized debt instruments is also increasing. In addition, from the perspective of international experience, it seems that if we want to completely get rid of low prices, we will need to continue to "overshoot" economic growth upwards for a period of time to fill the accumulated gap caused by exogenous shocks over the past few years.
Figure 4. Reversing negative price growth may require "overshooting" of economic growth
Source: WIND, the author calculates
Note: The growth rate is the difference from the average of 2018-2019; The first half of 2021 is a compound growth rate.
III. Basic Conclusions
First, the economy has inertia and is powerless not to change. Recently, local consumption subsidies and infrastructure investment have been significantly constrained by the gap between fiscal revenue and expenditure. The continuous widening of this gap is mainly due to the sharp decline in real estate-related income in the past few years. Even if we take into account the increase in central transfer payments and the rise in non-tax revenues, it will still be difficult to fully compensate for the shortfall in the short term. Local people's livelihood expenditures such as the "three guarantees" are indeed rigid.
Second, the early issuance of local bonds, especially special bonds, is often an important way to alleviate the gap between fiscal revenue and expenditure. However, a stricter accountability system and a mechanism for back-checking debt problems do constrain the progress of relevant debt borrowing in the short term. In addition, the coordination of monetary policy, especially interest rate policy, is also an important support for fiscal force, but the current interest rate reduction is also subject to many constraints of internal and external equilibrium.
Third, looking ahead, although external demand is resilient in the short term, domestic demand such as real estate and consumption is still slowing down. If we want to achieve the GDP target of around 5%, incremental policy tools may be needed in the second half of the year. In addition, from the perspective of international experience, it seems that if we want to completely get rid of low prices, we will need to continue to "overshoot" economic growth upwards for a period of time to fill the accumulated gap caused by exogenous shocks over the past few years.
Risk warning: Non-linear changes are expected.
【Author】Wu Ge: Ph.D., Chief Economist of Changjiang Securities. He has worked for a long time in the monetary policy department of central banks and as an economist at the International Monetary Fund. He is the winner of the Sun Yefang Economic Science Award, the Pushan Policy Research Award, the Liu Shibai Economics Award, and the Foresight Cup Economic Forecasting Champion. Gao Tong, Yu Tao, Cao Haiwei: Researcher of Changjiang Securities.
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