Zhang Bin: From the Central Economic Work Conference, we can look at macro policies and real estate risk resolution

Source: China Finance 40 Forum

According to Xinhua News Agency, the Central Economic Work Conference was held in Beijing on December 11-12.

The meeting pointed out that the mainland's economy has rebounded this year and high-quality development has been solidly promoted, but it also mentioned that some difficulties and challenges need to be overcome to further promote the economic rebound, specifically listing six major challenges, such as "insufficient effective demand, overcapacity in some industries, weak social expectations, still many risks and hidden dangers, blockages in the domestic cycle, and rising complexity, severity and uncertainty of the external environment".

For next year's economic work, the meeting proposed that "we must persist in seeking progress while maintaining stability, promote stability with progress, and establish first and then break down." In terms of macro policy, the meeting focused on enhancing the consistency of macro policy orientation, and mentioned the "coordination" and "effect" of policies in many places, which shows the importance of policy synergy and effectiveness. The meeting called for the active fiscal policy to be moderately strengthened and to improve quality and efficiency. A prudent monetary policy should be flexible, moderate, precise and effective. Focus on expanding domestic demand. It is necessary to stimulate consumption with potential, expand productive investment, and form a virtuous circle in which consumption and investment promote each other. Actively and prudently resolve real estate risks.

How to understand the series of judgments and deployments of the Central Economic Work Conference from the perspective of macroeconomic research?

Zhang Bin, a senior researcher at the China Finance 40 Forum (CF40) and deputy director of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, shared his views.

On the whole, Zhang Bin believes that the most prominent challenge to the mainland's economic operation at present is still insufficient demand, and the specific manifestation of insufficient demand is the low level of inflation. Several other challenges mentioned at the meeting, including "overcapacity in some industries", "weak social expectations" and "still many hidden risks", are also highly related to the lack of demand. To get out of the lack of demand and expand investment and consumption, the core depends on two things: one is to lower interest rates, and the other is to raise government debt and increase the growth rate of fiscal expenditure. "To achieve the goal of fiscal strengthening next year, we must not use revenue to determine expenditure, but must increase government debt and increase government spending by increasing government debt. ”

It is worth noting that the requirements for monetary policy at this meeting have been adjusted from the previous "keeping the growth rate of the broad money supply and the scale of social financing basically matching the growth rate of the nominal economy" to "matching the scale of social financing and the money supply with the expected targets of economic growth and price levels". In Zhang's view, this change is very important, and it includes the meaning of expectation management. From the current point of view, the new emphasis on the price expectation target is to avoid deflationary expectations through monetary policy operations.

In terms of real estate risk resolution, it is imperative to stabilize the financing cash flow of real estate enterprises. Policies need to exert force from both supply and demand at the same time, and exert force as soon as possible. On the demand side, further reductions in policy interest rates can be considered to drive down mortgage interest rates. On the supply side, it is mainly through selective asset acquisition or other forms of government credit endorsement to help real estate companies return to the financial market for financing. In order to build a new real estate model, it is necessary to start from the most prominent contradiction of "housing" and solve the problem of "poor housing" such as migrant workers and low- and middle-income groups in megacities.

The following is a transcript of the interview:

Q1: On the basis of affirming the economic rebound this year, the Central Economic Work Conference also proposed that some difficulties and challenges need to be overcome to further promote the economic rebound, including insufficient effective demand, overcapacity in some industries, weak social expectations, and still many hidden risks. How do you understand the central government's judgment on the current economy? Can you give some examples of the specific manifestations of the main challenges mentioned at the meeting?

Zhang Bin: Although the epidemic has passed this year, the difficulties and challenges facing economic operation are still very prominent. The most prominent challenge is the lack of demand, which is manifested by the low level of inflation, in November this year, the mainland's CPI and PPI both grew negatively, CPI was -0.5%, and PPI was -3%.

A low price level will bring a series of reactions: corporate income and profitability will be under great pressure, the incentive for enterprises to invest and recruit new employees will be greatly weakened, government tax revenues and household income will also be under greater pressure, and the bad debt ratio of financial institutions will also rise. The "overcapacity of some industries", "weak social expectations" and "there are still many risks and hidden dangers" proposed in the Central Economic Work Conference are highly related to the lack of demand, and are largely the performance of the insufficient demand environment.

Q2: The meeting proposed to adhere to the principle of "seeking progress in stability, promoting stability with progress, and establishing first and then breaking down" for next year's economic work. In your opinion, what is the guiding significance of "promoting stability through progress" and "establishing first and then breaking down" for policymaking?

Zhang Bin: "Promoting stability by progress" and "establishing first and then breaking" is a kind of work idea. This line of work emphasizes more additions and the resolution of contradictions and problems in the course of development.

At present, the mainland is in the stage of economic restructuring and upgrading, with new growth forces, and many industries and capital are also facing the pressure of being eliminated. Overall, the new growth force has not been fully unleashed, and investment is not enough to fully absorb savings and bring enough high-income jobs.

If the old one is broken and the new one is not enough to stand up, the economy will face unbearable labor pressure, and there is also a risk of falling down and not being able to get up. This requires that macroeconomic policies must put "stability" in the most prominent position, and this "stability" should specifically refer to economic growth and employment, and it is necessary to be as close as possible to the potential economic growth rate and achieve full employment as much as possible.

To achieve the goal of "stability", it is necessary to pursue "progress" and "promote stability through progress" in policy. If there is no policy in the general environment, the macro economy may not be stabilized. In terms of policy, it is necessary to pursue "progress", not to do everything, but to have priorities. The principle of sorting is to do more addition, do addition first, and then consider subtraction under the premise of stability, "first establish and then break".

Q3: The meeting demanded that "the active fiscal policy should be moderately strengthened, and the quality and efficiency should be improved." It is necessary to make good use of the fiscal policy space and improve the efficiency of funds and the effectiveness of policies. How should we understand this? Do you have any suggestions for the mainland's fiscal policy to be strengthened and improved next year?

Zhang Bin: In the past two years, the growth of the mainland's fiscal revenue has been under pressure, with local governments' land transfer revenues falling sharply, and local governments' disposable financial resources facing a sharp decline. As a result, local government spending has also fallen sharply, which is one of the key reasons for the current lack of demand.

To get out of the situation of insufficient demand, we must strengthen the financial side, and it is best to improve quality and efficiency. "Afterburner" should refer to increasing the growth rate of fiscal expenditure, which should not be lower than next year's GDP growth target, and it is necessary to achieve this growth target in a real way so as not to drag down aggregate demand. "Improving quality and efficiency" is to enhance the efficiency of fiscal revenue and expenditure, which is a long-term project that needs the support of many reform measures.

To achieve the goal of fiscal strengthening next year, we must not rely on revenue to determine expenditure, but must increase government debt and increase government expenditure through increasing government debt. The government's increase in debt and expenditure, while at the same time bringing about an increase in the level of revenue and financial assets of the non-governmental sector, will have an immediate effect on expanding domestic demand.

The main constraint on the government's increased debt is inflation. At present, there is no inflationary pressure on the mainland, but there is pressure on the inflation level to be too low, and the willingness of the private sector to save is much greater than the willingness to invest. This means that there is a lot of room for the government to borrow, and the government borrowing to expand spending can make better use of resources, which can improve private sector cash flow, and it is also a crowding in effect on the private sector.

Q4: The meeting proposed that "a prudent monetary policy should be flexible, moderate, precise and effective", and one of the requirements is that "the scale of social financing and money supply should match the expected targets of economic growth and price levels", which has changed significantly from the previous statement of "maintaining the growth rate of broad money supply and social financing scale basically matching the growth rate of the nominal economy". How do you understand the significance of these expressions in guiding next year's monetary policy, and what suggestions do you have for the mainland's monetary policy deployment next year?

Zhang Bin: This change in expression is very important. The expression "the scale of social financing and the money supply match the expected targets of economic growth and price levels" emphasizes the two key objectives of monetary policy, one is economic growth, which also corresponds to employment growth, and the other is inflation, which uses the expected target of the price level instead of the current inflation, which obviously contains the meaning of expectation management, and it is necessary to avoid deflationary expectations through monetary policy operations, which is also very important at present.

Monetary policy adjustments are essential to get out of the lack of demand. The mainland's policy interest rate and credit rate have fallen this year, but the decline is less than the decline in inflation, and from the perspective of real interest rates, real interest rates have risen rapidly. This is a constraint on raising the level of aggregate demand.

For monetary policy to achieve its policy objectives, real interest rates need to be lowered, and only when real interest rates are lowered can a monetary policy environment conducive to private sector investment and consumer spending. Personally, I believe that next year's monetary policy should be more active, the policy interest rate should be adjusted more aggressively, and the real interest rate should be lowered by a large margin. Lowering the policy rate is the aggregate policy, and it is also the most precise policy, which is to allow hundreds of millions of investors and consumers to choose how to expand their spending through a more conducive financial environment for investment and consumption. There is no policy more precise than this.

Q5: In particular, this meeting called for strengthening the consistency of macro policy orientation, giving full play to policy synergy, and emphasized that in terms of policy implementation, it is necessary to ensure that the final effect is in line with the decision-making intention of the Party Central Committee, and to grasp the timeliness and effectiveness as a whole. What is your understanding of the reasons and purpose of the focus on these elements?

Zhang Bin: This is mainly in response to some problems that existed in the implementation of policies in the past. Each sector has its own goals and priorities in the policy-making process. When you add up the policies of various sectors, there may be times when there may be "fights" between policies and deviations from the overall policy objectives.

Achieving consistency in macroeconomic policy orientation is also a requirement for all government departments to carry out their work. First of all, it is necessary to clarify the main contradictions and the main policy objectives. It is not possible to take into account all the goals of each department, but to make trade-offs. When formulating policies for their own departments, all departments should not only consider their own affairs, but should also study and Xi and understand the main contradictions and main policy objectives at the current stage, and help resolve the main contradictions and achieve the main policy objectives through the work of their own departments.

Q6: The meeting proposed to focus on expanding domestic demand. It is necessary to stimulate consumption with potential, expand productive investment, and form a virtuous circle in which consumption and investment promote each other. The 2022 Central Economic Work Conference proposed that "the recovery and expansion of consumption should be given priority." Does this change mean that the focus of the policy has changed in terms of expanding domestic demand? What is your understanding of this, and what are your policy recommendations for the mainland in 2024 in terms of "promoting consumption from post-pandemic recovery to continuous expansion" and expanding investment?

Zhang Bin: At present, the mainland's consumer demand and investment demand are weak. In an environment where demand is insufficient and resources are not fully utilized, increasing consumption is good for investment, and increasing investment is also good for consumption.

Whether it is to expand consumption or investment, the key must be to implement credit growth. Credit goes up, there is more money in the pockets of residents, businesses and governments, expenditure and income go up, profits and investment go up. At this stage, there are two main bases for expanding credit, one is to lower interest rates, and the other is to borrow money from the government. Judging from international experience and historical experience, as long as these two policies are sufficient, credit can go up, and consumption and investment can go up.

Q7: In terms of real estate risk resolution, the meeting continued the recent consistent formulation in meeting the financing needs of real estate enterprises and accelerating the "three major projects", while emphasizing "improving the relevant basic systems and accelerating the construction of a new model of real estate development". How do you assess the current risk situation of real estate enterprises in mainland China, and what are your thoughts on promoting real estate risk resolution and the construction of a new real estate development model?

Zhang Bin: The current situation of the real estate industry is not optimistic, and it still poses a serious drag on macroeconomic stability. In the past, some policies have been introduced to try to help mitigate the risks of real estate companies, but at the moment they are not enough. There is still a risk of default for real estate companies, and there is still a risk of further decline in real estate sales and investment.

Stabilizing the financing cash flow of real estate enterprises is a top priority, which requires the efforts of enterprises themselves and policy support.

Policy support requires both supply and demand to exert force at the same time, as soon as possible. On the demand side, we can consider further reducing the policy interest rate to drive down the mortgage interest rate, encouraging the competition of bank housing loan interest rates to drive down the mortgage interest rate, lifting the purchase restriction and loan restriction policies in stages, and adopting subsidy policies for the purchase of first homes by low- and middle-income groups. On the supply side, it is mainly through selective asset acquisition or other forms of government credit endorsement to help real estate companies return to the financial market for financing.

In line with the principle that a house is for living. At present, the most prominent problem of "housing" is that it has been difficult for migrant workers in megacities to live in their places of work, and the housing of low- and middle-income groups has not been improved. To build a new real estate model, we should start from these most prominent contradictions and help these people who do not live well. The foothold of solving the problem is to increase affordable housing and use affordable housing in some cities, and to reduce housing prices in metropolitan areas. Of course, the characteristics of each city are different, and we cannot generalize, and we must give full play to the policy positioning of one city and one policy.