Recently, Liu Aihua, spokesman of the National Bureau of Statistics, said that the complexity and severity of the current external environment in the mainland have increased, the effective domestic demand is still insufficient, and the internal vitality still needs to be enhanced.
In terms of stimulating domestic demand, fiscal policy and monetary policy have been given high hopes.
From January to May 2024, the national general public budget expenditure increased by 3.4% year-on-year, and the national government fund budget expenditure decreased by 19.3% year-on-year. At the same time, the medium-term lending facility (MLF), which is regarded as a proxy for the policy rate, has not been adjusted for many periods. In addition, the second quarter regular meeting of the Monetary Policy Committee of the People's Bank of China pointed out that the precise and effective implementation of prudent monetary policy, more attention should be paid to counter-cyclical adjustment, and the dual functions of monetary policy tools should be better played.
In the second half of 2024, how can the problem of insufficient effective demand be improved? How should monetary and fiscal policies continue to be promoted?
In response to these problems, Yicai interviewed Zhang Bin, deputy director of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences.
Zhang Bin believes that the improvement demand is insufficient, and the policy must be strong enough to reverse market expectations in order to see positive results, and small steps and slow steps cannot solve the problem. There is no need to wait for the Fed's policy to change, but the sooner the better, the sooner the better, which is a better support for the improvement of economic fundamentals and the rise of the RMB exchange rate. At the same time, it is recommended that the central government formulate a borrowing plan to increase debt, so as to improve the profitability and income level of enterprises and residents, and get out of the situation of insufficient demand.
(Zhang Bin, Deputy Director, Institute of World Economics and Politics, Chinese Academy of Social Sciences)
Yicai: Halfway through 2024, how do you see the improvement in domestic demand?
Zhang Bin: Overall, the data performance in the first quarter of this year is not bad, and there are some bright spots in the added value of industry, including exports. So far, however, the lack of demand remains a conspicuous constraint to the mainland's economic recovery.
The lack of demand is relative to the supply. If the demand is weak, it will be manifested as a low price level, the company's sales profitability will be low, the company's investment will be affected, and the company will not have a strong willingness to hire new employees, or even lay off employees. This will have an impact on the labor market, whether it is income or job creation. At the same time, corporate earnings are low, and asset valuations will also suffer.
We often say that the sense of economic growth is mainly reflected in the nominal variables of corporate profits, household income, resident employment, and government tax revenue. If the lack of demand persists, the level of these nominal variables will be low, and the sense of economic growth of enterprises and households will also be low. Even if the real economy is doing well and the economic growth rate is doing well, if the nominal GDP (gross domestic product) growth rate is low and the level of nominal variables is low, the sense of economic gain of enterprises and residents will not be able to keep up.
CBN: How do you view the launch and implementation of policies in the first half of 2024?
Zhang Bin: Fiscal policy and monetary policy have done a lot of actions, such as fiscal policy, through various forms of increasing borrowing, so as to form a better level of spending. There have also been some minor adjustments in monetary policy. But it will take time for these policies to be adopted and implemented.
The lack of demand is to a certain extent a negative cycle of downward spiral in income, expenditure, and credit, and there is a spontaneous sinking force. Positive effects can only be seen when the policy force is strong enough to reverse this downward force. So far, we are still fighting against this sinking force. Only when the policy is stronger than the market's expectations can the market expectations be changed.
Yicai: You recently mentioned that there is a considerable gap between fiscal expenditure and the target set at the beginning of the year, how can fiscal policy better exert force to guide the operation of the social economy?
Zhang Bin: The government's expenditure accounts for one-third or more of the total expenditure of the whole society. Through larger government spending, it will bring about the growth of non-government sector revenue, which will lead to an increase in the income of enterprises and residents, an increase in consumer spending, and an increase in investment spending, so government spending is very important to increase aggregate demand and help get out of the situation of insufficient demand.
However, judging from the implementation from January to May, our national general public budget expenditure has increased slightly, but the national government fund budget expenditure is close to 20% negative growth, and together, we call it government expenditure in a broad sense, which is a negative growth level (-15.9%). This means that it is still a drag on the average growth of spending across society.
Therefore, it is particularly necessary to make further efforts in broad fiscal expenditure. The purpose of increasing government spending is to increase the income of enterprises and residents and get out of the situation of insufficient demand.
The growth of government expenditure should not be a drag on the growth of social spending, which means that the growth rate of government expenditure should be greater than the target nominal GDP growth rate. For example, this year's real economic growth target is 5%, assuming that the price level is 1.5%, and together, the nominal GDP growth rate is 6.5%, and the government expenditure growth rate should be greater than 6.5%, so that it will be a pull on the overall expenditure growth and demand growth, rather than a drag, which is the bottom line.
Sustaining this increase in spending means that the government has to borrow more to do so. Whether the government can borrow depends not on how much it has borrowed or whether it has a high or low debt ratio, but on the balance of power between private sector savings and investment.
If the private sector is much more invested than saved, the economy is overheated and there is inflationary pressure, then the government should not borrow to increase spending, otherwise it will only bring inflation.
On the other hand, if there is a lot of savings and investment is relatively weak, at this time the government increases borrowing and investment, in fact, it is to make fuller use of resources, and then it is safe for the government to borrow.
At the same time, nominal GDP leads to more demand, more output, and a recovery in prices. Even if we borrow again, the debt ratio will not necessarily rise, and the ability to repay the debt will not necessarily be greater.
CBN: How can government borrowing be further transmitted to private sector investment and savings?
Zhang Bin: Intuitively, when the government borrows money and takes this money, it will form expenditure, and this expenditure will form the income of the non-governmental sector. If the income level of consumers increases, the willingness to consume will increase, and the profitability of enterprises will increase, and the willingness to invest will be further supported, and a new balance of savings and investment will be formed.
CBN: In the context of local government bonds, will increasing spending increase the pressure on local government bonds?
Zhang Bin: It is up to the central government to formulate a debt plan to increase debt. At present, some local governments want to reduce the level of debt, which can be understood as reducing leverage, and this matter still needs to be grasped at a good pace.
When the private sector is reluctant to consume, when the government is deleveraging, the government should no longer reduce spending and deleverage, otherwise a negative cycle will be formed. The government should play a hedging role, and should increase leverage, at least stabilize it.
CBN: In terms of monetary policy, you have repeatedly called for a reduction in the policy interest rate, but there have been no further regulatory measures since the beginning of this year.
Zhang Bin: There are a lot of concerns, such as worrying that there is already a lot of money now, is it useful to use the loose monetary policy to send more money? For another example, can monetary policy issue money solve the problem and help get out of the situation of insufficient demand?
We can make an international comparison, the financial assets of China's household sector are all combined, excluding real estate, about 230 trillion yuan, and the average is about 6-70,000 US dollars per household converted into US dollars. The average household in the United States has more than $1 million in financial assets this year. The average household in Japan and Europe also has more than $200,000 in financial assets. In comparison, the financial assets held by Chinese households are not as large as on average. Of course, our level of development is not the same, and our per capita GDP is also different, but even if we use per capita GDP as the denominator, China's household financial assets are not much relative to GDP, so we don't really have that much money.
Is it useful to have loose monetary policy, especially with a particular emphasis on lowering policy rates? At present, the debts of the government, enterprises and residents together are about more than 300 trillion yuan, and if the interest rate is fully reduced, such as 100BP or even 150BP, we will reduce the policy interest rate to 0 at the extreme, so that the annual interest saved by the government, enterprises and residents alone is conservatively estimated to be 3-4 trillion yuan. Not only that, but it can also improve the valuation of assets in the stock market and real estate market. By cutting interest rates, it will bring tens of trillions of changes to the balance sheets of governments, enterprises, and residents, which will make your wallet bigger, make your consumption and investment more confident, and then drive the growth of spending.
Monetary policy, especially interest rate cuts, is very precise for expanding spending, it is actually improving the balance sheet by cutting interest rates, so that you have more money in your pocket and less debt, so that you can decide how to increase consumption and how to increase investment. Leave the decision to increase spending to thousands of households. This is not the same as fiscal policy, where the government decides what to spend its money on.
CBN: The market generally believes that we will be able to follow up after the Fed cuts interest rates, what do you think about this?
Zhang Bin: We cut interest rates at any time in the future, the sooner the better, the sooner the better, and I don't think we have to wait until the Fed's policy changes. The sooner we lower, the sooner the economic fundamentals will improve, and the better the support for the exchange rate and economic fundamentals.
Actually, I don't attach much importance to the concept of the so-called time window, because the sooner we change, the less damage the negative cycle will suffer, the smaller the scar effect of insufficient demand will be, and the sooner we can get out of the situation of insufficient demand.
Yicai: Since interest rate cuts will play an obvious role in improving the fundamentals of the economy, how fast will the transmission cycle of this effect be?
Zhang Bin: Different markets perform differently, and the stock market or the real estate price market may have immediate results. Whether it is the Federal Reserve, the European Central Bank or the Bank of Japan, as long as the news of interest rate cuts is released, stock prices and asset prices will immediately have a very big reaction.
Through the reaction of asset prices, the rise in asset valuations will be slowly passed on to the real economic sector, then to the credit market, and then to the change in earnings, and the negative cycle will slowly turn into a positive cycle, which does take time, but it is a continuous positive process. So I was right when I said that the immediate result was going to be good, and it was going in a good direction step by step, but I was also right when I said that it would take a lot of time because it takes time to complete the process.
CBN: If the policy interest rate is lowered in place and the intensity is strong enough, will the situation of insufficient effective demand be significantly improved in the second half of the year?
Zhang Bin: I am very confident that if the policy interest rate is lowered very low, and the fiscal policy is maintained at the policy target at the beginning of the year, the situation of insufficient aggregate demand can be reversed very quickly, and the sense of economic growth of enterprises and households will change very quickly.
It is difficult to say that there is insufficient demand, but if the policy is strong enough, it can be changed quickly. Policies can only play a role if they are strong enough to change market expectations, and small steps cannot reverse this trend.
CBN: If the monetary policy is not in place, can we expect the effect of further fiscal policy stimulus?
Zhang Bin: Whether interest rates are cut or not, fiscal policy should be exerted in the second half of the year. It is necessary to speed up the implementation of the budget expenditure plan at the beginning of the year, including the borrowing plan, which will play a certain role in increasing the government's borrowing and spending. Don't hesitate to implement the budget more fully first, and if it is not enough, you should increase the debt.
Yicai: In the second half of 2024, will exports become the main driving force of the mainland's economic growth?
Zhang Bin: The overall situation of the world economy is okay now, but the mainland may face more pressure on trade frictions in the future, so don't expect too much from exports. In addition, from the perspective of resource allocation, I think that spending more resources on domestic demand, domestic consumption, and domestic investment is a better resource allocation, and a situation that can more effectively improve China's welfare level.