Tips from FT Chinese Website: If you are interested in more content of FT Chinese Website, please search for “FT Chinese Website” in the Apple App Store or Google Play, and download the official application of FT Chinese Website.
It is almost mid-December, and the central economic work conferences over the years have been held in mid-December to take the pulse of China’s economy and formulate the general direction of economic policies for the coming year. This year’s situation is quite special. The new crown epidemic spreads in many places in the middle of the year, with ups and downs, which has a great impact on consumption, investment, and business operations. At the same time, the U.S. and European economies have fallen into stagflation, leading to a decline in exports. The Chinese economy is facing the resonance of insufficient domestic demand and weakening external demand. The growth forecast for this year is around 3%, which is significantly lower than the growth target of 5.5%. Next year’s economic work will first need to reverse the downward trend of domestic demand, and also deal with supply shocks and lack of confidence. The challenges are great and the tasks are heavy. In order to cope with this complex situation, the author believes that after the adjustment of the epidemic prevention and control policy, the “three arrows” to support real estate financing, and the “opinions to support the development of private investment” and other positive policies have been introduced, the focus of macro policies next year will shift from monetary to financial. Fiscal policy and policy focus shifted from investment to consumption-led, and corporate bailouts shifted from focusing on small and medium-sized enterprises to new entity enterprises to drive the three major changes in the ecological chain.
Change 1: The focus of macro policy shifts from monetary and financial to fiscal policy
Monetary policy continued to be loose, and loan interest rates hit a record low. On November 25, the central bank announced a comprehensive RRR cut of 25 basis points, aiming to maintain reasonable and sufficient liquidity and reduce financing costs for the real economy. After this RRR cut, the weighted average deposit reserve ratio of financial institutions is about 7.8%, already lower than many emerging economies. In September, the weighted average loan interest rate of financial institutions dropped to 4.34%, a new low since statistics were available. Among them, the weighted average interest rate of personal housing loans dropped to 4.34%, which is also the lowest value since statistics are available. In addition, the balance of special refinancing and structural monetary policy tools exceeded 5.5 trillion yuan, and the leverage ratio of the real sector also rose to a high of 274%.
Due to insufficient effective demand, the transmission from wide money to wide credit is not smooth. On the one hand, the year-on-year rise in M2 deviates from the year-on-year decline in loan balances. As of October, the year-on-year growth rate of M2 was 11.8%, while the balance of RMB loans fell to 11.1% year-on-year. The rapid growth of money supply has not translated into credit expansion. The weak willingness of residents to buy houses and consumer loans is the main drag. In October, medium and long-term loans to residents increased by 33.2 billion yuan, a record low for the same period since 2009, and decreased year-on-year for 11 consecutive months.
On the other hand, new loans and new deposits of residents diverge significantly. From January to October, the new RMB loans of the resident sector were only 3.4 trillion yuan, a record low in the past seven years; in contrast, the new RMB deposits increased significantly by 12.7 trillion yuan, a new high since statistics were available, and close to 9.4 Trillions flowed to time and other deposits, showing that residents are actively deleveraging amid weak confidence.
In 2023, the focus of macro policy needs to shift from monetary and financial to fiscal policy. Facing the current situation of insufficient effective demand and poor transmission of monetary policy, in 2023, on the basis of maintaining a loose monetary policy, it is necessary to further increase the support of fiscal policy for aggregate demand, and smooth the supply and demand cycle by boosting demand. Considering the sharp decline in land transfer revenue of local governments this year, and the occupation of fiscal funds in other fields by epidemic prevention expenditures, the local fiscal situation is more severe. In 2023, it is necessary to increase the fiscal deficit rate, for example, from 2.8% this year to 3.5% or even higher, and at the same time consider issuing 1-2 trillion special treasury bonds to transfer payments to local governments for cash subsidies to specific needy groups, and Issue coupons to a wide range of people.
Change 2: The focus of policy efforts shifts from investment to consumption-led
With the relay support of local special bonds and policy loans, infrastructure investment maintained a relatively high growth during the year. In the first half of this year, the amount of local special-purpose bonds issued reached 3.4 trillion yuan, an average of nearly 570 billion yuan per month. Among them, more than 50% are invested in the field of infrastructure (such as municipal and industrial park infrastructure, transportation infrastructure, etc.). Since the second half of the year, policy-based financial instruments (quasi-fiscal) have become the main driver of infrastructure investment. As of the end of October, a total of 740 billion yuan had been invested in the two batches of policy development financial instruments, effectively supplementing the capital of major projects. At the same time, the 800 billion yuan credit line of policy banks has also helped the supporting financing of infrastructure projects. Driven by this, the cumulative investment in infrastructure in the first 10 months reached 11.4% year-on-year, and has maintained double-digit year-on-year growth since June.
However, the multiplier effect of infrastructure investment is small and cannot reverse the trend of weakening domestic demand. In terms of investment, the growth rates of private investment and state-owned investment diverge. In October, private investment fell by 1.6% year-on-year, a record low since May 2020. The growth rate in the past six months has also hovered around 0. The government-led infrastructure investment has not driven private investment to pick up. In terms of consumption, the growth rate of total social retail sales has turned negative again, falling to -0.5% in October, and optional consumer goods have weakened significantly. In addition to the multi-point spread of the epidemic, the recovery of consumption is also constrained by factors such as pressure on employment income and insufficient consumer confidence. Overall, despite the rapid growth of infrastructure investment, its multiplier effect is not obvious, and its driving effect on private investment and consumption growth is limited.
In 2023, policy efforts need to increase the support of the central government to boost consumption. Considering the limited driving effect of infrastructure investment and the greater contribution of consumption to economic growth (the contribution of consumption to economic growth in 2021 will be about 65%), the focus of policy support in 2023 needs to shift from investment-led to consumption-led, that is, tax rebates and tax cuts On the basis of bailing out small and medium-sized enterprises and policy loans to support infrastructure investment, the central government will increase its support to boost consumption. In view of the positive effect of the issuance of consumer coupons in various places this year in boosting consumption, we should focus on transferring payments to local governments through the issuance of special government bonds through the central finance, support local governments to increase the issuance of consumer coupons, and use the “central finance + local subsidies + enterprise “Discount” combination model, magnifying the leverage effect of consumer coupons, and promoting the recovery of domestic demand as soon as possible. In addition, another round of energy-saving and green home appliances, computers, and mobile phones can be traded in for new ones, entering the countryside, just to replace the previous round of product upgrades during the 2009-11 period.
Transformation 3: Enterprise bailout shifts from focusing on small and medium-sized enterprises to new entity enterprises to drive the ecological chain
Small and medium-sized enterprises continue to face greater operating pressure. First of all, the lack of demand has led to continuous increase in the operating pressure of small and medium-sized enterprises. In November, the small business manufacturing PMI further fell to 45.6%, which has been below the line of prosperity and contraction for 19 consecutive months. According to a survey by the Bureau of Statistics, in November, 58.8% of small businesses reported insufficient market demand, an increase of 1.9 percentage points from the previous month. Second, the profits of private industrial enterprises continued to grow negatively. From January to October, the cumulative profits of industrial enterprises above designated size fell to -3.0% year-on-year, among which the profits of private industrial enterprises have dropped to -8.1%. Finally, the implementation of tax cuts, fee reductions and tax refund policies has effectively offset the impact of the epidemic on business operations. However, in the case of continuous negative profit growth, the tax cut policy has a “survivor bias”, which weakens the effect of alleviating business pressure.
The corporate bailout policy needs to change the idea of ”direct bailout” and give full play to the leading role of the corporate ecosystem. The report of the 20th National Congress of the Communist Party of China calls for promoting the integration and innovative development of large and medium-sized enterprises in the industrial chain, innovation chain, capital chain, and talent chain. Prior to this, the Ministry of Industry and Information Technology and other 11 ministries and commissions have clearly proposed the policy of “hand in hand” to promote the integration and innovation of large and medium-sized enterprises, further play the leading role of large enterprises, promote the integration of small and medium-sized enterprises into the ecosystem of large enterprises, and stimulate the innovation and development of small and medium-sized enterprises vitality. This provides a new idea for changing the bailout policy for small and medium-sized enterprises. It is necessary to focus on “using the big to bring the small” to realize the integration of large and medium-sized enterprises in the ecosystem.
The new type of entity enterprise is an important starting point for “rescuing the small with the big”. With the rapid development of the digital economy, some large platform companies, especially the “new entity enterprises” that are both physical, technological and ecological, have become the “chain masters” of multiple industrial chain supply chains, and cooperate with The vast number of small and medium-sized enterprises have formed an integrated development ecology, which can be built as a model of the model of “relief from large to small”: in terms of industrial chain, through industrial integration, the ability to connect supply and demand of small and medium-sized enterprises can be improved to help small and medium-sized enterprises expand their business scale; In terms of chain, as a digital transformation service provider for small and medium-sized enterprises, it helps small and medium-sized enterprises to accelerate digital transformation and improve business quality and efficiency; in terms of capital chain, it relies on scenarios, technology and data advantages to improve the credit evaluation of small and medium-sized enterprises, and helps small and medium-sized enterprises to improve financing in the supply chain availability and lower financing costs.
In order to mobilize the enthusiasm of all parties to a greater extent, make up for the gap in this year’s economic growth that has not reached the target, and alleviate the greater employment pressure of college graduates next year, it is expected that the policy level will set the economic growth target for 2023 at 5% and above The possibility is high. If the adjustment of the epidemic prevention and control policy, real estate, private investment and other support policies can be continuously introduced and implemented, and the economic work can promote the above three major changes next year, the downward trend of China’s economy is expected to be reversed, and the growth target is also expected to be achieved.
Note: This article only represents the author’s personal views
Edited by Xu Jin [email protected]