Recently, 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, was interviewed by China News Weekly about the reasons for the introduction of this round of economic stimulus policies and the logic of their operation. Professor Zhang Jun said that this round of economic stimulus policies focuses on reversing people's expectations of China's economy by stimulating the stock market and property market. Looking ahead, the focus of stimulus should be on the service sector, addressing the lack of effective demand from the perspective of cultivating purchasing power.
Professor Jun Zhang
The stock market and the property market are the breakthrough points to reverse expectations
China News Weekly: What factors do you think prompted policymakers to launch this round of economic stimulus?
Jun Zhang: The process of decision-making transformation is indeed difficult. About 10 years ago, we began to feel the legacy of the last massive economic stimulus, including the real estate bubble and environmental pollution. Because of these "sequelae", the policymakers are determined to change the way of macroeconomic control and control, and not to stimulate demand, especially infrastructure investment, in the face of economic fluctuations. From 2014 to 2015, policymakers began to take the initiative to lower the economic growth target, proposed that economic development enter a new normal, and shifted the focus of economic policy from the demand side to the supply side, and adjusted the economic structure. A landmark event was in May 2015, when the People's Daily interviewed authoritative sources, who suggested that "if we adopt old methods such as large-scale strong stimulus and investment, new contradictions may accumulate."
This line of thinking was maintained until 2022, when the Central Economic Work Conference held at the end of that year proposed that "the triple pressure of shrinking demand, supply shocks, and weakening expectations is still large". At the same time, the caliber of economic policy began to be adjusted, proposing to "organically combine the implementation of the strategy of expanding domestic demand with the deepening of supply-side structural reform", and seek a balance on the basis of the original emphasis on supply-side policies, because the impact of the new crown epidemic has led to a contraction in demand.
In 2022, the expansion of domestic demand began to be emphasized, and the economy once showed a relatively strong rebound in 2023. However, some economic indicators in the first half of 2024 did not meet expectations, and the recovery from the pandemic in different sectors was extremely uneven, with many areas not returning to pre-pandemic levels. What's more, "weakening expectations" is becoming a growing problem. The housing prices, employment and other contents that people talk about after tea and dinner are all reflections of the continued weakening of expectations, and at the same time, negative expectations are being strengthened.
After 2015, policymakers placed more emphasis on "cross-cyclical adjustment", and during the epidemic, they emphasized the combination of cross-cyclical adjustment and counter-cyclical adjustment. The meeting of the Political Bureau of the CPC Central Committee held on September 26 this year emphasized "intensifying the countercyclical adjustment of fiscal and monetary policies". This shift is due to the fact that expectations have continued to deteriorate, making policymakers realize that if expectations are not reversed, the effectiveness of both supply-side structural reforms and strategies to expand domestic demand will be affected. For example, since the end of 2022, monetary policy has been relatively loose, but money cannot be loaned. Therefore, the focus of the problem is not whether the demand-side policies are introduced and followed up in a timely manner in the face of economic fluctuations, but the expectations have not yet been reversed, resulting in the economic growth rate in the second quarter of this year still cannot be maintained in the context of relatively abundant liquidity. At the end of September, a series of statements and policies were the realization that policymakers must reverse their expected performance.
China News Weekly: Since the post-epidemic economic recovery, various economic policies have been continuously increased, what do you think are the "new ideas" of this round of economic stimulus policies?
Zhang Jun: To reverse expectations, on the one hand, we need to introduce strong stimulus policies, and on the other hand, we need to choose a good breakthrough, that is, to find the most effective policy, if it only releases more liquidity, or increases the intensity of investment projects, it may not produce good results. The decision-makers must have carefully designed this aspect, and people are most concerned about nothing more than the capital market and the real estate market, once these two markets return to "popularity", it means that the expectation problem is starting to improve. Therefore, the Shanghai Composite Index will be pulled back to more than 3,000 points, and the real estate market is proposed to "stop falling and stabilize", all in the hope of reversing people's expectations by repairing the sentiment of these two markets.
In a market economy, the animal spirit of participants (refers to irrational factors such as instincts, habits and emotions that influence and guide human economic behavior) is crucial, including the spirit of adventure. Therefore, it is important for people to see opportunities in the market so that they can inspire a sense of adventure. There are N reasons why people are not optimistic about the economic situation, but these reasons are not worth an opportunity to make money. Many foreign investment banks have also changed their tunes, believing that China's capital market is worth investing in, precisely because they see the determination of policymakers to use these two markets as a breakthrough to reverse expectations.
China News Weekly: How do you see the pace of the follow-up fiscal policy rollout?
Zhang Jun: Now that the central bank is taking the lead in pulling up the stock market without increasing the supply of base money, with the gradual improvement of market expectations, fiscal policy must follow up. In the future, the gap between revenue and expenditure may be widened, and the deficit ratio may also exceed the upper limit of 3%, in a sense, this is also forcing the fiscal policy to make a breakthrough, but the policy style is still prudent and prudent. China's policy style generally takes into account the long-term while addressing immediate problems, and needs to balance short-term and medium- and long-term goals.
China News Weekly: The market is quite divided on the direction of fiscal policy, what do you think about this issue?
Zhang Jun: When policymakers communicate with the market about future incremental policies, they will certainly not target a single area, emphasizing comprehensive governance as a feature of Chinese policy, which means that China will not only give cash to households or give sufficient policy support for a certain area at one time, as United States does. Just as the head of the National Development and Reform Commission emphasized on October 8, while emphasizing policy support to improve people's livelihood, he will also emphasize support for effective investment. Of course, comprehensive governance needs to find a breakthrough, first to change market sentiment, and then to exert force in all directions.
The focus of the stimulus is on the service sector
China News Weekly: In a recent article, you mentioned that the income situation of the service industry and the construction industry is not optimistic, and suggested that the policy should support these two industries more, what is the relationship between the performance of these two industries and the macro economy?
Zhang Jun: A considerable part of the employed population is self-employed, while micro, small and medium-sized enterprises and individual industrial and commercial households in the service industry have been hit harder during the epidemic, and some individual industrial and commercial households have directly closed down and changed careers. After the epidemic is over, we should introduce policies to help these self-employed, such as giving them policies such as tax and rent exemptions. Many families rely on a small shop for their livelihoods, helping them to return to pre-pandemic levels, which can solve the income problem of these families, thereby driving consumer spending.
A recent analysis of our data found that production recovered relatively quickly after the epidemic, but the disposable income of residents, especially urban residents, did not return to the pre-epidemic growth trend, and even the growth rate declined significantly, dragging down consumer spending. Therefore, whether from the perspective of giving priority to employment or promoting the growth of consumer spending to be slightly higher than the growth rate of nominal GDP, we need to restore the operation of micro, small and medium-sized enterprises and individual industrial and commercial households to the pre-epidemic level through support policies.
In early August, the State Council issued the "Opinions on Promoting the High-quality Development of Service Consumption"; In September, the central government issued the Opinions on Implementing the Employment Priority Strategy to Promote High-quality and Full Employment. Previously, the outside world did not seem to have paid enough attention to these two documents. In fact, the new round of economic stimulus plan no longer has the conditions for the implementation of the "four trillion plan" in 2008, but if the focus of the stimulus is placed on the service industry, that is, around the above two documents, it can help more residents and families, and the effect will be better. Nowadays, many policies are intended to restore production, which seems to be able to boost GDP, but residents and families lack personal experience.
China News Weekly: From a longer-term perspective, how to solve the problem of insufficient effective demand?
Zhang Jun: Objectively speaking, we do face the problem of insufficient demand, if we adjust production to a level that matches demand, it means that economic growth will be affected, so we need exports and domestic demand to support the existing production capacity.
For example, for governments at all levels, the rulers think more about production, and compete to launch hot projects such as new energy vehicles and lithium batteries, which leads to overcapacity and involution, on the one hand, leading to more thinking about how to achieve the ultimate under the existing technical conditions, and lacking the ability to innovate technology; On the other hand, it is difficult to raise the wages of employees, and a low level of equilibrium is always maintained. The ideal scenario would be to have fewer companies, but be larger and more efficient, diverting more resources from manufacturing to services and absorbing more jobs. The more developed the service sector, the higher the level of labor wages, and only in this way can the overall wage level be raised, and if you rely only on manufacturing, you will find that wages are rising more and more slowly.
It will be difficult to switch from a production-led system to a consumption-led system, and it will require the fiscal system, bureaucracy, and other systems to gradually shift their attention from enterprises to households. However, the direction of transformation is definitely like this, and it is precisely because of this that the domestic cycle is proposed, relying more on the domestic market to digest its own production capacity, and gradually transforming from the world's factory to the world market. This requires consideration of how to cultivate purchasing power in the future, such as pension, medical care, education and other issues have become crucial, and only by better providing these public services can the burden of self-protection on households be reduced, so as to cultivate more reasonable purchasing power.
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: China News Weekly
Editor: Chen Guangyu
Editor-in-charge: Chen Yuan