Zhang Jun: Why is it imperative to restore and improve residents' income?

On October 6, Professor Zhang Jun, a first-class professor of liberal arts, dean of the School of Economics, and director of the China Economic Research Center of Fudan University, posted an article in the "National Day Talk" column of CBN, saying that the service industry and the construction industry provide the vast majority of the sources of employment and income growth of mainland households, which have been severely affected by the epidemic and have recovered slowly, which has directly affected residents' disposable income and consumption expenditure. At present, the expansion of manufacturing capacity and the decline in prices have led to the intensification of involution and deflationary pressure on the macro level. Therefore, the policy of stabilizing growth should shift from focusing on manufacturing to supporting the service and construction industries, and promote the recovery of these industries in order to maintain and expand employment and improve household income. The recent policies to support the stock market and the property market, as well as the guidance on prioritizing employment, are important measures to boost confidence, improve household incomes and expand consumer demand. We reprint the original article for the benefit of our readers. In a recent quantitative study of the post-pandemic economic recovery, we found that the revenue of manufacturing enterprises above designated size has experienced a relatively rapid recovery, and the recovery momentum is better than the average of the three years before the epidemic. However, the income situation in the non-manufacturing sector, especially in the service sector and construction as a whole, is not encouraging. This finding is not surprising, as the services and construction sectors have been much more negatively impacted by the pandemic than the manufacturing sector, and have been slower to recover since last year. The situation of the construction industry has been greatly affected by the contraction of the real estate sector and has been greatly affected. Considering that the entire service industry and the construction industry provide the vast majority of household employment and income growth, after the severe impact of the epidemic, these areas have been severely damaged and the recovery is weak, which will naturally directly affect the disposable income of households, resulting in a slowdown in the income growth of urban residents, which will inevitably affect the recovery of consumer spending. According to the data published by the National Bureau of Statistics, the most severely affected part of residents' disposable income is residents' operating income and property income, and the sources of these two parts of income are related to the service industry and the construction industry, and have not returned to the pre-epidemic trend value. For this reason, the per capita consumption expenditure level of residents is still below the pre-pandemic trend value. On the other hand, while the construction sector in the service sector has recovered more slowly, the manufacturing sector has recovered more quickly in the past four years, and production has continued to expand. This is because our steady growth policy is mainly focused on the growth of the manufacturing industry, and as a result, on the one hand, the upstream large state-owned enterprises, especially those in the field of equipment manufacturing, are supported by national policies and still maintain capacity expansion; On the other hand, in order to survive, the vast majority of small and medium-sized downstream manufacturing enterprises continue to start production even if they do not make money. This has led to an even more severe involution in the manufacturing sector: production is expanding, prices are falling, and in most cases firms are not making money. Macro deflationary pressures have also arisen. It is precisely because the focus of the growth policy is on the manufacturing industry rather than on the service industry, that we have seen that although demand has continued to be weak and it is difficult to make money in recent years, the production of the manufacturing industry has continued to expand, and the nominal GDP has grown by about 5%. This creates a macroscopic and microscopic "temperature difference". In fact, the PPI has been in negative territory for most of the year in recent years, and the overall price level has fallen, but the supply is still expanding. In this case, if the export growth of the manufacturing sector is better, the deflationary pressure will ease somewhat. Without the relatively strong export growth of recent years, deflationary pressures would have been even greater. But given the geopolitical landscape, the degree of certainty facing future exports is not high. Under this assumption, the focus of the policy of stabilizing growth is naturally to stabilize domestic demand, but the focus of stabilizing domestic demand is to stabilize employment and household income, rather than stabilizing production. To this end, the policy tendency to stabilize growth must shift from manufacturing to service and construction. As the service industry and the construction industry are seriously damaged and the recovery is lagging behind, if a package of financial and fiscal stimulus policies can be introduced to help the service industry and the construction industry recover faster, employment growth can be maintained and expanded, and the income situation of residents can be significantly restored and improved, so that it can return to or even exceed the pre-epidemic trend value, then it is possible to maintain a GDP growth rate of about 5% this year and next year, and there is no need to introduce a stimulus policy similar to 2009~2011 to expand government infrastructure investment. The emphasis on the need to better restore and develop our service industry and construction industry is due to the fact that our employment is dominated by private employment and construction. If the service industry and the construction industry do not develop well, the growth of residents' income will become a problem. The three years of the epidemic have mainly impacted the service industry and the construction industry, resulting in a poor supply and demand cycle in the economy. Even without the major shock event of the epidemic, if the structural problems of manufacturing development are not well corrected, it will eventually bring macro-austerity pressure as economic development enters a new and higher stage, which has long plagued the Japan economy. Theoretically, deflation caused by involution or oversupply is endogenous, not caused by external shocks to demand. Fundamentally, this is due to the government's perception and behaviour of over-reliance on manufacturing and neglect of the service sector in driving GDP growth. Even our entire system of government is formed around production. This approach played an important role in the stage when we needed to accelerate industrialization 30 years ago, but it is difficult to sustain this model in the long term, otherwise we will inevitably face internal and external pressures to rebalance at the macro level. The author noted that many years ago, the top management recognized the urgency of solving this problem, and began to make some adjustments in macroeconomic policies in 2016, proposing to strengthen the reform of the supply side, hoping to reduce excessive inefficient production capacity, emphasizing the need to prevent excessive investment in the future, and hoping to gradually adjust supply and demand to a new equilibrium with a moderate level of aggregate demand. Under this guiding ideology, the central bank's monetary policy and interest rate regulation and control ideas have also begun to emphasize the combination of cross-cyclical and counter-cyclical, innovate more structural tools, and try to avoid sharp braking and sharp turns. However, in order for such a policy to produce the desired effect, the internal and external environment must be relatively favorable. Since then, not only has the external situation changed rapidly, but the outbreak of the epidemic has created new challenges. In this complex situation, the top level has re-proposed the general framework of macroeconomic policies that should combine the expansion of domestic demand with supply-side reform, and once again emphasized the need to strengthen countercyclical adjustment. However, in order to prevent the policy of stabilizing growth from simply returning to the old way, it is necessary to find a good breakthrough. Even if the monetary and fiscal stimulus policy package is to be launched, only by adjusting the target to the recovery and development of the service industry and the construction industry, and supporting private employment and the improvement of residents' income with real money, is the breakthrough point for the implementation of the combination of expanding domestic demand and supply-side structural reform. In short, if the economy needs to make progress while maintaining stability, and for stimulus policies to have the desired effect, it is necessary to start with those areas that will help expand private employment and restore income growth and confidence, which is the key to the impact of the epidemic. In this sense, the central bank and the China Securities Regulatory Commission (CSRC) on September 24 jointly issued financial policies to support the recovery and prosperity of the stock market are better than policies to support infrastructure investment. Policies to support the prosperity of the capital market have significant benefits for improving market confidence and the wealth effect of residents. In the same way, the Politburo meeting on the 26th proposed to fully support the property market to "stop falling and stabilize" is also very important, on the one hand, to help restore and boost the confidence of the property market, on the other hand, to help better restore the business conditions of the construction industry, to drive the growth of more demand for residential services, to improve residents' income and expand consumer demand is also of great significance. In fact, as early as September 15, the Central Committee of the Communist Party of China and the State Council jointly issued guidance on giving priority to employment and promoting the reasonable growth of labor remuneration, proposing to accelerate the transition to an employment-friendly development mode. Prior to this, guidance on promoting household consumption was also issued. These are very important guiding ideologies. When considering the implementation of a new round of stimulus policies to stabilize growth, we should rely on these opinions to help the lowest working people of the economy with real money, and effectively promote the service industry and the construction industry to recover faster and better to the pre-epidemic situation, so as to restore their income expectations and confidence.

Professor Zhang Jun, born in 1963, is an economist. He is currently a first-class professor of liberal arts, dean of the School of Economics, and director of the China Center for Economic Research at Fudan University.

Source: Yicai

Editor: Chen Yuan

Editor-in-charge: Yang Hongbo