Lian Ping, President and Chief Economist of Guangkai Chief Industry Research Institute, Chairman of China Chief Economist Forum
Liu Tao, senior researcher of Guangkai Chief Industry Research Institute
This article appeared in The Banker Magazine, Issue 4, 2024
2024 marks the 75th anniversary of the founding of the People's Republic of China and a crucial year for achieving the goals and tasks of the 14th Five-Year Plan. The "Government Work Report" clarified the main tone of the policy of "persisting in seeking progress while maintaining stability, promoting stability through progress, and establishing first and then breaking down", put forward the target of about 5% economic growth in the mainland this year, and released a positive signal for the further expansion of macroeconomic policies: the active fiscal policy should be moderately strengthened and improved in quality and efficiency, the prudent monetary policy should be flexible, moderate, precise and effective, and coordination and cooperation between macroeconomic policies and between macroeconomic policies and non-macroeconomic policies should be strengthened. Overall, this year's macroeconomic policies will be more active, more flexible, more forceful, and more targeted.
1. The issuance of ultra-long-term treasury bonds is normalized, and the fiscal policy is strategically expanded
At the beginning of 2023, the mainland's fiscal deficit ratio target is set at 3%. However, due to natural disasters such as torrential rains, floods, and typhoons in many parts of the mainland that year, in order to support local post-disaster recovery and reconstruction and enhance disaster prevention, mitigation and relief capabilities, the central government decided to issue an additional 1 trillion yuan of treasury bonds in the fourth quarter to be managed as special treasury bonds, and the fiscal deficit rate was raised from 3 percent to about 3.8 percent. At the local level, 3.8 trillion yuan of new special bonds and 1.3 trillion yuan of special refinancing bonds will be issued in 2023, which has played an active role in controlling risks, stabilizing investment, making up for shortcomings, and benefiting people's livelihood.
2024 is a crucial year for achieving the goals and tasks of the 14th Five-Year Plan. In the face of the complex and severe domestic and international economic situation, the mainland will further strengthen the counter-cyclical and cross-cyclical adjustment of macroeconomic policies and continue to implement a proactive fiscal policy. The government work report proposes that the active fiscal policy should be "moderately strengthened, and the quality and efficiency should be improved". Compared with the "active fiscal policy to improve efficiency" in 2022 and the "active fiscal policy to improve efficiency" in 2023, this year's fiscal policy not only better maintains the continuity, stability and pertinence of the policy, but also has more specific implementation goals, more visibility and feeling, and can also play a better role in the expected management of the market. This year's deficit rate is planned to be 3 percent, with a deficit of 4.06 trillion yuan, an increase of 180 billion yuan over the previous year's budget; the scale of general public budget expenditure is 28.5 trillion yuan, an increase of 1.1 trillion yuan over the previous year; and 3.9 trillion yuan of local government special bonds, an increase of 100 billion yuan over the previous year. In addition, the trillion yuan of treasury bonds launched at the end of last year have been issued at the beginning of this year, and their policy effects will be released mainly this year. This is not only an expansion brought about by the investment of fiscal policy resources, but also a positive signal from the perspective of the central government, expressing the government's determination and goal to promote economic growth this year.
What is particularly noteworthy is that the central authorities have decided to issue ultra-long-term special treasury bonds for several consecutive years starting this year, which will be used specifically for the implementation of major national strategies and security capacity building in key areas, and will first issue 1 trillion yuan this year. Ultra-long-term special government bonds generally refer to government bonds with a maturity of more than 10 years and a maximum of 30 years or 50 years, which have a special purpose and purpose and are not included in the deficit. Although the government work report does not give a specific year for "consecutive years", considering that this year is the penultimate year of the "14th Five-Year Plan", the role of connecting the past and the next two years is more obvious, and the next "15th Five-Year Plan" will continue until 2030, which is extremely critical for the long-term goals of the mainland to achieve socialist modernization by 2035 and per capita GDP to reach the level of moderately developed countries. During this period, the complexity, severity, and uncertainty of the external environment may remain high, and it cannot be ruled out that there will be a situation of high winds and turbulent waves, and the domestic economy may also continue to face a series of problems and challenges, such as insufficient effective demand, overcapacity in some industries, and blockages in the domestic circulation. In order to stabilize the economy, stabilize expectations, stabilize employment, and achieve medium- and long-term economic and social development goals, it is necessary to continue to exert extraordinary macroeconomic policies and increase strategic expansion. Therefore, it is very likely that the "consecutive years" will be 4-5 years, that is, from 2024-2025 at the end of the 14th Five-Year Plan to 2027 or 2028 in the middle of the 15th Five-Year Plan. If the annual arrangement is 1 trillion yuan, the final total issuance scale may be as high as 4-5 trillion yuan, which will far exceed the previous issuance scale of 270 billion to 1.55 trillion yuan of special treasury bonds. This is a major national strategic measure launched under the condition that the central government's financial leverage level is very good, and it is of far-reaching significance. The mainland's central government's low level of financial leverage is a major strategic resource in the mainland's economic development, and it is necessary to put it into use when it is most needed. The aggressiveness of the central fiscal expansion has exceeded market expectations, which will not only bring a considerable increase in policy stimulus, but also greatly boost market confidence.
Looking ahead to 2024, the mainland will take multiple measures to maintain a reasonable degree of fiscal expansion and further enhance the coordination between fiscal policy and other policies in order to meet the needs of macroeconomic regulation and control, fiscal sustainability, and optimization of the tax system. First, it is necessary to make comprehensive use of treasury bonds, ultra-long-term special treasury bonds, policy-oriented development funds, as well as various policy tools such as financial subsidies, fiscal interest discounts, and financing guarantees, to appropriately expand the scale of fiscal expenditure. The second is to make overall plans to make good use of special bond funds, investment in the central budget, local funds for vehicle purchase tax subsidies, railway construction funds, civil aviation development funds, etc., to promote the construction of key areas and major projects. The third is to continue to implement the structural tax and fee reduction policies. We will improve the financial support policies for small and medium-sized enterprises, further reduce or exempt value-added tax and income tax for small, medium and micro enterprises, and implement tax incentives such as additional deductions for R&D expenses. Fourth, increase fiscal spending in the field of people's livelihood. We will increase the reduction or exemption of taxes and fees and financial subsidies for small, medium, and micro enterprises, individual industrial and commercial households, enterprises that stabilize and expand jobs, and employment training institutions, and increase related expenditures on medical care, pensions, and education. Fifth, increase financial support for industrial transformation and upgrading. In March this year, the State Council issued the "Action Plan for Promoting Large-scale Equipment Renewal and Trade-in of Consumer Goods", and decided to accelerate the renewal of equipment in key industries, construction and municipal infrastructure equipment, transportation equipment, old agricultural machinery, education, cultural tourism and medical equipment. Sixth, focus on and alleviate the pressure on local finances. We should further speed up the pace of issuance of national and local bonds, increase transfer payments from the central government to local governments, and do not rule out the possibility of issuing new treasury bonds to ease the financial pressure on local governments.
From the point of view of budget guarantees, although the nominal deficit rate target for this year is set at 3 percent, in view of the good financial situation of the central government, the financial departments still have a lot of room for maneuver, and some funds can be transferred from the central budget stabilization and adjustment fund, the central government fund budget, and the central state-owned capital operation budget to ensure it, and if necessary, the scale of the fiscal deficit can be further increased, and the final actual deficit rate is likely to reach or exceed 3.8 percent.
Second, the monetary policy has strengthened aggregate and structural adjustment, and it is still possible to further cut the reserve requirement ratio and interest rates during the year
In 2023, the PBOC lowered the reserve requirement ratio twice to maintain reasonable and abundant liquidity, ensuring that the total amount of money and credit was moderate and stable, and the policy interest rate was lowered twice, driving down market interest rates such as the loan prime rate, guiding commercial banks to reduce the interest rate on existing first-home loans in an orderly manner, and guiding more funds to flow to weak links such as private small and micro enterprises and rural revitalization, supporting the steady and healthy development of the real estate market.
Since the beginning of 2024, the pace and magnitude of the intensive introduction of monetary policy have exceeded market expectations. For example, on January 24, the central bank lowered the deposit reserve ratio by 0.5 percentage points, providing long-term liquidity to the market by about 1 trillion yuan; on February 9, the central bank released financial data for January 2024, and the incremental scale of credit and social financing on the balance sheet was higher than that of the same period last year; on February 20, the central bank announced that the interest rate on LPR with a maturity of more than 5 years was lowered from 4.2% to 3.95%, the largest decline in recent years. Subsequently, small and medium-sized domestic banks have lowered their deposit interest rates.
Compared with the "prudent monetary policy should be flexible and moderate" in 2022 and "the prudent monetary policy should be precise and powerful" in 2023, the tone of "prudent monetary policy will be flexible, moderate, precise and effective" this year is undoubtedly more comprehensive. The government work report proposed to "strengthen the dual adjustment of aggregate and structure" is more direct in purpose and function than the previous proposal of "giving full play to the dual functions of monetary policy tools in aggregate and structure", and further strengthens the counter-cyclical and cross-cyclical adjustment of macroeconomic policies through the comprehensive use of dual tools and means, and increases support for major strategies, key areas and weak links.
From the perspective of the domestic environment, in order to achieve this year's economic and social growth goals, monetary policy needs to better meet the strong demand of all aspects of the market. First, the government's bond issuance needs to be supported by market funds. The issuance of both government bonds and local bonds requires active subscription by market participants such as financial institutions, and about 80% of government bonds are purchased by banks. Continuing to create a market environment with reasonable and loose liquidity will help financial institutions better support the issuance of relevant bonds. Second, the financing cost of the real economy needs to be further reduced. The decline in loan interest rates can further reduce the financing costs of enterprises, especially the medium and long-term financing costs, and reduce the burden on enterprises, so as to better meet the medium and long-term development needs of enterprises. Reducing corporate financing costs requires maintaining reasonable and abundant liquidity. Third, the expansion of domestic demand is inseparable from the input of financial resources. The country's medium- and long-term strategic key construction projects, including energy and food security facilities, water conservancy facilities and new infrastructure, need strong financial support. Fourth, the reasonable financing needs of the real estate market should be effectively guaranteed. Reducing the interest rate of incremental and existing housing loans, reducing the proportion of down payments, and increasing the amount of personal housing loans will help better meet the rigid and improved housing needs of residents. If the scale of financing available to real estate enterprises increases and the financing cost decreases, the debt repayment pressure of real estate enterprises will be significantly reduced, and the related financial risks can be mitigated, which will help the real estate industry gradually stabilize. Fifth, the confidence of the capital market has been boosted, and liquidity support is urgently needed. Recently, the mainland capital market has experienced considerable challenges, which has put pressure on market confidence and expectations. As a market for direct financing, the recovery of confidence in the capital market requires liquidity support from the financial system. The RRR and interest rate cuts will bring more liquidity support to the capital market, especially for listed companies in the banking, real estate, manufacturing and consumer sectors. Sixth, banks should be more willing and able to lend credit funds. The decline in deposit interest rates can reduce the cost of banks to absorb social funds, and the reduction of the standard will help banking institutions release the scale of low loanable funds and improve banks' willingness and ability to lend.
From the perspective of the external environment, the conditions for the moderate force of monetary policy may improve. At present and in the future, the world economy will enter the second stage of operation after the end of the epidemic, showing a series of new changes and new characteristics: global inflationary pressure will gradually ease in fluctuations, economic growth in the United States and Europe will decline, monetary policy in the United States and Europe will turn from tight to loose, the outlook for global trade and capital flows will change, capital is expected to flow back to emerging markets from the United States market, and China, which has a good economic growth level in the world, may become an important beneficiary. Although the adjustment process of the US federal funds target rate may be delayed due to the recent rebound in US inflation, it is only a matter of time before interest rates are cut. It is predicted that the Fed may cut interest rates 1-2 times throughout the year in 2024, and further in 2025. Changes in international macroeconomic policies may be favorable to the mainland, and domestic macroeconomic policies, especially monetary policies, will be weakened by external constraints, thus providing conditions for the mainland's monetary policy to better "focus on itself" and give better play to it.
On the whole, the actual orientation of the mainland's monetary policy this year is likely to be steady and loose, and efforts should be made to create a good monetary and financial environment for the further consolidation of the economic rebound. The first is to make full use of the total volume and price tools. In order to match the scale of social financing and money supply with the expected targets of economic growth and price levels, and maintain reasonable and abundant liquidity, the possibility of another RRR cut will not be ruled out during the year, and it is expected that the second RRR cut may be mainly targeted. At present, the reserve requirement ratio of small and medium-sized banks has dropped to 5.0-6.5%, while the reserve requirement ratio of large banks is 8.5%, and there is still some room for reduction. With the Fed likely to turn to rate cuts after mid-2024, and the European Central Bank and other central banks in developed and some developing countries following suit, the room for a mainland policy rate cut will be further opened. It is expected that there is room for MLF to decline by 10-20bp, and LPR may still be lowered accordingly. With the reduction of the reserve ratio, banks' credit capacity has been maintained or even further expanded, which will help support key national construction projects and weak links, especially the financing needs of real estate enterprises. The growth rate of property development loans is likely to accelerate to support the gradual stabilization of the property market.
The second is to make comprehensive use of structural tools. The expanded use of structural tools will not only play a role in structural directional support, but also bring about the effect of total expansion. Focusing on the five articles of science and technology finance, green finance, inclusive finance, pension finance and digital finance, the central bank will strengthen the comprehensive use of a variety of policy tools this year, make good use of re-lending, re-discounting, mortgage supplementary loans (PSL) and inclusive small and micro loan support tools to support agriculture and small and micro loans, continue to implement carbon emission reduction support tools, inclusive pension special re-loans, etc., and actively create new tools. In April this year, the central bank announced the establishment of a new structural monetary policy tool "scientific and technological innovation and technological transformation re-lending" on the basis of the original scientific and technological innovation re-lending and equipment renovation special re-lending, aiming to encourage and guide financial institutions to increase financial support for technology-based small and medium-sized enterprises, technological transformation and equipment renewal projects in key areas. In addition, this year, the scale of investment required for the "three major projects" such as affordable housing, urban village transformation, and "level-emergency dual-use" public infrastructure will be more than one trillion yuan. In addition to the 350 billion yuan that the central bank injected through the PSL in December last year and the 150 billion yuan that was injected again through the PSL at the beginning of this year, there is still a half-funding gap, and it is not ruled out that new PSLs or other quasi-fiscal instruments may continue to be added as needed during the year.
The third is to free up more credit resources by supporting the development of corporate bonds. The central bank's fourth-quarter monetary policy implementation report proposes to reasonably grasp the relationship between the two largest financing markets of bonds and credit, and guide the reasonable growth and balanced allocation of credit. Judging from the credit and social finance data in the first two months of this year, on the one hand, RMB loans increased by 6.37 trillion yuan, of which medium and long-term loans to residents increased by 523.4 billion yuan and medium and long-term loans to enterprises increased by 4.6 trillion yuan; on the other hand, the net financing of corporate bonds was 659.2 billion yuan, an increase of 129.3 billion yuan year-on-year. In the future, the growth rate of bond financing is expected to further increase, and the issuance of corporate bonds is likely to continue to increase. The freed up bank credit can be used to meet the other capital needs of enterprises and residents.
3. Strengthen coordination and cooperation of macroeconomic policies, and include non-economic policies in the assessment of consistency
This year is a crucial year for achieving the goals and tasks of the 14th Five-Year Plan. The momentum of global economic recovery is divergent, geopolitical conflicts and other uncertainties are still high, and a series of difficulties and challenges need to be overcome to further promote the economic recovery in China. To this end, the central government requires all regions and departments to come up with more policies that are conducive to stabilizing expectations, growth, and employment, prudently introducing contractionary and repressive measures, and cleaning up and abolishing policies and regulations that are contrary to high-quality development.
This kind of coordination and cooperation is first reflected in the close coordination of fiscal policy and monetary policy. In fact, the current situation is that fiscal policy and monetary policy will be both expanded, and they will work together to exert moderate force. In terms of aggregate, the active fiscal policy exerts a multiplier effect to expand aggregate demand, and the prudent and loose monetary policy can act on the economy through monetary and credit, interest rate and other policies, and the two work together to create loose macro policy space, create a good monetary and financial environment, and jointly help the economy operate within a reasonable range. The key issue that needs to be resolved in the policy coordination between the two is how to better match the expansion of monetary policy with the expansion of fiscal policy. Monetary policy should play a more active role in smoothing out the impact of daily fiscal revenue and expenditure, supporting the centralized issuance of government bonds, satisfying the financial needs of key areas and weak links of the state, and supporting the establishment of policy-oriented development financial instruments.
This year's government work report also emphasizes that it is necessary to focus on the overall development situation, strengthen the coordination and cooperation of fiscal, monetary, employment, industrial, regional, science and technology, environmental protection and other policies, and incorporate non-economic policies into the consistency assessment of macro policy orientation, so as to strengthen policy coordination and ensure that the same direction is exerted and a joint force is formed. From the perspective of overall planning and coordination, including the policy formulation process of various regions and departments in the consistency assessment in advance and strengthening forward-looking guidance will not only help to pay more attention to the priority of policy arrangements and avoid different policies from conflicting with each other or leading to the "synthetic fallacy", but also help to fully mobilize the enthusiasm of business entities and form a joint force to promote high-quality development.
Fourth, relevant suggestions for macroeconomic policies to play a better role
At present, the mainland's economy is continuing to recover. However, from an objective point of view, the foundation for recovery is not yet solid, the endogenous driving force is not strong, and the demand drive is insufficient, especially at the micro level, there are still problems such as unstable expectations, insufficient confidence, and weak demand. In order to further promote steady economic growth and increase macroeconomic policy adjustment, the following policy suggestions are put forward.
It is recommended to raise the level of government debt reasonably. To increase the amount of funds available to the government, it is necessary to adjust the concept and take a rational view of the debt level. To date, there has been no universally acceptable measure of the level of leverage in the public sector globally. The debt level and leverage level should be grasped in light of the actual situation of each country, while taking into account the relative leverage ratio of national governments. At present, the leverage level of the Chinese government is significantly lower than that of the developed countries in the West, and the strength of state-owned assets is very strong, so the Chinese government departments have a large room to further increase leverage. Appropriately increasing the quota of local special bonds, or making full use of the balance limit of special bonds, or issuing additional special treasury bonds, will not increase the general public budget and the deficit in the narrow sense; of course, we can also consider increasing the fiscal deficit and adjusting the fiscal budget. When needed, the central government can continue to borrow moderately, increase transfer payments, support local governments to improve the contradiction between revenue and expenditure, reduce the debt pressure of some local governments, and enhance the positive effect of the implementation of policy measures.
It is proposed to enrich the tools and instruments of monetary policy. The first is to issue additional policy-based development financial instruments in a timely manner. Policy-based development financial instruments are financial instruments established by development financial institutions and policy banks with the support of the central bank to supplement the capital of major projects such as new infrastructure and scientific and technological innovation, as well as to bridge the capital of special bond projects. Although this financial instrument is not a normalized regulatory tool, considering the relatively high scale of new local special bonds this year, the tight financial situation of some provinces and cities, and the different uses of funds with other quasi-fiscal instruments such as PSL, if it is necessary to further stimulate infrastructure investment, the necessity and demand for additional policy-based development financial instruments will rise in the second half of the year. Second, it is necessary to further increase financial support for direct financing of enterprises, rationally adjust the capital supervision requirements of banks, and encourage commercial banks to actively purchase bonds and participate in secondary market investment, so as to invigorate the capital market. The third is to support and encourage more non-state-owned commercial banks to lower the interest rates on existing housing loans, cancel the loan interest rate increase or further reduce the increase in the interest rate through preferential relending interest rates, preferential deposit rates, cash subsidies or financial incentives, etc., so as to reduce the debt repayment pressure of more residents.
It is recommended to increase financial support for real estate enterprises. The first is to expand the scale of special loans, M&A loans and re-loans for "guaranteed delivery of buildings", and about 1 trillion yuan of related loans can be invested throughout the year. The second is to maintain reasonable financing for high-quality real estate enterprises, and it is recommended to add 2 trillion yuan of bank loans to real estate enterprises throughout the year, so as to promote the growth rate of development loans to move closer to the overall loan growth rate of financial institutions. The third is to increase efforts to create a relaxed non-bank financial environment for real estate enterprises, and it is recommended to increase the scale of credit bond issuance in the mainland of real estate enterprises to 500 billion yuan within this year. Fourth, it is proposed to set up a debt relief fund for China's real estate enterprises, which will be jointly funded by the central government and all aspects of society, so as to meet the needs of real estate enterprises for the disposal of medium and long-term stock assets and stabilize the expectations of the real estate market.