Wu Ge is the Chief Economist of Changjiang Securities and a director of the China Chief Economist Forum
Key takeaways:
1. Resolve the stock, and wait for the increase. Recently, the policy turning signal is obvious, and the package of measures of the central departments is frequent. This is undoubtedly the first step in facing up to the difficulties. However, how much do you know about finance, increment? Currency, is it strong enough? Real estate, will there be a breakthrough? Ultimately, the expected substantial improvement depends on the targeting and effectiveness of policy measures.
2. From the perspective of policy priorities, the solution to the stock problem will be placed in a prominent position this time. Increasing the debt limit on a larger scale and replacing local implicit debt can alleviate short-term liquidity pressure, but the main body of debt repayment is still local government. Historically, if the fiscal increment is limited during the period of debt reduction, short-term growth-promoting expenditures represented by infrastructure tend to decline.
3. In terms of real estate, the "collection and storage" of special bonds (i.e., the local government's acquisition of stock commercial housing for affordable housing, etc.) focuses on increasing effective demand, but "ensuring the balance of project financing income" is still the key consideration of local "independent decision-making and voluntary implementation". "The construction of commercial housing should be strictly controlled incrementally", which is intended to reduce supply, or will further affect local land revenue.
4. Looking ahead, it is worth looking forward to "strong interest rate cuts", but it remains to be seen whether the relevant internal and external constraints in the past can be significantly eliminated. Judging from the successful experience of reform and opening up over the past 40 years, the ultimate effectiveness of the incremental macroeconomic policy depends not only on solving the stock problems such as historical debts, but also on the extent to which resources can be increased to promote incremental economic growth.
Body:
Recently, there have been obvious signals of policy turnaround, and the central government has frequently issued a package of measures, which is undoubtedly the first step to face up to the difficulties. However, the expected substantial improvement depends on the targeting and effectiveness of policy measures. How much do you know about finance, increment? Currency, is it strong enough? Real estate, will there be a breakthrough?
1. How much do you know about finance and increment?
From the perspective of policy priorities, this time the solution to the stock problem will be placed in a prominent position. Increasing the debt limit on a larger scale and replacing local implicit debt can alleviate short-term liquidity pressure, but the main body of debt repayment is still local government. On the demand side, although there are incremental policy intentions such as tax cuts and people's livelihood expenditures, the scale is relatively limited.
Figure 1. Dissolve the stock, or expand the increment?
Source: Official government website, compiled by the author
Historically, if the fiscal increment is limited during the period of debt reduction, the expenditure represented by infrastructure tends to fall. In the third quarter, about 20-30% of the new local special bonds were invested in existing government debts. "We will continue to arrange a certain amount of bonds in the new special bond limit every year to support the resolution of existing government investment project debts", indicating the continuation of this diversion trend in the future.
Figure 2. During the period of debt, infrastructure investment tends to weaken
Source: WIND, the author calculates
2. Will there be a breakthrough in real estate?
The "collection and storage" of special bonds (i.e., the local government's acquisition of existing commercial housing for affordable housing, etc.) focuses on increasing effective demand, but "ensuring the balance of project financing income" is still the key consideration of local "independent decision-making and voluntary implementation". The actual effect of "collection and storage" depends on whether the incentive is compatible. In addition, "the construction of commercial housing should be strictly controlled incrementally", which is intended to reduce supply, or will further affect land fiscal revenue, as well as the potential intensity of local counter-cyclical forces.
Figure 3. If the construction of commercial housing is strictly controlled, the increment
Source: WIND, the author calculates
3. Is the currency strong enough?
"Strong interest rate cuts" are worth looking forward to, but whether they can get rid of the factors that have constrained the adjustment of interest rates on the mainland in the past remains to be seen, especially in the possible scenario where uncertainties such as the United States election often correspond to the appreciation of the US dollar and the RMB exchange rate is facing fluctuations.
Figure 4. When will there be a "strong interest rate cut"?
Source: WIND, the author calculates
Note: The interest rate is the 7-day reverse repo rate.
Resolve the stock, but also wait for the increase. Judging from the successful experience of reform and opening up over the past 40 years, the ultimate effectiveness of incremental macroeconomic policies depends not only on solving the stock problems such as historical debts, but also on the extent to which resources can be increased to promote incremental economic growth. These may all have reference value.
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.
Yu Tao, Gao Tong, Cao Haiwei: Researcher of Changjiang Securities.