The following article is from the China Macroeconomic Forum CMF, written by Wu Ge
Wu Ge is the Chief Economist of Changjiang Securities and a member of the China Chief Economist Forum
The following views are compiled from Wu Ge's speech at the CMF Quarterly Forum (Q1 2024).
1. What is the short-term real economic growth rate?
As far as the short-term economy is concerned, market consensus expectations have adjusted significantly since the beginning of the year. At the beginning of the year, the market generally expected that the real GDP growth rate in the first quarter might be less than 4.5%, but after the release of the data in January and February, it is widely expected that the first quarter will reach about 5% expected by the two sessions. The base in the first quarter of last year has a significant impact on various indicators this year, including the different months in which the Spring Festival falls also have a greater impact on consumption and prices. As far as exports are concerned, exports in March this year may be revised downward due to the high base in March last year. Statistical standards such as investment and industrial added value have also been optimized recently, and it is difficult to look at these data scientifically.
From the perspective of the whole year, if the target of about 5% can be achieved or approached in the first quarter of this year in the face of such a high base challenge, then the pressure to achieve the target of about 5% for the whole year may not be as great as expected at the beginning of the year. Real-world data can have some substantial impact on policy. Historically, if the economic data in the first quarter can meet or even exceed the targets set by the two sessions, the overall policy performance may be more prudent from the second quarter onwards. This prudence may be reflected in monetary policy, benchmark interest rates, and broad fiscal deficit ratios.
2. What are the desired long-term economic goals?
In the process of economic transformation, it is not easy to set what kind of economic growth target. Year-on-year growth, especially real GDP growth, may be susceptible to base effects. For example, the data from January to February mentioned above will be affected by technical factors such as different periods and optimization of statistical caliber. Overseas experience shows that many countries are not looking at real GDP, but on price levels and labor markets. Since China is still in the transition stage, there may also be optimization and transformation in the future. Among them, price targets can be very critical. Prices are characterized by their overall continuity and are less susceptible to year-on-year influences, and they themselves express neither simple demand nor supply, but are the result of an equilibrium between supply and demand, and thus characterize a country's output gap.
On the one hand, in the long run, we hope to achieve high-quality growth and achieve the great rejuvenation of the Chinese nation, but on the other hand, in the short term, the economic goal should be to match the actual economic growth rate with the potential economic growth rate, which is good economic growth. This means that people are fully employed, and enterprises can make full use of their production capacity, and can achieve positive growth in profits and incomes, which is a sign of the potential growth rate of the economy. Due to population and other reasons, our potential economic growth rate is facing adjustment pressure in the long run, but this adjustment should actually be a smooth and natural historical process. When the potential growth rate is adjusted, it is more important to match the actual and potential growth rate to give the economy a stable macro environment.
The key is how to find China's potential growth rate. The potential growth rate is actually a very academic indicator, and there are various algorithms and processing methods, such as HP filtering for industrial added value, state space method, Solow model, etc. But are the conclusions of these theoretical model calculations convincing, and are they consistent with the real potential growth rate of China's transition? Objectively, it may only be possible to test the accuracy of these theoretical model calculations in hindsight.
Apparent measures of potential growth, including price and capacity utilization. More than 100 years ago, American economists did not know exactly what the potential growth rate was, but there must be full employment and full utilization of production capacity under the potential growth rate. Perhaps China's potential growth rate can be extrapolated according to the current capacity utilization situation and labor market conditions. It is not so important how high or low the potential growth rate is, but what is important is to achieve the goals of price stability and full employment in the process of achieving the potential growth rate. As far as the current objective situation is concerned, the pressure and motivation of the mainland to further bridge the output gap coexist.
3. Policy recommendations to promote desirable economic growth
When the effective demand of micro subjects is not so sufficient, it is very important to make up for the gap of effective demand through policy means. To make up for the effective demand gap, policy options may include: first, at the monetary level, the real interest rate should be more concerned than the nominal interest rate, or whether the nominal interest rate is declining, but the extent of its decline is compared with the income of micro entities, whether the two match is the key; As a matter of fact, the narrow fiscal deficit ratio rose markedly last year, while there is still room for the broad fiscal deficit ratio to exert its strength.
In addition, the real estate market is systemic. A large number of the stock assets of residents' wealth are real estate, and for a single micro entity, the lower the price when buying a house, the more desirable it is. However, from the perspective of the whole system, if there is too rapid unilateral adjustment, it will lead to adjustment pressure on the stock of wealth, which will then affect consumption and investment. In addition, commercial banks generally lend on a collateral basis. Rapid adjustment in the price of collateral can also constrain credit.
In the process of clearing out the market and adjusting the real estate, do we need more powerful government forces? A successful example is that in the 90s of the last century, the Chinese government actively solved the problem of bad debts, and the four major state-owned commercial banks not only did not take major risks, but finally successfully went public. Therefore, when some problems arise in systemically important industries, how should we view the issue of stock and increment? Reform and opening up is a gradual process. This is not to say that there is no resistance in the reform, nor is it that the economy will not encounter problems, but we must properly handle the problems of stock and increment. In the 90s of the last century, the four major commercial banks did have the risk of bad debts, but they would not allow commercial banks to extend credit on increments because of the bad debts on the stock, but handled the relationship between the stock and the increment well. Under the condition that the incremental economy can be guaranteed, it is possible to feed back and solve some existing debt problems. The challenge facing China now is similar, whether it is local debt or real estate, it needs to be divided into two - the scientific treatment and disposal of stock and increment.
Fourth, summary
This year, we are expected to achieve the target of about 5%, and although there is pressure now, there is no particularly strong expectation that it will not be achieved. If the real GDP target of about 5% can be achieved in the future, there is a correlation with the improvement of the expected problems mentioned by the central government, but it is not necessarily related. It also depends on the achievement of other goals, in particular, positive changes in price indicators, which are more related to the income of residents and the profitability of enterprises. For medium- and long-term goals, no matter how to set economic growth targets in the future, the most desirable way is to align the potential growth rate with the actual growth rate.
In terms of policy, if aggregate demand growth does gain momentum, we are more concerned about not only nominal interest rates but real interest rates. For finance, the narrow deficit ratio is important, but historically, the positive broad deficit ratio may be more indicative of the expansion of aggregate demand policy. For real estate-related issues, we agree with the market-oriented approach to liquidation, and at the same time emphasize that if there are problems in certain fields, projects or even enterprises in market-oriented liquidation, we can learn from the experience of successfully disposing of existing debts in the 90s of the last century, so as to ultimately achieve high-quality development.
