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Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

Yesterday, my circle of friends was swiped by one thing: the latest press conference of the State Council Information Office.

Lan Foan, Minister of Finance, personally introduced the relevant situation of "increasing the counter-cyclical adjustment of fiscal policy and promoting high-quality economic development" and answered questions from reporters.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

At the meeting, Minister Lan said that in accordance with the deployment of the Political Bureau of the Central Committee held on September 26, the Ministry of Finance will focus on stabilizing growth, expanding domestic demand, and reducing risks on the basis of accelerating the implementation of the determined policies. A package of targeted incremental policy measures will be launched in the near future. It mainly includes the following aspects:

1. Increase the debt quota on a large scale and support local governments to resolve hidden debts.

2. Issuing special treasury bonds to support large state-owned commercial banks to replenish their core Tier 1 capital.

3. Superimpose the use of special bonds, special funds, tax policies, etc., to support and promote the real estate market to stop falling and stabilize.

4. Increase support and protection for key groups.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

I know, I know what you're trying to ask. These policies seem to be extremely ambitious, but they involve too much financial knowledge and professional terms, and they are really a bit incomprehensible. Can anyone explain a little bit for me?

As an official account, we have always hoped to do one thing: lower the cognitive threshold of business.

Macroeconomics is one of the most important components of the business world. But the topic is super complex, and almost every small order can be written into a set of millions of words.

But today, I still want to challenge and try to use the time of an article to help you do a disassembly.

If you're interested in: How exactly does the macroeconomy work? How exactly does the economy grow? What exactly do these new policies mean at the press conference? How will it affect our lives?

Then I am sure that you will definitely gain something.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?
Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

How is the economy growing?

I would like to seriously ask you a deceptively simple question: how exactly does the economy grow?

You may have heard the saying that there is a troika of economic growth: consumption, investment, and net exports.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

But have you ever seriously thought about why these troikas? Why isn't it a four-wheeled or five-horse carriage?

Because, these troikas are derived by logical deduction.

It is based on the extremely simple logic that everything that a country produces over a period of time (i.e., GDP) ends up with only 3 destinations:

Or, it is bought by its own residents and the government, that is, consumed.

Or, bought by foreign residents and the government, that is, net exports.

Or, it will be used by companies and governments to invest in the expectation of higher returns in the coming year. For example, enterprises invest in factories, or the government invests in high-speed railways and highways.

Think about it, is there only these 3 places to go, and nothing else?

If the produced goods do not fall into these three places, that is, they are not bought by anyone, and they are lost and expired in vain. These products don't actually generate any value and shouldn't be considered economic growth in a sense.

Thus, economic aggregate = consumption + investment + net exports.

This calculation idea, known as the "final product method" and also known as the "expenditure method", is one of the important methods for GDP measurement.

As long as these three horses continue to move forward, there will be no major problems in economic life. Similarly, when economic growth slows, the solution is to raise the whip and stimulate one or more of the three horses to accelerate forward with the economic chariot.

This may seem like a complete explanation, but is that what macroeconomics is all about? Of course not.

If there are only these three forward horses, then it stands to reason that the economy will move forward slowly, at least not backwards. But why is it not uncommon for the economy to stagnate or even regress in real life?

This is because, on the other side of the chariot, there is a fiery horse pulling the chariot in the opposite direction, trying to make it go backwards. The name of the horse is "Debt Risk".

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

What is debt? What is the importance of debt to the economy?

Here's a video I've seen · Dalio's How The Economic Machine Works, which you can see when you search for the name on major platforms.

In this video, Dalio explains the relationship between debt (called "credit" in the video) and economic growth in crystal clear language.

Chinese culture generally resists "borrowing", believing that it is eating more food and overdrawing the future. But in fact, after watching this video, you will understand that reasonable borrowing will have a great impetus for economic growth.

Suppose a sweater sells for 10 yuan, and a textile worker knits sweaters by hand, he can only knit 10 sweaters a year and earn 100 yuan. And his dream is to own a loom, with which he can weave 500 sweaters a year and earn 5,000 yuan.

And a loom costs 5,000 yuan, and in a world where borrowing is prohibited, even if he doesn't eat or drink, it will take him 50 years to save enough money.

But what if the world could borrow? Through the loan, he can buy back the loom immediately, and with a loan of 5,000 yuan, plus some interest, he can pay off the debt in a little more than one year. In a sense, economic development has been accelerated by a factor of 50.

You see, this debt, with a very low risk, has greatly promoted the development of the economy.

In fact, the vast majority of transactions in daily life are in the form of borrowing, or credit. In the video, Dalio said that the total amount of credit in the United States is about $50 trillion, while the total amount of money is only $3 trillion.

Or to put it another way, nearly 95% of total expenditures are credit.

However, Dalio added that credit is "the largest and most unpredictable part of the economy". This is because if debt risk gets out of control, it will bring incalculable risks to the entire macroeconomy.

For specific details, you can watch Dalio's video, which will not be expanded here, but in general you can remember:

This backward steed is a thousand-mile horse, and once it gets out of control and goes crazy, it will drag the entire economic chariot in the opposite direction, causing economic stagnation or even regression.

For example, the European debt crisis in 2009 was essentially a debt crisis in Greece, the main body of the country, insolvent, the country on the verge of bankruptcy, and eventually dragged the entire euro area into the water, and even caused the entire world economy to be volatile.

And Greece's GDP has also turned from a peak of 350 billion US dollars in 2008 to 190 billion in 2016, falling by nearly half in 8 years, and has not slowed down until today. According to some experts, the full recovery of the Greece economy is likely to take until 2060.

That was 50 years, and the youth of two entire generations of young Greece had to pay for the consequences of the debt crisis.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

Greece GDP trend chart for the last 25 years

Okay, so now we've added a link to the economic model, and in addition to the three horses forward, there's also backward debt risk.

But is that the end of it? There is still a part, and that is the person who drives.

The person who drives the car is you, me, and him, and the countless individuals living in this world.

When the stock market was going crazy the other day, many people asked me for their opinion, and at that time I reposted an old article that I had written before, which fully explained this logic.

In a word, the form of the economy depends not only on people's income, but also on people's confidence in the future and the consensus reached by everyone around them.

For example, you performed well this year and got a year-end bonus of 50,000 yuan.

In a period of social prosperity and economic prosperity, your confidence in the future is bright, and you predict that you will get a year-end bonus every year, and even rise to 100,000 next year and 150,000 the year after.

So what would you do? You are likely to spend all the 50,000 yuan, and you will even borrow money to spend, and then borrow tens of thousands of yuan to buy a new car, and you will definitely be able to repay it next year anyway.

But in times of economic slowdown, everyone around me is extremely pessimistic about the economy. Your expectation is that there is a high probability that there will be no more year-end bonuses, and you may even lose your job next year.

So what would you do? You will honestly deposit the $50,000 in the bank in case you need it.

You see, it's the same 50,000 yuan income. People will deal with it very differently at different times. Such is the power of confidence and consensus. An important factor in economic growth is to create confidence and consensus.

The consensus of winning is the path to real win.

Now, let's look at this model: the chariot of economic growth, pulled by consumers, investment, and net exports, is trying to offset the impediments posed by debt risk, and at the same time, the confidence and consensus of all the people who drive can drive the cart steadily forward.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

With this basic model, let's look at these policies at the press conference. I'm sure you'll be enlightened.

Unbelief? I'll take you through them one by one.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?
Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

Resolve local debts

Let's look at the first policy: to resolve local debts, let's take a look at Minister Lan's original words:

The first is to strengthen support for local governments to resolve government debt risks, increase debt quotas on a large scale, and support local governments to resolve hidden debts.

Localities can free up more energy and financial space to promote development and protect people's livelihood.

Resolving local debts can reduce "debt risk".

In fact, borrowing for development is a common practice of governments around the world. Government borrowing, or "deficits" that you often hear about in the news. As long as the debt is kept within a reasonable scale, not only can the risks be controlled, but also the economic development can be greatly promoted.

The deficit ratio of the mainland government has been maintained at about 3%-4%. Side-by-side comparison with the major countries in the world, this proportion is not high.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

Source: IMF, Soochow Securities Research Institute

But China's government debt has a structural problem: the central government's debt is not high, while the local government's debt is not.

I also read from an article by the famous economist He Fan that according to mainland law, local governments cannot directly borrow money from banks. So where did the money come from? One of the main methods is that the local government allocates assets to set up a company, and then the company can raise funds through loans, bonds, etc.

The kind you often hear, XX City Construction Investment Co., Ltd., XX Provincial State-owned Assets Investment Co., Ltd., is essentially this kind of company, also known as local financing platform.

The money raised and the debts borrowed by these platforms are the "hidden debts" mentioned by Minister Lan. They are more flexible than special loans and are more suitable for the social environment during periods of high growth.

Over the past 40 years, almost every corner of China has achieved unprecedented development and created an economic miracle that is rare in the world. Remember? Proper debt is an accelerator for the economy. Of course, it is indispensable for this.

But if we really ask the question like a bone-and-bone egg, is every decision made during this period flawless?

Obviously not, this is not the problem of the decision-makers, but the economic life itself is constantly changing, and there can be no perfect answer, and this is true in any country.

For example, how big an airport should I build? 2 runway or 4 runway? 20 million throughput or 60 million throughput?

For example, how many kilometers of highway should be built? 4 lanes or 8 lanes? Is it enough to go to every prefecture-level city, or to every county or even township?

For example, how long is the high-speed rail? How many subways? How many hospitals? How many kindergartens?

These problems, no matter how you calculate and predict, will inevitably have all kinds of deviations.

So why has it not been a problem for so long, and it is only in recent years that the problem of local debt has gradually emerged?

The answer is that in boom times, rapid economic growth will "mask" many flaws and imperfections in decision-making.

The airport with a throughput of 40 million was repaired, but it turned out that it was accidentally repaired too much, and the actual annual passenger flow was only 30 million. Are there any serious consequences for this? Actually, no, because as long as the economy is growing at a high rate, the passenger flow will reach or even exceed 40 million in a few years.

At that point, this will not only be not a miscalculation, but a pre-emptive amount for development.

When the growth converges and the growth slows down, there are more high-speed repairs, airports are bigger, and no one is sitting on high-speed rail. The investment in the early stage may not be able to recover the cost in the later stage.

As a result, these local debts will be concentrated and manifested, and if they have a "thunderstorm", it will bring major hidden dangers to economic development.

In the vernacular, this policy is to allocate special funds to solve the debt problem of local governments.

In Minister Lan's words, the problem of local debt has been solved, and "local governments can free up more energy and financial space to promote development and protect people's livelihood."

In fact, this operation has already begun, and what are the results? Let's take a look at the original words from the press conference:

The Ministry of Finance has allocated more than 2.2 trillion yuan of local government bonds to support local governments, especially high-risk areas, in resolving existing debt risks and clearing arrears of enterprises, and the overall alleviation of local government debt risks. As of the end of 2023, the balance of implicit debt included in the government debt information platform nationwide has decreased by 50% compared with the 2018 map, and the debt risk is controllable.

Since 2024, the Ministry of Finance has arranged a debt limit of 1.2 trillion yuan to support local governments in resolving existing hidden debts and digesting the government's arrears to enterprises.

Only by unloading the burden on your body can you start again.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?
Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

Support large state-owned banks to replenish core Tier 1 capital

Let's take a look at the second policy: support large state-owned banks to replenish core Tier 1 capital. Again, let's take a look at Minister Blue's exact words:

The issuance of special treasury bonds will support large state-owned commercial banks to replenish their core Tier 1 capital, enhance their ability to resist risks and provide credit, and better serve the development of the real economy.

This policy can stimulate "investment" in this horse.

What is "core Tier 1 capital"? This is a particularly professional financial term, and it is a compulsory concept for the financial master's examination. But we're not a graduate school after all, so I just want to give you a very simplified model.

We all know that banks, as the main arteries of economic life, need to have a strong ability to resist risks, and cannot close their doors at the slightest disturbance.

You might say, don't the banks have our deposits? With so many deposits, can't you resist risks?

Of course not, the money belongs to you, not to the bank. When you go to withdraw money, the bank will pay you back with interest.

Your deposit is never the property of the bank, but your property, the debt of the bank.

But the operation of banks, after all, is risky. For example, if he takes out the money and lends it, but the loans are all bad debts and cannot be recovered, and even the savings that belong to you are gone, what can I do? This is a huge risk to the entire financial system.

Therefore, the law requires banks to have their own "property", or "capital", to protect against risks.

In other words, this capital is there to protect your deposits. As soon as something goes wrong with the bank's operations, use that capital to repay your deposits.

And this kind of capital can be roughly divided into two categories.

The first type of anti-risk ability is extremely strong, and when a risk occurs, it can be directly repaid on the premise that the bank maintains its operation. This kind of capital is called "Tier 1 capital".

The most typical Tier 1 capital is the profits accumulated by the bank itself over the years, and in the event of operational problems, this money can be used directly to repay your deposits.

On the other hand, the ability to resist risks is slightly weaker and cannot be repaid immediately. However, if the bank goes into liquidation, it can also be used to repay your deposits. This kind of capital is called "secondary capital".

For example, money borrowed from banks. In normal times, banks generally do not use these "loans" to repay your "deposits" and pay off old debts with new debts. However, if the bank goes into liquidation, the order in which these debts are settled will occur after your deposit debts.

This means that if a bank goes bankrupt, it must pay back your deposits and if there is any surplus before it can pay those debts. Therefore, this Tier 2 capital is also a layer of protection for your deposits.

If you look at it more closely, Tier 1 capital can also be divided into two categories, called "core Tier 1 capital" and "other Tier 1 capital". But this classification is too detailed, so I won't expand on it.

In conclusion, you can remember one conclusion: core Tier 1 capital is one of the important components of bank capital, it is the greatest protection of your deposits, and it is the umbrella of the entire financial system.

Core Tier 1 capital also reflects a bank's ability to resist risks, and even its overall strength. For example, every year, the China Banking Association publishes a "Top 100 List of China's Banking Industries", which is ranked on the basis of "net core Tier 1 capital".

From this dimension, core Tier 1 capital is as important as corporate revenue. For example, the law of the mainland stipulates that the core Tier 1 capital adequacy ratio of banks shall not be less than 5%, in order to ensure that banks have sufficient anti-risk capabilities.

Okay, that's it, but I have to stress again that this is just a minimalist framework to give you a quick understanding. If you answer the exam with this answer, you will probably be deducted points.

This time, the policy is to issue special treasury bonds to support those large state-owned banks to further replenish their core Tier 1 capital.

And then what to do? Banks are the heart of investment activities and, in the words of Minister Lan, can "enhance their ability to resist risks and provide credit to better serve the development of the real economy".

In fact, this policy has also begun to be planned, as early as September 23, Li Yunze, director of the State Administration of Financial Supervision and Administration, said at a press conference:

In order to consolidate and enhance the ability of large commercial banks to operate and develop steadily, and better play the role of the main force in serving the real economy, after research, the state plans to increase the core Tier 1 capital of the six large commercial banks, which will be implemented in an orderly manner in accordance with the idea of "overall promotion, phased and batched, and one bank and one policy".

Only when the banks are stable can the economy be stabilized and investment be firm and stable.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?
Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

Promote the real estate market to stop falling and stabilize

The third policy: to promote the real estate market to stop falling and stabilize. It's still the old rule, let's go to the original words first:

The third is to superimpose the use of local government special bonds, special funds, tax policies and other tools to support and promote the real estate market to stop falling and stabilize.

This third point can shape "confidence and consensus".

This logic is very simple, let's take it quickly. Because housing prices are almost a decisive part of Chinese residents' property, many households have more than 50% or even more than 80% of their total assets are real estate.

The trend of housing prices will greatly affect people's confidence and consensus in the future. Housing prices are bullish, and confidence in the future is strong. Housing prices are bearish, and confidence in the future is weak. The economy will need greater stimulus to recover.

Regaining confidence and shaping consensus is the starting point of all development.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?
Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

Increase the extent of protection for key groups

The fourth policy: increase the degree of protection for key groups. Continuing with the original words:

Fourth, we will increase the support and guarantee for key groups, and a one-time living subsidy has been issued to the needy people before the National Day, and the next step will be to increase the number of students to help the poor and enhance the overall consumption capacity.

Fourth, it can spur the "consumption" of the horse.

This is also very easy to understand, the premise of consumption is to have money in hand. And one person's consumption will become another person's income, and this person's income will become further consumption, which will become the next person's income.

Therefore, an investment of 100 yuan on the consumer side is likely to bring 300 yuan, 500 yuan, or even higher economic benefits. This phenomenon is known as the "multiplier effect".

And I want to emphasize that subsidies for low-income groups are particularly important in the stimulation of consumption. After all, their consumption will not only be used in basic livelihood industries such as physical manufacturing, but also will really change their living situation.

For example, last month, Sheng Songcheng, former director of the Survey and Statistics Department of the People's Bank of China, proposed in a speech that the mainland's personal tax threshold should be raised from 5,000 yuan to 8,000 yuan.

According to his calculations, raising the tax threshold will only reduce tax revenue by about 30 billion yuan per year, which is only 0.17% of the total tax revenue in 2023, and the impact is minimal.

But this 30 billion yuan will really fall into the hands of low-income people. Increase their spending power and improve the stability of the economy as a whole.

Although the individual income tax threshold has not been adjusted for the time being, similar actions have already begun, let's take a look at the original words of Minister Lan's press conference:

Since the beginning of this year, the central government has allocated 66.7 billion yuan in employment subsidies to support local governments in the employment of key groups such as college graduates and vocational skills training. From January to September, the national education expenditure exceeded 3 trillion yuan.

The basic pension level of retirees will be increased according to the proportion of 3% of the country, and the minimum standard of basic pension for urban and rural residents will be greatly raised. The financial subsidy standard for basic public health services will be raised to 94 yuan per person per year, and the financial subsidy standard for basic medical insurance for urban and rural residents will be raised to 670 yuan per person per year.

In the next step, we will adapt to the changing situation of the mainland's population development and the multi-level and diversified needs of the people, and further increase spending in related fields to better benefit people's livelihood.

Boosting consumption is not only related to the macro economy, but also to the lives of every ordinary person.

Now, let's take a look at the previous economic growth model.

Liu Run: What does the "package of policies" issued by the Ministry of Finance mean?

You see, consumption, investment, debt risk, and confidence consensus are all taken into account.

What about net exports, you may ask? Why didn't you mention net exports this time?

In my opinion, on the one hand, foreign trade mainly falls under the jurisdiction of the Ministry of Commerce, and is not the focus of this press conference. On the other hand, in terms of exports, various policies have already been introduced to stabilize the exchange rate and stimulate exports, which I believe you have seen more than once in the news.

In the press conference, Minister Lan Foan had a passage that impressed me particularly deeply:

I can responsibly tell you that China's finances are resilient enough to achieve a balance between revenue and expenditure and achieve the annual budget target by taking comprehensive measures.

I have rarely seen a high-ranking person in the system express his emotions in such surging words.

Don't know how you feel? At least I sigh from the bottom of my heart, it's good, it's good. The decision-making department has really made great efforts in all aspects of China's economy.

Although, the general environment is not easy.

Although, the economy is a super complex system, which affects the whole body.

Although, the outcome of a policy cannot be predicted by a simple law of cause and effect, let alone a simple conclusion that "what if, what will happen".

But at least, we've been trying, we've been trying.

Even if you encounter some bumps, you can cross the river by feeling the stones.

After all, there will always be flowers.

*Personal opinion, for reference only.

Viewpoint / Liu Run Writer / Ge Ping Editor / Er Man Layout / Huang Jing

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