Abstract: Due to high uncertainties in the foreseeable future, this year's Government Work Report did not set a specific growth target, it instead highlights the priority to stabilize employment and ensure living standards. To achieve these goals, the GDP growth rate for the whole year of 2020 will likely range between 2-4%. Regarding fiscal expansion, in addition to raising the deficit-to-GDP ratio to "more than 3.6%", exceeding the 3% threshold for the first time, the government will issue 1 trillion-yuan special government funds, but these measures may not be enough for getting the economy back on track. To fill in the gap, monetary policy will have to be more flexible, and interest rates will have to further go down. In this regard, the government plans to boost M2 and aggregate financing. The basic policy stance on the real estate market will not change this year, but a quantitative target for the renovation of old urban residential communities has been set. The Report also proposed to help firms, especially micro, small, and medium businesses to weather the pandemic crises. But attention should be paid to policy designs to improve policy effect and avoid arbitrage practices.
I. Actual economic growth range could be 2%-4%
This year's Government Work Report (Report) did not set an economic growth target for the whole year, the explanation for which, according to the Report, is as follows:
"Our country will face some factors in its development that are difficult to predict due to the great uncertainty regarding the COVID-19 pandemic and the world economic and trade environment. Not setting a specific target for economic growth will enable all of us to concentrate on ensuring stability on the six fronts and security in the six areas. We must focus on maintaining security in the six areas in order to ensure stability on the six fronts. By doing so, we will be able to keep the fundamentals of the economy stable. Maintaining security will deliver the stability needed to pursue progress, thus laying a solid foundation for accomplishing our goal of building a moderately prosperous society in all respects."
The impact of the pandemic on the economy this year has already been evident. In the first quarter, GDP recorded negative growth for the first time since 1992, falling to -6.8%. GDP grew by 6% in the fourth quarter last year from a year earlier. Assuming that the potential growth rate remains at this level, a rough estimate of nominal GDP growth for 2020 would be around 3.2%.
But the problem is uncertainty. At a meeting following the release of the Government Work Report, Sun Guojun, a member of the research office of the State Council, said it is impossible to accurately judge the annual growth range because there are too many uncertainties.
The uncertainties mainly come from two aspects. One is the uncertainty about the global evolvement of the COVID-19 pandemic, which is currently the biggest factor affecting global economic activities. It will be hard to predict the necessary control measures without proper judgement of the pandemic situation.
The other is the huge uncertainty in the world economy. In the first quarter of this year, major economies around the world experienced considerable fluctuations. Many analysts believe that the world economy has entered an acute recession no less severe than the Great Depression. If a specific growth target were proposed, actual implementation might diverge from that goal quite a bit and could hamper a lot of other work focuses.
Prior to the 2020 "Two Sessions", many scholars had already debated on the GDP target this year. According to Liu Yuanchun, CF40 member and Vice President of Renmin University of China, that the Government Work Report did not mention specific growth target is "within expectation". "Given the current high level of uncertainty, it is difficult for the GDP growth target to fully incorporate all the problems and risks, and to fully reflect the quality and structure of the Chinese economy," he said in an interview. "A simple GDP target could push China into a GDP trap, ignoring the principal contradiction and core risks it faces."
Instead of setting a growth target this year, China will place higher priority on ensuring the stability of employment and living standards. But "not setting growth target does not mean that China does not value economic growth or will allow it to decline," Sun noted. "There is a very important sentence in the Government Work Report, that is, 'ensuring stable economic performance is of crucial significance'", he added. "At present, we have two top priorities: to stabilize employment and ensure people's wellbeing, and to resolutely win the battle against poverty. Both need to be supported by a certain level of economic growth."
So how much is this "certain level"? The Report stated that this year's main targets are "over 9 million new urban jobs, a surveyed urban unemployment rate of around 6%, and a registered urban unemployment rate of around 5.5%". According to Liu, to achieve these goals, the GDP growth rate for the whole year of 2020 should not be lower than 4 percent.
According to a parallel estimate by Zhang Tao, CF40 Youth Forum member who also works for the financial market department of the China Construction Bank, the bottom line of real GDP growth rate in 2020 is 2%. When taking into consideration the hedging effect of macroeconomic policies (for instance, the Report clearly required "M2 money supply and aggregate financing to grow at notably higher rates than last year"), the actual economic growth range in 2020 is expected to be 2%-4% with the average level at 3%. If macroeconomic policies aimed to offset the pandemic shock function well, it would not be impossible to achieve a growth of 3.5% or 4%, or even higher.
II. A minimum deficit-to-GDP ratio of 3.6% and 1 trillion-yuan special government bonds
The deficit-to-GDP ratio given in this year's Government Work Report exceeds the threshold of 3%. The ratio has never been allowed to rise above 3% before, but this year, it is set at "3.6% and above", which means that the actual ratio will likely go beyond "3.6%". At the same time, the government deficit is allowed to increase by 1 trillion yuan over last year, and 1 trillion yuan of special government bonds is expected to be issued for COVID-19 control.
The issuance of special anti-epidemic bonds to is a special measure in a special period. Another highlight of this year's Report is that "a special transfer payment mechanism will be set up" to transfer the 2 trillion yuan to local governments. These funds are to "go straight to prefecture and county governments and directly benefit businesses and people", and "should be primarily used to ensure employment, meet basic living needs, and protect market entities", including "giving support to cut taxes and fees, reduce rents and interest on loans, and increase consumption and investment". "It is important to stress that government funds are public in nature and that no such funds are allowed to be withheld or diverted for non-designated uses". This measure can help ensure that the anti-epidemic funds can reach the affected enterprises and residents to the greatest extent.
Policy suggestions regarding the issuance of anti-epidemic special government funds were proposed by CF40 senior fellow Zhang Bin as early as late February this year in the CF40 Macroeconomic Policy Report for the fourth quarter of 2019, which pointed out that policies need to be designed based on the characteristics of the impact of the epidemic.
Zhang's report recommends issuing special government bonds as soon as possible to bridge the gap between government revenue and expenditure, which would be key to prevent secondary damages from the collapse of broad credit and the shortfall in government income. The issuance of special government bonds can increase broad credit in the whole society, make up for the decline of commercial loans during the epidemic, and help maintain the stable growth of broad credit. The best way to finance for the shortfall in government income is to issue special bonds backed by government credit with low cost and long cycle. We must absorb lessons from previous stimulus programs that such gap should not be filled by allowing local governments to source finance from commercial financial institutions. Because in doing so, we are actually giving up the advantage of low-cost financing backed by government credit, incurring higher financing costs, saddling financial institutions with a large amount of non-performing assets, and increasing systemic financial risk. The shortfall in government revenue should not be paid by companies, which goes against the functional purpose of the policy to help residents and businesses through the crisis. It is estimated that about 1 to 1.5 trillion yuan of special government bonds would be needed to finance various preferential policies and the increase in government spending.
By what means will the 1 trillion special government bonds be issued? According to government’s budget report, the 1 trillion-yuan special anti-epidemic government bonds will be issued with a maturity of 10 years and will not be included in fiscal deficit; instead, it would be measured as outstanding government bonds and transferred to local governments for public health infrastructure projects and other anti-epidemic expenditures. Meanwhile, the interest on the special government bonds will be fully borne by the central government, while the repayment for principle will be shared between central (30%) and local governments (70%). Revenue and expenditures from the special government bonds will be managed under budgets for government-managed funds.
Zhang also pointed out in the above-mentioned report that fiscal policy should play a leading role, which was echoed in the Government Work Report in calling for "a more proactive and impactful fiscal policy".
In addition to the 1 trillion yuan of special government bonds, government deficit this year is expected to increase by 1 trillion yuan over last year, and local governments’ special bonds by 1.6 trillion yuan, adding up to 3.6 trillion yuan. Will such a fiscal expansion be large and strong enough to support the need to stimulate economic growth?
In Zhang Bin's view, the expansion is relatively conservative compared with the packages that Western countries rolled out amid the pandemic. For the first four months of the year, he pointed out, China's public finance income dropped by 1 trillion yuan year-on-year, while the revenue from government funds decreased by 0.2 trillion yuan, and the decline in government income will likely continue in the near future. Thus, most of the new debts will be used to make up for the lost income, the remaining amount will not be enough for beefing up government expenditure or push the economy back on track.
III. Monetary policies should be flexible with proper magnitude, and interest rates should be pared down.
The above analysis shows that debt financing will not be able to expand government expenditure by much. China should coordinate its monetary policies accordingly. The Government Work Report suggested to "pursue a prudent monetary policy in a more flexible and appropriate way", to "enable M2 money supply and aggregate financing to grow at notably higher rates than last year", and to "promote steady reduction of interest rates".
Liu Yuanchun noted that two things about monetary policies in the Report worth special attention.
First, it's important to keep sufficient liquidities, and the Report this year has set a clearer quantitative goal. The growth rates of M2 money supply and aggregate financing are expected to stand above 2%.
Second, the Report has proposed to "develop new monetary policy instruments that can directly stimulate the real economy" and to "promote steady reduction of interest rates". Despite the previous measures to cut required reserve ratios and interest rates, the financing costs of businesses have not reduced by much given the high market rate. In the first quarter, the added value of the financial sector in China grew by 6.0%. In other words, the financing costs of real economies had actually been elevated, which was not what the policymakers wanted. Therefore, careful consideration is required when designing monetary policy tools to be introduced in the second half of the year.
According to Zhang Bin, considering the employment and economic growth targets, the current fiscal expansion that relies on the issuance of government bonds is a bit too conservative. To support the Chinese businesses and secure 9 million new jobs, there must be more credit expansion, and that will inevitably entail monetary easing. Against the current economic backdrop, with the private sector not that eager to invest or borrow, aggregate credits cannot pick up without more borrowing from local governments and state-owned enterprises.
IV. Principles of regulating the real estate sector will stay the same, while renovation of 39,000 old urban residential communities will begin.
We can tell from the Report that China has not relaxed its control of the real estate sector, with the same principles that houses are for living in, not for speculation, and that policies must be "city-specific". The ultimate goal is to "promote the steady and healthy development of the real estate market".
The idea of implementing "city-specific policies" has been reiterated in the 2020 Report. Yan Yuejin, Research Director at the E-House China R&D Institute, said this expressed Chinese government’s hope that local governments could take tailored measures based on the actual situations of the local real estate markets, which would give them more flexibility in policymaking.
But the recent booms in the house markets in many cities across the country have exposed local governments' urge to stimulate the economy by bolstering up their real estate sectors. But with the central government reaffirming its dedication to enhancing the control of the house market, most of the local policies have quickly taken a U-turn. Monetary easing measures in the near future may place some strains on the house prices, but the real estate market is expected to remain relatively stable.
Liu Yuanchuan held that the complexity of China's real estate market is evident in two aspects. One is the polarization of house prices—prices in big cities skyrocket, while small cities are facing greater destocking pressures; the other is the highly unbalanced structure of the sector, with huge contradictions between house stocks and increments.
As for the issue of real estate taxes which has been brought up in the "Two Sessions" each year, Liu Yuanchun believed that collecting real estate taxes would be helpful in controlling new houses, but there would be a lot of disputes about its impacts on house stocks. He expounded that the reason why the Report this year did not mention making laws in this regard is because it serves as a guideline for government work this year, and focuses on addressing the most pressing problems; thus, it did not take on systematic or institutional problems such as the contradiction between the real estate market and the land market, an issue not possible to be solved within a year or two. Besides, the long-standing policies on the real estate sector have been continued with in many of the recent documents released by the CPC Central Committee. Although the land prices in some of the third- and first-tier cities have picked up recently, followed by certain policy adjustments, the overall policy framework is not expected to see big changes.
The 2020 Report did not say much about real estate policies, but of particular note, it set a concrete target for the number of old urban residential communities to be renovated. The Central Economic Working Conference at the end of last year proposed to step up renovation of these communities, and the 2020 Report clearly put forward the goal to "begin the renovation of 39,000 old urban residential communities and support the installation of elevators in residential buildings and the development of meal, cleaning, and other community services".
The executive meeting of the State Council on April 14 mentioned that the main targets for the renovation of old communities this year would be those built before 2001. The costs will be shared reasonably among the government, the dwellers, and private funders. The central government will provide subsidies, local governments will offer supports with special bonds, while private investors are encouraged to engage in the efforts as well.
The 2020 Government Work Report set a clear, quantified target in this regard for the first time ever, which embodied the government's hope to make life more comfortable for the dwellers in the old communities. Moreover, given the need to stabilize investments, local governments are likely to encourage more investment into the renovation of old residential communities.
V. China must support businesses, especially small and micro- enterprises (SMEs).
Medium, small and micro enterprises have borne the brunt of the pandemic's blow in China, and governments at all levels have intensified efforts to provide reliefs for them.
The Report stated that China "must do our utmost to help enterprises, particularly micro, small, and medium businesses, and self-employed individuals get through this challenging time". Measures to this end include cutting taxes and fees, exempting micro, small, and medium businesses from contributing to basic old-age insurance, unemployment insurance, and work injury compensation insurance schemes, and postponing the payment of corporate income taxes by micro and small businesses and self-employed individuals, etc. It was predicted in the Report that these measures would see additional savings of more than 2.5 trillion yuan for enterprises throughout the year.
The Report suggested the following moves to provide stronger financial support for businesses: the policy allowing micro, small, and medium businesses to postpone principal and interest repayments on loans should be further extended till the end of March next year, while payments on all inclusive loans of micro and small businesses eligible for this policy should also be deferred; large commercial banks should increase inclusive finance lending to micro and small businesses by more than 40%, and enterprises should be encouraged to increase their bond financing. The goal is to ensure that micro, small, and medium businesses have significantly better access to loans and that overall financing costs drop markedly.
How to better support SMEs amid the pandemic? Recently, Shanghai Finance Institute (SFI) and the IMF held a joint workshop on "COVID-19 Pandemic, Virtual Banking, and SME Financing in China". Speakers pointed out that fintech could help support SMEs by empowering them with digitalized financing means. With big data and AI analysis, internet banks can identify SMEs in real needs of loans; they can study the real-time data of potential borrowers, analyze their past behaviors, and rate their creditability before deciding whether to lend to them or not, and thereby lower the possibility of defaults and other risks.
Without a doubt, the survival of SMEs amid the pandemic is critical, because they employ the largest number of people.
Zhang Bin argued that the most important way to help SMEs is to increase their income through multiple measures such as further opening up the market, expanding aggregate demands, and reducing taxes and fees, as opposed to loosing credits significantly. He reminded that some of the SMEs had been using the money that they borrowed at preferential interest rates to buy wealth management products for arbitrage purposes. This practice must be suppressed.
Yu Yongding, CF40 Advisor and Academician at the Chinese Academy of Social Sciences, emphasized in his previous articles that the government must do something to help SMEs carry through, especially those in the services sector, such as cutting taxes and fees, and providing generous reliefs for the hardest-hit enterprises, as long as these measures do not induce moral risks. He also recommended to establish insurance funds for epidemics, so that the whole society could help share the losses of businesses brought by viruses.
