By Wei Hongxu*
The latest data from China’s National Bureau of Statistics showed that its economy grew 4.8 percent in the first quarter, essentially maintaining stable economic growth and picking up from the fourth quarter of last year. However, amid escalating geopolitical conflicts around the world and growing pressure on national pandemic prevention and control, on the one hand, consumer data shows negative growth in total retail consumption in March, and on the other hand, the real estate market is still in a downward trend with a sharp contraction in sales. Under such circumstances, China’s domestic economic situation cannot be called “optimistic.” The impacts of internal uncertainties such as COVID-19 prevention and control measures are gradually emerging; the external situation will also become more complicated in the future, and there could be a “double squeeze” in international economic growth and the currency. In this context, more policy tools are needed to stabilize the country’s domestic economic fundamentals.
For the current Chinese economy, a senior finance official recently said that the triple pressure of macroeconomic operation still exists in the first quarter of this year, while the pandemic and economic growth have also brought new situations and changes that require attention. In addition, there are also clearly defined corresponding policies to coordinate with economic and social development under the pandemic, while promoting economic functioning to maintain a reasonable range. At present, all measures are being implemented in accordance with the requirements of advancing efforts and taking targeted measures, and other combinations of policies are being studied and prepared. The ANBOUND researchers mentioned that the current economy needs systematic policy support, which should be reflected in policy beyond the overall tone of existing macroeconomic policy.
Regarding monetary policy, the People’s Bank of China (PBoC) has taken steps to lower the reserve requirement ratio (RRR). However, the central bank also said current liquidity is already at a reasonably plentiful level. On the one hand, the reduction of the RRR will improve the capital structure and free up long-term funds; on the other hand, it is a matter of reducing the cost of capital for financial institutions. RRR cuts are not enough for systemic easing. In the external context of rising global inflation and monetary tightening by major central banks, room for further expansion in global policy is limited. Going forward, monetary policy should pay more attention to structural policies and support SMEs and some emerging strategic industries through new loans and other tools. At the same time, monetary policy tools will support financial system reform and provide a stable monetary environment for systemic reform.
In terms of fiscal policy, based on a deficit-to-GDP ratio of 2.8% this year, current policy emphasizes lowering taxes and levies and investing in special bonds to help ease the burden on the real economy, and ensure economic and fiscal stability through investment-led growth. However, judging from the current performance of central and local state-owned enterprises, state-owned enterprises still maintain rapid development momentum this year, and they still make some contribution to public finances. At the same time, the senior finance official also discussed the possibility of raising funds in the form of short-term treasury bills, if necessary, to help stabilize public finances. Therefore, the strength of fiscal policy should be further strengthened in the future, and fiscal policy will also play the main role of the new policy tool.
With regard to the policy easing in the real estate market since the beginning of this year, the current risk prevention policy should accelerate the cleaning up of the real estate business market, so as to remove the obstruction, reverse the downward trend in the real estate market as soon as possible and help stabilize overall economic demand. With regard to the financial sector, the non-performing assets of commercial banks and non-banking financial institutions related to real estate have been gradually exposed. With the gradual implementation of the financial stability law and the establishment of the financial risk prevention framework, accelerating the merger and reorganization of the real estate market and unloading the burden of the market should be the focus of future risk prevention policies, which is also conducive to achieving a “soft landing” of the macroeconomy.
To achieve stable economic growth, China needs not only monetary and fiscal coordination, but also more reform tools to smooth the market cycle. This is reflected not only in the field of commodity circulation, but also in the continued reform of capital markets and the development of various regional markets. In the central government’s proposal to build a “unified market”, these contents have been defined and will be implemented with various relevant policies in the future. Therefore, institutional reform and construction will be central to freeing up market space and enhancing endogenous growth. Finance officials expect financial institutions to provide more financial services to leading logistics, warehousing and e-commerce companies, and help these companies better leverage the driving effect and the effect aggregation for seamless logistics and supply chains. This will require not only further reform of the financial system, but also additional new capital to meet the needs of the new economy. An indispensable component of this would be the opening of the market and the relaxation of policies to direct financial resources to related areas.
Based on the expectation and judgment of changes in China’s economic situation, systematic easing is still needed to support the economy and avoid stalling economic growth. As things stand, this need has become increasingly urgent. To keep the economy functioning within a reasonable range, the country should not only continue to promote structural reforms and carry out cross-cyclical adjustments, but overall and structural policies should also strengthen their counter-cyclical adjustments, promote demand in sectors emerging and conventional, resolve the prominent contradiction and achieve a new balance of supply and demand at a higher level.
*Wei Hongxu, ANBOUND researcher, graduate of Peking University School of Mathematics and PhD in Economics from University of Birmingham, UK