China needs 10 trillion yuan stimulus plan: Liu Shijin

Yu Yongding believes treasury-fuelled infrastructure stimulus can "crowd in" domestic consumption.

Our briefing on key economic and financial developments in China as of Tuesday, 24 September, 2024:

• Chinese politician Liu Shijin calls for ten trillion yuan stimulus plan to cure current China’s economic woes and double its middle-income demographic within a decade.

• Leading economist Yu Yongding says treasury-fuelled infrastructure stimulus needed to lift aggregate demand, as well as spur Chinese consumption by means of a “crowding in” effect.

China needs 10 trillion yuan stimulus plan, can double middle-income population within a decade: Liu Shijin

A leading Chinese economist and politician has called for Beijing to launch a ten trillion yuan stimulus package to tide the economy over through the rest of 2024, as credit growth and domestic demand remain enervated.

Liu Shijin (刘世锦), deputy-director of the China Development Research Fund and deputy-chair of the economics committee of the Chinese People's Political Consultative Conference (CPPCC), points out that the economy still faces the worsening problem of downward pressure on aggregate demand.

Speaking at the sidelines of the Renminbi University China Macroeconomic Forum (CMF) on 21 September, Liu noted that China's GDP deflator has remained in negative territory for the seventh consecutive quarter.

"Consumer-side price indices have fallen to zero growth in year-on-year terms, and producer-side prices are weak, reflecting the contraction of consumer demand in 2024," the CMF's third quarter report said.

"At the same time, producer demand is restricted by the weakness of real estate, and contractions in private investment and foreign investment."

Official data indicates real estate investment dropped -10.2% YoY in the first eight months of 2024, while retail sales of consumer goods posted growth of 6.9%, for a deceleration of 0.3 percentage points compared to the first half.

Fixed asset investment in China grew 3.4% YoY in the first eight months of 2024, for a deceleration of 0.5 percentage points compared to the first half.

In order to deal with these challenges, Liu calls for a ten trillion yuan stimulus plan, in nominal terms 2.5 times the size of China's four trillion yuan stimulus package for dealing with the Global Financial Crisis of 2007 - 2008.

"A major goal would be to use the opportunity of this economic stimulus package to achieve a doubling of the middle-income population in around a decade, from roughly 400 million at present to 800 - 900 million," Liu said.

Liu says his proposed stimulus package would supplement shortcomings in basic public services, and shift the focus of investment from physical investments in infrastructure, to investment in human capital in the areas of eduction, healthcare and social welfare.

Two key focal areas for the package would be:

1. Vigorously raising the level of basic public services for new urban residents such as rural migrant workers.

2. Accelerating the establishment of small and medium-sized cities within capital city urban conurbations, thus driving a second round of Chinese urbanisation.

Treasury-fuelled infrastructure stimulus needed to spur Chinese consumption: Yu Yongding

One of China's leading economists has called for stepping up treasury-fuelled infrastructure stimulus, in order to spur growth in both aggregate demand and domestic consumption.

Yu Yongding (余永定), currently an academician at the Chinese Academy of Social Sciences (CASS), points out that lacklustre demand remains a key weak point dragging on the growth of China's economy.

"Our own simple forecasts indicate that growth in consumption in the first half was markedly lower than in 2023," Yu said in an interview with Diyi Caijing at the sidelines of the Sixth Bund Financial Summit in Shanghai in early September.

From January to July, social consumer good sales rose 3.5% YoY to 27.37 trillion yuan. Fixed asset investment for the same period rose 3.6%, held back by ongoing declines in real estate investment.

Exports remain a "bright spot" for the economy, with August exports rising 8.4% YoY, and exports for the first eight months of 2024 rising 6% compared to the same period in 2023 to hit 28.58 trillion yuan.

However, given weak consumption and ongoing declines in real estate investment, it will be challenging for China to achieve this year's 5% growth target.

For this reason, Yu advocates greater fiscal stimulus and a sizeable boost to infrastructure investment compared to 2023.

Given there remains a huge gap in the funds needed for infrastructure investment and this years fiscal budget, Yu wants China to further raise its issuance of treasury bonds, as well as accelerate its issuance of special treasury bonds.

In addition to directly raising aggregate demand, Yu believes increased infrastructure investment will serve as an effective means of spurring China’s domestic consumption.

According to Yu, increasing infrastructure investment and public investment will have a "crowding in" effect that will drive private investment.

The economic growth that this generates will in turn drive growth in household incomes and improvements to income expectations, thus raising consumer demand from Chinese households.

In the absence of these measures, Yu believes it will be difficult for consumption to make much of a contribution to economic growth given prevailing economic conditions.

"Last year, consumption's contribution rate to GDP growth was 82.5%,” Yu writes.

“Given low growth in end consumption as represented by growth in social consumption good sales from January to July, full-year consumption this year is expected to make a contribution to GDP growth of around two percentage points.

"[Increasing] investment demand and consumer demand can compensate for the gap in aggregate demand, alleviate deflationary pressure, and enable China's growth rate to remain within the 5 - 6% range."