Image source: Visual China
2023 is coming to an end. Recently, the Political Bureau of the Central Committee held a meeting to analyze and study the economic work in 2024, and the meeting proposed to effectively enhance economic vitality, prevent and resolve risks, improve social expectations, consolidate and enhance the economic recovery trend, and continue to promote the economy to achieve qualitative and effective improvement and reasonable quantitative growth.
Looking back, what is the expected "report card" of the mainland's national economy this year, and what kind of challenges are it facing? How can we unleash its growth potential in the medium and long term? What kind of "combined fist" of fiscal and monetary policies will we need next year to help the economy grow steadily?
On this occasion, Blue Whale Finance has launched a series of articles on economic review and outlook, inviting macroeconomic research experts to discuss the "shape" and "potential" of the economy and explore the new momentum of economic growth. In this issue, the Blue Whale Financial Reporter has an exclusive conversation with Lu Zhengwei, Chief Economist of Industrial Bank.
Image source: Courtesy of the interviewee
"The annual GDP growth rate is expected to exceed 5%, and the economic growth target set at the beginning of the year has been successfully achieved. ”
"The mainland economy still faces some challenges. For example, enterprises are still facing constraints from insufficient demand, there is a risk of relocation of some industries, the continued decline of real estate needs to find more new drivers to make up for the growth gap left by it, and local debt pressure affects investment momentum. ”
"In 2024, the coordination of fiscal policy and monetary policy will be the key, and the relationship between existing debt and incremental debt should be properly handled, and the quasi-fiscal function of policy finance should be fully utilized. ”
Political Commissar Lu pointed out that the mainland economy has shifted from a stage of rapid growth to a stage of high-quality development, and it is necessary to further improve the system of policy objectives, link monetary policy, fiscal policy, and industrial policy with diversified goals such as unemployment rate, prices, and financial stability, and improve the stability and continuity of policies through clear policy rules to stabilize market expectations. In terms of fiscal policy, it is necessary to implement more proactive policy measures to maintain the deficit ratio above 3% in 2024, continue to promote the replacement of high-interest debt in urban investment stocks, and improve debt sustainability. In terms of monetary policy, there is room for RRR and interest rate cuts, deepening the market-oriented reform of deposit interest rates, guiding deposit interest rates to further decline, and easing the trend of deposit regularization, which will also be the focus of next year.
Political Commissar Lu believes that the core of the "new driving force" of economic growth is to realize the mainland's industrial upgrading through continuous improvement of scientific and technological innovation capabilities. At present, the mainland is undergoing a new round of capacity optimization and structural upgrading. However, unlike the previous industrial structure switching, this round of industrial structure upgrading is largely manifested in the upgrading of the industry, and the "new forces" within the industry characterized by digitalization and greening are rising and gradually becoming the main force leading the growth.
The full-year growth target of 5% is expected to be achieved
Blue Whale Finance: 2023 is coming to an end. In retrospect, China's economy as a whole exceeded expectations in the first quarter, the recovery rate slowed down in the second and third quarters, and the momentum of economic recovery declined. What is your assessment of the current economic situation on the mainland, and what are the outstanding challenges, and can the economic growth rate for the whole of this year reach the expected target of 5 percent?
Political Commissar Lu: At present, the mainland's economic situation is generally showing a trend of recovery, but the recovery process is also characterized by waves and twists and turns. There have been many structural bright spots in economic growth this year. First, since August, the profits of industrial enterprises have returned to positive growth year-on-year. In the third quarter of 2023, the earnings of A-share listed companies bottomed out, and the year-on-year growth rate of net profit attributable to the parent company of all A-shares in a single quarter turned from negative to positive. From January to October this year, the retail sales of services in mainland China increased by 19.0% year-on-year, 12.1 percentage points higher than the total retail sales of consumer goods. Third, the unemployment rate in urban areas has steadily declined. The surveyed urban unemployment rate fell to 5.0% in October, which is already lower than the average of 2019 before the epidemic.
At the same time, however, the mainland economy still faces some challenges. First, enterprises are still facing insufficient demand constraints. According to a survey by the China Federation of Logistics and Purchasing, the proportion of enterprises reflecting insufficient market demand rose to 60.6% in November, returning to more than 60% after running below 60% for three consecutive months. Second, under the industrial chain strategy of "China + N" in the United States and Europe, the mainland is facing the risk of some industrial relocation. According to the State Administration of Foreign Exchange, China's net FDI (Foreign Direct Investment) in the third quarter of this year was US$11.8 billion, turning negative for the first time since statistics began. Third, the real estate market is in a downward cycle, the real estate market continues to be sluggish, and real estate investment continues to grow negatively. The continued decline in real estate requires more new momentum to fill the growth gap left behind. Fourth, local debt pressure affects investment momentum. Compared with the end of 2022, in October 2023, only the fixed investment in the eastern region accelerated year-on-year, and the growth rate of fixed investment in the central, western and northeastern regions, where debt pressure is high, all dropped significantly. The investment in water conservancy, environment and public facilities industries, which are highly dependent on local fiscal expenditure, has greater downward pressure.
Looking ahead to the full-year GDP growth rate, the cumulative GDP growth rate in the first three quarters was 5.2%. On the basis of the economic recovery in the first three quarters, the year-on-year GDP growth in the fourth quarter only needs to reach more than 4.4% to achieve the annual growth target of 5%. Therefore, I believe that the full-year GDP growth rate is expected to exceed 5%, and the economic growth target set at the beginning of the year will be well met.
The coordination of fiscal and monetary policies will be the key next year
Blue Whale Finance: 2024 is a critical stage for China's economy to consolidate the foundation for recovery and promote structural transformation. A few days ago, the Political Bureau of the Central Committee held a meeting to analyze and study the economic work in 2024, and proposed to effectively enhance economic vitality, prevent and resolve risks, improve social expectations, consolidate and enhance the upward trend of the economy, and continue to promote the economy to achieve effective qualitative improvement and reasonable quantitative growth. Do you think that next year's 5 percent growth target is expected, and should we downplay our expectations for economic growth in the coming period?
Political Commissar Lu: Setting a 5% growth target will help boost market confidence and push economic growth closer to potential. Prices will be generally low in 2023, and the CPI will show negative growth year-on-year for many times, indicating that the economic growth rate may be slightly lower than the potential level, and there is room for improvement. The increase in countercyclical policy intensity can strengthen economic momentum and close the output gap. On the one hand, the issuance of additional special government bonds in the fourth quarter of 2023 is intended to boost economic growth at the end of the year and the beginning of the year. According to our estimates, infrastructure investment could reach around 8% year-on-year in 2023, supported by special government bonds. On the other hand, the in-depth promotion of urban village transformation will ease the downward pressure on real estate investment. The estimated housing area of urban villages in megacities is 1.31 billion square meters, which will bring about 747.1 billion yuan of fixed asset investment every year, compared with 5.6% of real estate investment in 2022.
As the mainland economy has shifted from a stage of rapid growth to a stage of high-quality development, it is necessary to further improve the system of policy objectives, link monetary policy, fiscal policy and industrial policy with diversified goals such as unemployment rate, price and financial stability, and improve the stability and continuity of policies, stabilize market expectations, and strive to improve the quality and efficiency of development through clear policy rules.
Blue Whale Finance: Standing at the current point in time, it can be said that it is quite important to stabilize the fundamentals of economic growth, what are your suggestions for the next monetary and fiscal policies to help stabilize economic growth?
Political Commissar Lu: In 2024, the coordination of fiscal policy and monetary policy will be the key.
In terms of fiscal policy, there is room for improvement in the leverage ratio of the central government. Compared with major economies, the leverage ratio of the central government and the proportion of central government debt to government debt are all at a low level. In 2022, the central government leverage ratio of the mainland was 21.4%, that of developed economies such as the United States, the United Kingdom, and France was around 100%, and that of developing economies such as India, Brazil, and South Korea was 55%, 81%, and 48%, respectively. The proportion of central government debt to government debt is 42.5%. This compares between 60% and 100% of the comparison economies.
In terms of monetary policy, there is room for RRR and interest rate cuts. The proportion of the mainland's debt interest payment expenditure to fiscal expenditure is on the rise, and the decline in land transfer revenue has also affected the ability of local debt.
In this context, I believe that monetary policy and fiscal policy need to be more closely coordinated: first, continue to replace existing debts with low interest rates to reduce the repayment pressure of existing debts and help resolve hidden debts; second, for incremental debts, continue to reduce the financing costs of the real economy, maintain reasonable and abundant liquidity, and create a good environment for the issuance of government bonds; third, consider giving full play to the quasi-fiscal functions of policy-based finance, including increasing the use of policy-based development financial instruments, and at the same time increasing PSL (Pledged). Supplementary Lending). It is worth noting that in the broad-spectrum interest rate, the rate of decline in deposit interest rates is relatively slow, and there is a certain degree of inversion between long-term time deposit interest rates and government bond interest rates, so deepening the market-oriented reform of deposit interest rates, guiding deposit interest rates to further decline, and easing the trend of deposit regularization may also be the focus in 2024.
Digitalization and greening are on the rise
Blue Whale Finance: There is a view that after the mainland economy shifts from a high-speed growth stage to a high-quality development stage, it needs to constantly get rid of the traditional development model that relies on population, low labor costs, and sacrificing resources and environment, and constantly promote the switch between new and old kinetic energy, find new kinetic energy, cultivate new engines, and build new support. But there is also an opinion that "new kinetic energy" can only be generated on the basis of "old kinetic energy". In your opinion, is it a false proposition to look for "new momentum" for economic growth? What are the aspects of economic "new momentum"?
Political Commissar Lu: Finding "new drivers" for economic growth is not a false proposition. The core of the new driving force for economic growth is to realize the mainland's industrial upgrading through continuous improvement of its scientific and technological innovation capabilities. At present, the mainland is undergoing a new round of capacity optimization and structural upgrading. However, unlike the previous industrial structure switching, this round of industrial structure upgrading is largely manifested in the upgrading of the industry, and the "new forces" within the industry characterized by digitalization and greening are rising and gradually becoming the main force leading the growth.
Judging from the situation of the mainland's economic sub-industries, the three industries that have continued to have a positive year-on-year growth rate in profits every month this year, namely electrical machinery, transportation equipment and special equipment, are all closely related to the green wave. From the perspective of fixed asset investment in the mainland, the growth rate of steel and cement "iron public foundation" is getting lower and lower, and the higher growth rate is investment in artificial intelligence, data room (IDC) investment, new energy equipment manufacturing and power station and other digital and green investment. From January to October, the exports of electric manned vehicles, lithium batteries and solar cells increased by 31.0% year-on-year, which was 36.6 percentage points higher than the overall export growth rate. The new driving force that is constantly emerging in the process of industrial upgrading is playing an increasingly important role in the mainland's economic growth.
Blue Whale Finance: If we need to find "new momentum", what support is needed at the policy level, and what measures can be taken to help achieve economic recovery and climbing?
Political Commissar Lu: With the gradual peak of the home-buying age population, we need to find a "new momentum" for relay real estate. First, we can consider realizing the transformation and upgrading of the manufacturing industry by undertaking high value-added manufacturing in developed countries, and provide policy support through land and tax incentives and optimizing the business environment. The second is to enhance the ability of independent research and development and innovation, increase the proportion of science and technology expenditure in fiscal expenditure, and increase support for higher education and science and technology enterprises. The third is to increase support for the consumption of services such as medical services, elderly care and childcare services, and cultural and entertainment services. It is possible to increase the proportion of expenditure on pension and medical care and recreation by adjusting the structure of fiscal expenditure, and to increase the supply of high-quality services by expanding the opening up of the service industry to the outside world.
In addition to implementing cross-cyclical policies to find "new momentum", we also need to expand aggregate demand and stabilize market confidence through counter-cyclical policies. First, the fiscal policy will be more active, maintain the deficit ratio at more than 3% in 2024, continue to promote the replacement of high-interest debt in urban investment stocks, and improve debt sustainability. The second is to speed up the reform of deposit interest rates and promote the continued decline of financing costs in the real economy. Since 2021, the PBOC has continued to deepen the market-oriented reform of deposit interest rates, but the trend of fixed-term deposits for residents and enterprises has weakened the impact of the decline in deposit interest rates to a certain extent, restricting the downside of bond interest rates and loan interest rates. The third is to ease the downward pressure on the real estate market. On the investment side, we will provide low-cost financial support for the construction of the "three major projects" through PSL, and consider increasing the scale of special loans for policy-based development financial institutions to "guarantee the delivery of buildings" to protect the confidence of home buyers. On the consumer side, to adapt to the new trend of changes in the relationship between supply and demand in the real estate market, measures such as purchase and sale restrictions will be further relaxed, the criteria for identifying ordinary residential buildings will be optimized, and residents in more areas will be supported to withdraw their provident funds as a down payment. (Blue Whale Finance, Li Danping, [email protected])