Zhang Liqun: There should be a round of government investment plans similar to those in 2009-2010

From the "924" New Deal to the National Development and Reform Commission's explanation of the package of incremental policies on October 8, and then to the press conference of the Ministry of Finance on October 12, what difficulties China's economy is facing and whether it needs a new round of large-scale government investment plans has become a hot topic in the market. On October 12, the Economic Observer interviewed Zhang Liqun, a researcher at the Development Research Center of the State Council.

Zhang Liqun said that the Ministry of Finance's "most supportive measure in recent years" mentioned at the press conference on chemical bonds deserves special attention. On the one hand, if local government bonds achieve significant results, the spending capacity of local governments will inevitably be significantly enhanced, which will help the government significantly expand spending and investment, thereby supporting the recovery of demand. On the other hand, if the issuance of ultra-long-term special treasury bonds is vigorously increased this year, it will significantly promote governments at all levels to accelerate the construction of "double education" and the upgrading of public goods.

Zhang Liqun believes that the issuance of ultra-long-term government bonds in China has a very large space and needs to be significantly expanded. According to the 2008 "four trillion" ratio, the scale of stimulus policies should be more than 10 trillion yuan.

Zhang Liqun said that in the past decade, China's economy has been in a stage of complex changes, including shifting from high growth to high quality, and many explorations have been made around economic growth under the new pattern of high-quality development. In this process, relatively little attention has been paid to the macroeconomic aggregate imbalance caused by the contraction of demand and the resulting decline in economic growth.

In Zhang Liqun's view, China's economy still has a high potential growth rate. Once it enters the recovery period, it will last for a long time, and the recovery period of GDP growth will be roughly symmetrical with the decline period of GDP growth in the past ten years.

10 trillion level stimulus scale

Economic Observer: How do you assess the stimulus of the recent series of incremental policies?

Zhang Liqun: Before the National Day holiday, from the "924" New Deal to the Politburo meeting of the CPC Central Committee on September 26, it should be said that market confidence has been significantly enhanced and expectations have been boosted. Therefore, the signs of market recovery, especially the stock market, are very obvious. After the National Day holiday, confidence and expectations began to fluctuate because the strength of the policy was weaker than market expectations, and the market saw a correction.

On October 12, the Ministry of Finance mentioned at a press conference that "the largest measure to support chemical bonds in recent years" is worth paying special attention to: on the one hand, if local government bonds achieve remarkable results, the spending capacity of local governments will inevitably be significantly enhanced, which will help the government significantly expand spending and investment, thereby supporting the recovery of demand; On the other hand, if the issuance of ultra-long-term special treasury bonds is vigorously increased this year, it will significantly promote governments at all levels to accelerate the construction of "double education" and the upgrading of public goods.

Of course, short-term fluctuations are inevitable when a major policy package is implemented, so it should not be rushed.

Economic Observer: Is the stimulus policy still in the process of being further introduced?

Zhang Liqun: I think we are in the process of introducing a package of major policies, which are systematic, complex and powerful, so it may take some time to fully implement them and show their results.

Economic Observer: In your opinion, how much stimulus is needed?

Zhang Liqun: I think there is a lot of room for the issuance of ultra-long-term government bonds in China and it needs to be significantly expanded. The 2009-2010 "four trillion yuan" investment plan accounted for more than 10% of GDP that year (China's nominal GDP was about 35 trillion yuan in 2009) – and the actual scale was much higher than 4 trillion yuan because of the support of local governments and financial institutions. Last year's nominal GDP was 126 trillion yuan, and the scale of the stimulus policy should be more than 10 trillion yuan.

Economic Observer: How do you see the role of government investment in the new round of stimulus?

Zhang Liqun: There are some views that the market is the most efficient in resource allocation and the government is inefficient in allocating resources.

First of all, the supply of goods can be broadly divided into two categories: goods and public goods. Public goods are indispensable in the national economy and people's livelihood of all countries, and public goods have the characteristics of public welfare and inclusiveness. The focus of public goods construction projects is not on return on investment, but on bringing high-quality use value to the broad masses of people. For example, the construction of large-scale water conservancy facilities such as China's water network, flood control and disaster reduction, the construction of high-standard farmland, and the upgrading of urban pipe network to underground comprehensive pipe gallery system. It is difficult to expect these projects to have good market economics, and many market-oriented investment institutions do not pay attention to these products, but these products are indispensable and must rely on the government to promote.

Many people criticize the government from the perspective of the market for not making a profit in the construction of public goods, especially due to the lack of a restraint mechanism, and some local governments have built some performance projects. However, it should be noted that the construction of public goods promoted by governments at all levels has played an indispensable role in promoting urbanization, improving urban functions, and strengthening the supporting capacity of urban and rural infrastructure.

Therefore, it is very important to evaluate government investment objectively and comprehensively, and it cannot be regarded as a large-scale construction and performance project. For example, without the 2009-2010 "four trillion" investment plan, China would not have been able to build a world-leading high-speed rail system, which also reflects the institutional advantages of socialist countries to concentrate on major tasks.

At present, public goods are in an important historical stage of "from existing to good", and the modern urban system, industrial system and agricultural system are inseparable from the support of high-quality and high-level infrastructure system. Therefore, the current government-led investment in public goods is crucial.

In addition, government investment in public goods is also a key factor in expanding domestic demand. At present, the contraction of demand led by the market is moving in a self-accelerating direction, and this cycle can only be broken by the massive expansion of government investment in public goods. As long as the scale of government investment is large enough, it will inevitably lead to a general increase in enterprise orders, a general increase in production and investment activities, and an improvement in the employment situation, thereby promoting an overall recovery in consumer demand, and consumption will eventually gradually replace public goods investment as the main force of order growth.

Economic Observer: What lessons can we learn from the 2009-2010 "four trillion" investment plan?

Zhang Liqun: We need to be more scientific in project selection and improve the strategic planning system.

Compared with 2008, we have developed around 19 urban agglomerations, and now our project reserve and selection ability have been significantly improved. If we don't invest in these public goods now, wait for the monetary release to precipitate, and wait for demand to contract, we will lose a major opportunity. Therefore, it is time to properly recognize and make full use of the huge potential of government investment in public goods.

At the same time, it should be noted that the "four trillion" investment plan for 2009-2010 has accomplished a lot of major things that we have wanted to do for many years but have not been able to accomplish. At that time, the market thought that 4 trillion yuan was a big stimulus scale, but looking back, compared with the total GDP of 126 trillion yuan in 2023 or the fiscal revenue of more than 21 trillion yuan, the investment scale of 4 trillion yuan is not large. Therefore, the calculation of the space for bond issuance must be based on the fundamentals of China's long-term economic growth, and China is fully capable of issuing more than 10 trillion yuan of ultra-long-term special treasury bonds at present.

How to Say Goodbye to "Downward Pressure"

Economic Observer: What are the deep-seated difficulties facing China's economy?

Zhang Liqun: In the first eight months of 2024, the cumulative year-on-year growth rate of consumption and investment continued to decline, which shows that although we have done a lot of work to expand domestic demand, domestic demand is still on a downward trend. It can also be analyzed from the decline in capacity utilization and employment pressure that there is a significant surplus of production capacity.

Therefore, it is necessary to attach great importance to the current market-led contraction of demand and the imbalance of macroeconomic aggregates. In the face of such a situation, the introduction of more aggressive stimulus policies is a very necessary choice. At the same time, the fundamentals of China's long-term economic growth have not changed. From a supply perspective, China's potential GDP growth rate is still above 8%. Therefore, it is necessary to achieve remarkable results in expanding domestic demand as soon as possible and reverse the macroeconomic imbalance between supply and demand and the resulting decline in economic growth.

Economic Observer: In recent years, what kind of development has China's economy experienced?

Zhang Liqun: Over the past decade or so, China's economy has been in a stage of complex changes, including shifting from high growth to high quality, and has made many explorations around economic growth under the new pattern of high-quality development. However, in this process, not enough attention has been paid to the contraction of demand and the resulting macroeconomic aggregate imbalance and the decline in economic growth.

When China's economic growth rate continues to decline from double digits, there are many schools of thought and opinions that support the need to tolerate a decline in economic growth and a contraction in demand from different perspectives. For example, the supply-side school and the production function method measure input-output, the decline in the input-output rate of capital and the decline in total factor productivity. These views suggest that when they enter the ranks of middle- and high-income countries, economic growth will generally decline.

The 2019 Central Economic Work Conference has proposed to pay attention to the downward pressure on the economy. On April 17, 2020, the meeting of the Political Bureau of the CPC Central Committee proposed to implement the strategy of expanding domestic demand. This means that the policy level has begun to focus on the problem of insufficient demand. However, the three-year pandemic has caused the rollout of many policies to be delayed.

Therefore, in general, the problem of demand contraction and macroeconomic aggregate imbalance has been developed for a long time, and it is also a self-accelerating process - a decline in economic growth will lead to a decline in income growth, which in turn will lead to a decline in demand growth, and eventually lead to further development of demand contraction. Once the economic growth rate falls below 6%, the intensity of the contraction will increase significantly.

Economic Observer: What is the difference in the current level of economic hardship compared to around 1998 or around 2008?

Zhang Liqun: Even in the face of economic growth difficulties, the GDP growth rate around 1998 and 2008 was still significantly higher than that in recent years. After nearly a decade of continuous decline, China's economic growth has been declining more deeply than in 1998 and around 2008. This also means that the basis for supporting investment and consumption of enterprises is worse than in the previous two periods, and now some enterprises in difficulty are even unable to repay debts and pay wages, which has greatly affected the growth of demand.

Economic Observer: How do you forecast China's economic growth next year, the year after next and beyond?

Zhang Liqun: Judging from the above analysis, China's economy is in a stage of gaining momentum. The rebound is due to the huge potential for economic growth and the continued strengthening of increasingly aggressive countercyclical macroeconomic control policies. According to this calculation, it is expected that the downward trend may develop in the fourth quarter of this year, but the prospect of bottoming out is very clear. Once economic growth enters a recovery period, the recovery period will last for a long time, and the recovery period of GDP growth will be roughly symmetrical with the decline period of GDP growth in the past ten years.