Guan Tao, Global Chief Economist of BOC Securities: Cross-cycle adjustment began to enter the second half

Per reporter: Zhang Shoulin Per editor: Liao Dan

"The pursuit of high-quality development is an important logical starting point for understanding the current macroeconomic regulation and control", in the face of the complex and changeable economic situation, Guan Tao's observation has always been to see the clouds, in a word.

On October 22, at the 2021 China Financial Development Forum hosted by the Daily Economic News News, Guan Tao, global chief economist of BOC Securities, delivered a keynote speech, pointing out that from the perspective of pursuing high-quality development, our macro policy emphasizes that reform is more important than stimulus. "I think it is inaccurate to understand cross-cycle regulation only from the perspective of the balance of stable growth and risk prevention." He said.

Guan Tao put forward a number of important views in his speech, he pointed out that the current cross-cycle adjustment of the first half of the task is basically completed, has begun to enter the second half, before and after there are obvious differences.

<h2>Cross-cycle is not a substitute for countercyclicals</h2>

In his speech entitled "Policy Options for Stabilizing Growth under Cross-Cyclical Regulation", Guan Tao reviewed the history of cross-cyclical regulation. On July 30 last year, the Politburo meeting of the CPC Central Committee first mentioned this concept, and after a year, cross-cycle adjustment was revived on July 30 this year, requiring the maintenance of macro policy continuity and stability.

Guan Tao believes that the new formulation of "cross-cycle adjustment" is inaccurate if it is only understood from the perspective of the balance of stable growth and risk prevention.

He reminded that it must be clear that cross-cycle is not a replacement for counter-cyclical, but a supplement, not that there will be no counter-cyclical regulation in the future.

In its view, cross-cyclical adjustment is an important theoretical innovation in macroeconomic regulation and control, but it cannot be generalized across cycles, and not all macro policies are cyclical. For example, strengthening the orientation of fiscal and monetary policies to support employment can be cyclical, but is it a cyclical policy to promote entrepreneurship to drive employment, deepen the reform of decentralization and management services, promote new industries and new formats, increase new jobs, and strengthen the protection of workers' rights and interests and strengthen vocational training? No, a lot of it is the content of reform, it is structural policies.

Why is macro policy now mentioning cross-cycle and not counter-cyclical? Guan Tao's answer is that the counter-cyclical is not to say that there will be no more in the future, but it is not mentioned now, and it is necessary to realize that the pursuit of high-quality development is an important logical starting point for understanding the current macroeconomic regulation and control. From the perspective of pursuing high quality, our macro policy emphasizes that reform is more important than stimulus.

Although the 2020 Central Economic Work Conference judged that the situation was more severe than in 2019, it did not mention countercyclical. Guan Tao pointed out that the meeting summarized four important understandings in the 13th Five-Year Plan period, one of which is to run the main line of supply-side structural reform through the whole process of macroeconomic regulation and control, seek dynamic balance among multiple goals, activate the development potential of stinging through reform, adhere to supply-side reform as the main line, adhere to reform and opening up as the driving force, and promote high-quality development.

At the beginning of 2020, the new crown epidemic suddenly appeared, and at the end of May of that year, the government work report proposed that we should use the method of reform and opening up to find a new way to effectively cope with the impact and achieve a virtuous circle. "At that time, the new crown was already very serious, and it was more severe than the situation judged at the end of 2019." Guan Tao proposed that the pursuit of high-quality development is an important starting point for us to understand the current macro policy logic.

<h2>Cross-cycle adjustment into the second half</h2>

Guan Tao further proposed that the current cross-cycle adjustment has entered the second half, and a clear difference between the second half and the first half is that the pressure of steady growth has re-emerged.

Guan Tao analyzed that it is not difficult to achieve the growth target of more than 6% proposed at the beginning of the year, and international organizations predict that it is above 8%. To achieve 8% growth, it means that the economic growth rate in the fourth quarter is above 3.6% year-on-year, which is relatively easy to achieve. However, the most crucial issue is how to do a good job in the overall consideration of the economy in the second half of this year and next year, and keep the economy running in a reasonable range. This is the big challenge we face.

The foundation of our economic recovery is not yet solid, and at present, when looking at economic development, in addition to looking at economic growth, we also need some auxiliary indicators. Guan Tao tends to employment indicators. In the first three quarters, we added 10.45 million new jobs, which has completed 95% of the regulatory target proposed at the beginning of the year, and the urban survey unemployment rate is 4.9%, which can easily achieve the regulatory target of less than 5.5% throughout the year, which is good statically, but Guan Tao reminds that even if 10.45 million urban employment population is added, it is still 570,000 people lower than the average in the same period in 2019, and employment has not yet returned to the pre-epidemic level. We can also understand why the recovery of domestic consumption is relatively slow: there is no income without work, and there is no consumption without income.

Another aspect of weakness is external demand. In Guan Tao's view, external demand has given us a lot of surprises, originally thought that the export growth in the first half of this year was the reason for last year's base, the speed of the second half of the year will decline, but after the "false fall" in July, August and September continued to rebound, and the trade surplus expanded. Guan Tao reminded that export growth is largely to enjoy the benefits of epidemic prevention and control, and the dividend of taking the lead in resuming work and production, which deviates from the equilibrium state, there will be mean reversion, but we are not sure when mean reversion will occur. The hypothetical prospect is that when the global economy is under control, orders are likely to be diverted to other regions, our export market share will fall, and the role of external demand in pulling economic growth will weaken. If domestic demand can not start in time, once the external demand turns, domestic demand and external demand both downward, the problem of stable growth or will be more prominent, so the time left for us is not much, to seize the current external demand is still relatively strong time window, to achieve the growth momentum of internal and external demand switch. Therefore, both the government and the market are concerned about what level our economic growth rate will fall back to, and whether we can keep the economy running in a reasonable range in the decline.

Guan Tao once again pointed out that in the context of cross-cycle adjustment, the pursuit of high-quality development is an important logical starting point of the current macro policy, and stable growth is obviously to play a good combination of fists, rather than our traditional strong stimulus.

<h2>The Fed's shift in monetary policy has less impact on China</h2>

Recently, both the central and central banks have mentioned that it is necessary to adhere to the autonomy of macro policies, which is also what everyone is more concerned about. While the Fed is considering launching a reduction in the size of its bond purchases, the International Monetary Fund has issued several warnings during the year to remind the market to prevent panic caused by the shrinkage. Guan Tao analyzed that for China, this problem should not be too prominent.

For the reasons behind this, Guan Tao pointed out that in the process of responding to the new crown epidemic, the Chinese central bank has entered the epidemic state ahead of other central banks around the world, and has also led other central banks around the world to return to the normalization of monetary policy. So far, interest rates at major central banks have not been adjusted, and China's central bank's lead has expanded rather than narrowed. From the perspective of macro leverage ratio, last year itself did not increase much, and this year it is generally down. As a result, our advantage over other central banks is further demonstrated.

Further, if the domestic situation really needs to cut the RRR and cut interest rates, will it eventually be reduced? Guan Tao further analyzed that from the previous statement of Governor Yi Gang, he has always emphasized that China, as a big country, gives priority to monetary policy internally, and focuses on how to make China's economy develop in high quality while controlling financial risks. But it is also important to accept the consequences of policy choices, including the impact on exchange rates. The central bank has always stressed that the implementation of normal monetary policy for as long as possible, normal monetary policy is assets rather than liabilities, giving China more confidence and confidence, keeping the economy running in a reasonable range.

Zhou Xiaochuan, former governor of the central bank, once mentioned that the things in reserves should be kept and used rather than stored for viewing. Guan Tao believes that the same is true of normal monetary policy, which provides us with more policy space to deal with various uncertainties in the future, and from this point of view, we have more room for monetary policy operations than other central banks. Recently, the relevant person in charge of the central bank has also repeatedly stated that the Fed's monetary policy shift to China's impact is controllable.

<h2>Make full use of existing policies and play a good combination of fists</h2>

Guan Tao then reminded us that we should also take into account that monetary policy is not omnipotent and has its own boundaries, such as the economy in the third quarter is facing downward pressure, including the causes of the epidemic, the flood situation, and the impact of the supply side. Monetary policy can not directly eliminate the virus, the supply side such as the power sector to pull the gate of power curtailment, but also not the central bank can directly solve, these problems are more to adopt structural policies, rather than resort to the total policy, the central bank can only provide some necessary credit support to enterprises that encounter difficulties. Of course, the central bank also has a very important mission, that is, to promote carbon emission reduction in an orderly manner, support the implementation of tools, and promote green development.

In the last part of the speech, Guan Tao concluded that at present, the cross-cycle adjustment without mentioning counter-cyclical adjustment has released several signals to the market, one is that the macro policy should maintain continuity and stability, and will not rush to withdraw, because our economic recovery has not yet been completed; the second is to make full use of the existing policies and play a good combination of fists.

In the short term, it is very crucial to seize the time window of high export growth, deepen reform, expand opening up, realize the timely switching of economic growth momentum, and keep the economic operation in a reasonable range by dredging the policy transmission mechanism.

From the perspective of monetary policy, Guan Tao's view is that we should adhere to the principle of being steady and taking the lead, with me as the mainstay. To be steady is to continue the existing tone of the policy and maintain a stable state, but still to provide the necessary support for economic recovery. With me as the mainstay, it is that the cross-cycle is not a substitute for the counter-cyclical, and it is time to shoot when it is time to strengthen the analysis of the situation.

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