Zhang Yansheng: China's current incremental policy package can be borrowed from 1998, not 2008

From the "924" New Deal to the National Development and Reform Commission's interpretation of a package of incremental policies on October 8, and then to the Ministry of Finance's introduction of "increasing the countercyclical adjustment of fiscal policy and promoting high-quality economic development" on October 12, China's macroeconomic policies are undergoing some changes.

Why is a package of incremental policies being introduced at this time, what are the similarities and differences between the current difficulties faced by China's economy and history, should there be another round of "four trillion" investment plan, and how should the problem of China's long-term economic growth be solved? In response to these problems, on October 12, the Economic Observer interviewed Zhang Yansheng, a researcher at the China Macroeconomic Research Institute and former secretary general of the Academic Committee of the National Development and Reform Commission.

Zhang Yansheng said that the market hopes that the People's Bank of China, the Ministry of Finance, and the National Development and Reform Commission will introduce a package of policies similar to the "four trillion yuan" investment plan in 2008. In his view, however, a more reasonable expectation for the government would be to introduce a policy package similar to that seen between 1998 and 2002. It is necessary to solve the problem of insufficient demand in the short term, the problem of insufficient endogenous power in the medium term, and the transformation difficulties and obstacles faced by high-quality development in the long term.

Zhang Yansheng believes that China's economy is now standing at a crossroads of fate. The period from 2024 to 2027 is the period of structural adjustment of China's economy, and if it follows the same path of structural reform as it did in 1998-2002, China's economy will usher in a new upward cycle in 2028. If a "four trillion" investment plan, such as the one in 2008, is introduced, it will not solve the fundamental problem and will adversely affect future confidence and expectations.

Zhang Yansheng suggested that during the period of structural adjustment from 2024 to 2027, in addition to solving short-term, medium-term and long-term problems, it is also necessary to permeate the spirit of reform and opening up of "emancipating the mind, seeking truth from facts, advancing with the times, and seeking truth and pragmatism" throughout the implementation of the package of policies, so as to mobilize the enthusiasm of localities, enterprises and the whole society to develop the economy to the greatest extent, and prevent bureaucracy, formalism, and only talking but not doing.

Economic Observer: How do you view the huge adjustment at the policy level in a short period of time?

Zhang Yansheng: This incremental policy emphasizes five aspects: increasing macro policy counter-cyclical adjustment, expanding effective domestic demand, increasing assistance to enterprises, promoting the real estate market to stop falling and stabilizing, and boosting the capital market. From the perspective of market expectations, it is hoped that national policies can give the economy a variety of boosters and stimulate the economy. At present, there is indeed a lack of expectations and confidence, reflecting that the assets and liabilities of local governments, enterprises and individuals have not really recovered from the damage caused by the epidemic, and the economy has not returned to a reasonable range in five years. In this context, there is a big difference between whether the incremental policy package is intended for large-scale economic stimulus or to solve the main contradictions and problems facing the current economy and society.

The market hopes that the People's Bank of China, the Ministry of Finance, and the National Development and Reform Commission will introduce a package of policies similar to the "four trillion yuan" investment plan in 2008. But in my view, a more reasonable expectation for the government would be to introduce a package of policies similar to that of the period between 1998 and 2002.

How to look at the "four trillion" stimulus policy in 2008 is a complex issue. It is a basic fact that China's exports to the United States, Japan and Europe fell sharply in 2007, while the import demand of the United States, Japan and Europe did not decline at that time (domestic macroeconomic control). Another basic fact is that the "four trillion" plan was launched in November 2008 and China's economy bottomed out in February 2009, and the stimulus policy was countercyclical or pro-cyclical. After the implementation of the "four trillion yuan", in fact, huge local debts, irrational real estate prosperity, excess capacity and other problems have been accumulated. The economic boom at the time did help many businesses, localities, and capital, but at the cost of a doubling of macro leverage (from 142% at the end of 2008 to 290%), which profoundly influenced medium- and long-term policies thereafter.

The structural reform from 1998 to 2002 was problem-oriented, with the issuance of long-term construction treasury bonds as the starting point to solve the shortage of aggregate effective demand in the short term, the problem of insufficient endogenous power in the medium term with the focus on the reform and listing of the banking industry, the three-year extrication of state-owned enterprises from difficulties, and the restriction of production and spindles in the textile industry, and the long-term focus on transportation, food, ecology, social and other infrastructure to repay historical debts.

The structural reforms have solved the short-, medium- and long-term problems of the Chinese economy, laying a solid foundation for China's rapid economic growth since then. Coupled with the impetus for China's accession to the World Trade Organization on December 11, 2001, China's GDP grew at an average annual rate of 11% from 2002 to 2008, and the annual contribution of total factor productivity increased by 4.2 percentage points, which was the best period of economic development since the reform and opening up and even the founding of New China.

Economic Observer: What are the current difficulties facing China's economy?

Zhang Yansheng: The current problem facing China's economy is not whether it can achieve a GDP growth rate of 5%, but the decline in its long-term potential growth capacity. The assets and liabilities of local governments, enterprises, and residents are deteriorating, the market and the people lack confidence in the future economic prospects, and the international environment is further deteriorating.

Therefore, the package of incremental policies introduced needs to consider how to change the balance sheet of local governments, enterprises and individuals. If the balance sheet of the three countries continues to deteriorate, people will become more pessimistic, and China's economy will be fine with 5% growth in the short term, but the growth potential will be worrying in the medium and long term.

Economic Observer: How did China deal with the difficulties facing its economic development in 1998?

Zhang Yansheng: First of all, we should accurately grasp the core issues and act quickly, coordinate properly from top to bottom, left and right, and work hard.

When the Asian financial crisis broke out in July 1997, policymakers judged that the Asian financial crisis would have a very great impact on China's economy. Therefore, starting from the Spring Festival in 1998, various central departments have not rested and issued long-term construction bonds and a package of "policy packages" for the purpose of coping with the Asian financial crisis. In February 1998, the central government began to form a policy package; In October 1998, the central government dispatched 31 inspection teams for long-term construction bond projects to each province to inspect whether the project was in compliance with the regulations in the early stage, whether all funds were in place, and whether the project had started to stimulate domestic demand.

In my opinion, the spirit of seeking truth from facts and seeking truth and pragmatism at that time was "stuck in the end". At present, we can see that there is still bureaucracy, formalism, and the phenomenon of only saying but not doing things can be seen in some places, and the authenticity of the project start-up rate is doubtful.

Second, the period from 1998 to 2002 was a series of reform measures that solved short-, medium- and long-term problems. In the short term, investment has become the main force of steady growth, and consumption has maintained a relatively stable growth, indicating that people are confident in weathering the difficulties and full of confidence that the government can lead the people of the whole country out of the predicament. In the medium term, structural reform will play an important role, promoting the extrication of state-owned enterprises from difficulties in three years, the stripping of non-performing assets in the banking industry, the promotion of shareholding reform, and the return of farmland to forests and pastures. Taking the textile industry as an example, the total production capacity of the textile industry was 40 million spindles, the production capacity of state-owned enterprises was compressed by 9.4 million spindles, and the production capacity of private enterprises increased by more than 20 million spindles, forming a situation in which state-owned enterprises gradually withdrew and private enterprises ran in, which in turn promoted the long-term "stuck neck" fabrics and printing and dyeing technology to achieve rapid development; In the long term, it took four years to effectively solve the long-term historical arrears of transportation, food, embankment, municipal, social and other infrastructure.

Therefore, although China's economy did not return to medium-high growth from 1998 to 2002, with an average annual GDP growth rate of 7.3%, the four-year structural adjustment period laid the "golden baton" for China's economic growth, and from 2002 to 2008, the average annual GDP growth rate reached 11%, and the total factor productivity averaged 4.2% per year, which was the best period for the development of new quality productive forces.

Economic Observer: What lessons can China's economy learn from coping with economic difficulties in 2008?

Yansheng Zhang: I don't think we can have another massive stimulus like the one we did in 2008. The international financial crisis of 2008 was never China's economic crisis, it was the financial crisis of highly leveraged countries, and China's macro leverage ratio was 142% at the end of 2008, which is very healthy.

In 2007, before the international financial crisis, China was faced with structural problems such as a large trade surplus, a low position in the global division of labor, and a large export ratio of "two highs and one capital" (high-energy-consuming and high-polluting resource products). However, the 2008 financial crisis disrupted the rhythm of China's macroeconomic regulation and control, and lost a major opportunity to take advantage of the crisis to promote domestic market-oriented reform, structural adjustment and opening up to the outside world. In contrast, Guangdong Province shouted out the transformation strategy of "vacating the cage for birds" at that time, and eight or nine years later, Guangdong's economic indicators were significantly better than those of other major economic provinces.

The reason why the 2008 economic stimulus plan gave everyone such a bad impression was that the whole society enjoyed an irrational bubble boom, but when the economic growth rate "broke eight" in 2012 and "broke seven" in 2015, the previous economic boom became the burden of structural adjustment of excess capacity. In the end, local governments, businesses and ordinary people have all suffered great harm.

Economic Observer: If we need to learn from the 1998-2002 policy package, what should China's economy do now?

Zhang Yansheng: From 2024 to 2027, it is very likely that China will experience a period of structural adjustment similar to that of 1998 to 2002. In the past four years, it is necessary to solve the problem of insufficient domestic demand in the short term, the problem of insufficient endogenous power in the medium term, and the transformation obstacles and problems faced by high-quality development in the long term. Only by solving the problem can China's economy enter a new stage of development from 2028, with enterprises daring to invest, ordinary people daring to consume, and local governments daring to dare to do things.

First of all, consumption is a slow variable and investment is a fast variable, so in the short-term policy mix, policies to stabilize investment should be introduced to solve the problem of insufficient domestic demand in the short term. We have a misconception about investment, believing that the peak of China's infrastructure investment in 2018 has passed. However, the high-quality infrastructure system to meet the people's needs for a better life has not yet been built, such as the 15-minute living circle and 30-minute commuting circle in first-tier cities are far from complete, and the construction of underground pipe network also has long-term historical debts. If we look at the construction of new infrastructure, it should be said that it is the beginning of a new era of investment.

Second, in the medium term, it is necessary to solve the problem of insufficient endogenous power by resolving structural contradictions. Solve the problems of the real estate market and bulk consumption, solve the problems of local debts and reconstruct the fiscal and tax relations between the central government and the local government, solve the problems of new urbanization based on counties, urbanization of rural transfer population, and reallocation of three rural plots. All these need to implement the spirit of the Third Plenary Session of the CPC Central Committee, further deepen reform in an all-round way, and promote Chinese-style modernization.

In the long run, it is necessary to solve the transformation difficulties and obstacles faced by high-quality development, Chinese-style modernization and the development of new quality productive forces. The first connotation of Chinese modernization is the modernization of a huge population, which inevitably involves the relationship between China's economy and the world economy. For example, the "new three" (electric vehicles, lithium batteries, photovoltaic products), as a strategic emerging industry and a new track for the development of new quality productive forces, needs to change the system of "creating conditions if there are conditions, and if there are no conditions, we must also go to the price war".

The first connotation of high-quality development as the primary task is that innovation should become the first driving force, which includes both scientific and technological innovation and institutional innovation. The core hallmark of new quality productivity is a substantial increase in total factor productivity. Among them, it includes not only the competition between China and the United States in macroeconomic governance capabilities, but also the competition between China and the United States in terms of total factor productivity growth, and the competition in the return on net assets between China and the United States.

Taking the reform of the fiscal and taxation relationship between the central and local governments as an example, people expect the fiscal policy to play a role, that is, they expect the central government to assume its due responsibilities. In 1994, when the central government was faced with the difficult situation of "two excessively low proportions," Zhu Rongji, then leader of the State Council, led the central government to negotiate with the provinces one by one, and finally resolved the crisis of two excessively low proportions of central fiscal revenue (i.e., the proportion of fiscal revenue in GDP and the proportion of central fiscal revenue in national fiscal revenue). Now, the central government needs to solve the problem of the fiscal and taxation system of the central and local governments, help local governments loosen the constraints, and establish a sustainable fiscal and taxation system relationship between the central and local governments through further deepening reforms.

Finally, the current economic policies issued by the Ministry of Finance, the National Development and Reform Commission and other departments are stimulus sufficient, but it is still necessary to integrate the spirit of reform and opening up of "emancipating the mind, seeking truth from facts, advancing with the times, and seeking truth and pragmatism" into the package of policies. If we talk about what we have done right in the past 40 years or so of reform and opening up, one sentence is "insisting on seeking truth from facts."

Before the National Day holiday, the "924" new deal reacted strongly in the market, because the government provided confidence to the market in terms of introducing practical measures. After the National Day holiday, the Ministry of Finance, the National Development and Reform Commission and other departments have also issued many practical measures, the most important of which is that government departments need to learn to use the language that ordinary people, enterprises and market investors can understand, and communicate and exchange with the whole society.

There is a saying in the market that if the government learns how to talk to the market, the market will cooperate with the government's policies. We all know that going against government policies will cost you money, and we still need to solve the problem in a reformed way.