China Needs to Step up Fiscal Stimulus: Former Central Bank Official

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Leading economists in China, including a former senior official from the Chinese central bank, have called for more concerted fiscal stimulus measures to help the economy sustain its recovery from the impacts of the Covid pandemic. 

First-half GDP clocks in at 5.5%

China’s first-half GDP grew 5.5% in year-on-year (Yoy) terms, 1.0 percentage points more than the print for the first quarter of 2023. GDP growth in the second quarter was 6.3% in YoY terms and 0.8% over the month. 

While at first blush these figures may seem robust, Sheng Songcheng (盛松成), a former director and head of statistics at the People’s Bank of China (PBOC), said the Chinese economy is still in a state of convalescence requiring government support. 

“The base is low, and economic growth is currently still recovering,” Sheng wrote in an opinion piece published on Sina

“In the process of returning the economy to the track of normal operation, we should still actively face the difficulties and challenges of post-epidemic recovery, maintain the continuity and stability of policies, ensure necessary policy strength, and accelerate the cultivation of new drivers of economic growth.”

Headwinds for the Chinese economy in 2023

Sheng outlined a trio of key headwinds for the recuperation of the Chinese economy in 2023, including:

  1. Endogenous drivers of economic recovery need further strengthening, and recovery may take time. “This is mainly because the impact of the pandemic on market players over the past three years is relatively large. For enterprises, short-term economic shocks can be dealt with by suspending operations. As demand recovers, supply can also recover quickly, and the elasticity of supply to demand is relatively high. However, if the shock lasts for a long time, market players will find it difficult to endure, and eventually withdraw from the market, before then re-entering the market or starting anew, the cost of which will be significantly higher. Damage to market players directly affects employment and purchasing power on the demand side. Therefore, it should be realized that the path of economic recovery after the pandemic is inherently slow. It is worth pointing out that although the current growth rate of consumption is not strong, this achievement has not come easily and is compatible with the overall operation of the economy.
  2. Downward pressure on the real estate market is relatively high. “In the first half of the year, investment in real estate development fell by 7.9% year-on-year, becoming the main factor dragging down China’s fixed asset investment. Judging from the data, the marginal downward trend of real estate has not yet reversed. At present, while adhering to the principle of ‘houses are for occupation, not speculation,’ what the real estate sector needs most is confidence and liquidity, mainly to avoid more serious downturns.”
  3. Shrinking external demand. “From the perspective of China’s manufacturing PMI (Purchasing Managers Index) in June, new export orders and imports were 46.4% and 47%, respectively, down 0.8 and 1.6 percentage points from the previous month, for the lowest point since February this year. The external environment is still complex and fraught, and downward pressure on the economies of overseas economies has increased, which will have a relatively large negative impact on China’s exports. In addition, the decline in international bulk commodity prices may further drag down Chinese foreign trade.

Calls for central government to step up fiscal stimulus

In order to deal with these headwinds, Sheng is of the opinion that the Chinese central government should take on more debt to expand fiscal stimulus. 

“Fiscal policy should play a greater role, increasing central government debt issuance if necessary,” Sheng writes. 

“The direction of use of funds is very important. To achieve economic recovery and sustainable growth, more support should be given to consumption and high-tech sectors. 

“Central government debt issuance could be increased if necessary. The leverage ratio of China’s central government is lower than that of major countries, which provides room for proactive fiscal policies to increase efficiency.”

Sheng is not alone in this opinion. Liu Yuanchun (刘元春 ), chancellor, professor and deputy party secretary at the Shanghai University of Finance and Economics (SUFE), has also called for the launch of concerted fiscal measures to deal with insufficient demand. 

“Fiscal policy must return to an active position,” Liu wrote in an opinion piece. 

“It is necessary to further expand the debt scale through the central government, strengthen the expansion capacity of local governments, and restore the original positioning of the proactive fiscal policy.

“Monetary policy can also be coordinated accordingly, but it is necessary to attach great importance to the structural distortions caused by the traditional fiscal ‘digging’ and monetary expansion model.”

Sheng likewise believes coordination of fiscal and monetary policy by the Chinese government can abet the effectiveness of both. 

“We should strengthen coordination and cooperation between monetary policy and fiscal policy, and consider timely reduction of the required reserve ratio,” Sheng wrote. 

“Most of China’s national bonds and local government bonds are purchased by commercial banks. The reserve ratio cut will increase the funds freely available to commercial banks, thereby better supporting the issuance of national and local government bonds.”

Sheng makes the caveat, however, that interest rate cuts in China’s current economic environment will not advance the goal of raising household consumption. 

“The role of interest rate cuts in stimulating investment and consumption may be limited, because the current elasticity of consumption and investment rates in China is not high,” Sheng writes. 

“At present, the ‘income effect’ of reducing interest rates is dominant, and the household sector is more risk-averse than previously. 

“Lowering interest rates may reduce the income of household deposits, reduce household wealth and income, and prompt people to increase precautionary savings, resulting in a reduction in current consumption.”