China's fiscal expansion a necessity as monetary policy hits limits: Yu Yongding

Capital injections into banks will support China's stock market. Politburo determined to hit 5% growth target.

Sep 30, 2024

Our briefing on critical economic and financial developments in China as of Tuesday, 1 October, 2024:

Renowned economist Yu Yongding believes fiscal expansion is now inevitable, as loosening of monetary policy will only prove to be of limited effect given China’s current economic challenges.
Wen Bin, chief economist at China Minsheng Bank, believes Beijing is firmly on the path to “fiscal intensification,” with policymakers determined to achieve this years 5% growth target.
China is shoring up the capital standing of its big state-owned banks for the purpose of giving greater support to the stock market, according to researchers from the country’s top think tank.
In a departure from precedent he September meeting of the Communist Party’s Politburo focused on economic matters, highlighting the sense of urgency felt by Chinese leadership when it comes to dealing with flagging growth.

Yu Yongding says China's fiscal expansion a necessity given limits of monetary policy

Leading Chinese economist Yu Yongding (余永定) has hailed plans by Beijing to step up fiscal policy measures to give a shot in the arm to easing growth and ailing markets.

In an interview with The Economic Observer, said that while the required reserve ratio and interest rate cuts unveiled by the Chinese central bank are "completely the correct thing to do," monetary policy will only be of limited effect under prevailing conditions of "quasi-deflation."

"The next step must be a marked expansion of fiscal intensity,” Yu said.

"Expansionary fiscal policy will be the mainline, with supporting monetary policy playing an ancillary role.

"The combination of the two can turnaround the ongoing trend of easing in the Chinese economy."

Yu said that main problem that the Chinese economy currently confronts is insufficient aggregate demand.

"The growth of real estate and manufacturing investment is to a large extent endogenous, and difficult to markedly change in the short-term

"With consumption growth markedly easing, however, if we want to meet the forecast economic growth targets, investment growth must significantly increase.

"Infrastructure investment growth is directly controlled by the government...the government should employ the role of infrastructure investment in driving economic growth."

China is on the path to fiscal intensification: Wen Bin

Leading Chinese economist Wen Bin (温彬) says the latest raft of announcements from the State Council, the People's Bank of China (PBOC) and the Communist Party's Politburo indicate that the country is firmly on the "path to fiscal intensification."

Wen, chief economist at China Minsheng Bank, writes that Beijing is determined to achieve its 5% GDP growth target this year, with key measures already unveiled by the Politburo including greater fiscal support for driving consumption and improving living standards.

He further points out that the pace of central and government bond issuance this year has been comparatively slow, leaving room for more debt raising by Chinese authorities.

Further measures could include:

Raising the deficit. Issuing a further 1 - 2 trillion yuan in long-term treasuries to expand fiscal expenditures and spur consumer demand. Increasing transfer payments to local governments via deficit funding, for consumption and living standard subsidies. Wen does not rule out the possibility of direct payments to low-income groups.
Accelerating personal income tax reforms. Structural reductions to taxes for scientific and technological innovation, manufacturing enterprises, and undertakings that increase employment as well as venture capital investments.
The approval of around 1 trillion yuan in special refinancing loan quotas, to ease repayment pressures for local government financing platforms.
Expanding the scope of state-owned capital operating budgets and raising the share of profits remitted by state-owned enterprises.

China injects capital into big state-owned banks to support equity market, deal with narrowing net interest margins

At a press conference held by the State Council on 24 September, Li Yunze (李云泽), China's top financial regulator, announced plans to increase the core tier-1 capital of the country's big six state-owned banks.

The announcement gave a shot in the arm to their share prices that date, with Bank of Communications closing up 6.74%, ICBC up 4.9%, China Construction Bank up 4.63%, Bank of China 4.48%, Agricultural Bank of China up 3.9%, and Postal Savings Bank 3.78%.

The big state-owned banks play a critical role in China's financial system. This is due to their disproportionate share of the China's banking sector, which in turn dominates the country's financial system.

Official figures indicate that the big banks are in fine fettle, however, with their average capital adequacy ratio standing at 18.31% as of the end of the second quarter.

Li Guangzi (李广子), chair of the Banking Research Office at the prestigious Chinese Academy of Social Sciences (CASS), said the capital injection decision is intended to drive the state-owned banks to "better fulfil the role of serving the real economy and being a ballast for preserving financial stability."

Li pointed in particular to "use of capital injections to drive the big state-owned banks to use their investment companies to better undertake equity investment operations, and thus better support science and tech innovation."

Chinese financial regulators are also highly concerned about the adverse impacts of interest rate cuts on the profitability of the banks.

According to Li, the capital injections are "advance moves to deal with declining endogenous capital supplementation capability, as net interest margins narrow and profits ease."

China's Politburo outlines plans for China's economic future

On 26 September, the Communist Party's Politburo convened its customary meeting held towards the end of each third quarter.

The meeting for 2024 made a departure from precedent by focusing heavily on China's economy and related policy arrangements, due to the challenges and strong headwinds it currently confronts.

The Politburo called for "pragmatically strengthening the sense of responsibility and urgency in performing economic work," highlighting the need to achieve China's 2024 GDP growth target of roughly 5%.

The meeting arrived just after China's State Council held a landmark press conference on 24 September with the country's top financial regulators, to unveil vigorous credit and monetary policy loosening.

Key measures outlined by China's Politburo on 26 September were as follows: -

With regard to fiscal policy - "issuing and effectively using ultra-long-term treasury bonds and special treasury bonds. Making effective use of the stimulative role of government investment."
On the monetary policy front - "reducing the required reserve ratio, and implementing vigorous interest rate cuts."
With regard to real estate, the Politburo called for "halting declines in the real estate market and restoring stability."
The Politburo also stressed the need to "invigorate capital markets" following their long-standing lacklustre performance.

Property market measures

Strictly controlling increases in the development of commercial housing. Optimising inventories, increasing quality, and supporting the invigoration of existing idle land.
Responding to the concerns of the masses, adjusting housing restriction policies, reducing rates for outstanding mortgages.
Driving the establishment of a new model for real estate development.

Capital market measures

Vigorously guiding the entry of medium and long-term funds into the market, removing the barriers to social welfare, insurance and wealth management funds.
Supporting the mergers, acquisitions and restructuring of listed companies. - Steadily advancing reform of publicly offered funds.
Unveiling policy measures to protect small and medium-sized investors.

Private enterprise

Unveiling the "Private Economy Expediting Law," and operating a sound environment for the development of the non-state-owned economy.

Consumption

Expediting growth in the incomes of medium and high-income demographics.
"Elevating" the structure of consumption.
Integrating consumption with improvements to living standards.
Cultivating new forms of consumption.

Economic opening

Reform measures for the entry of foreign capital into the manufacturing sector.
Further optimising China's market-based, rule-of-law based, world-class commercial environment.