Abstract: To deal with the economic shocks brought by the COVID-19 pandemic in 2020, China launched a series of unconventional policies. In a recent interview with China Finance 40 Forum, Wu Ge talked about how China should exit from those unconventional policies as the economy gradually recovers while avoiding making sudden policy turns, the outlook on China’s economic growth and macro leverage ratio in 2021, the main factors that will help sustain economic recovery, as well as the obstacles to demand management.
Q1: The Central Economic Work Conference mentioned that China needs to maintain the continuity, stability and sustainability of macro policies in 2021, and to continue to implement proactive fiscal policy and prudent monetary policy to provide necessary support to economic recovery. It also mentioned that there will not be any sudden policy turns. Under such a background, how should China smoothly and steadily exit from various business relief policies? How to determine the timing and pace of exit and the optimal instrument mix?
Wu Ge: The basic tone of macro policies in 2021 is still proactive fiscal policy and prudent monetary policy. But generally speaking, as pandemic gradually recedes and the economy continues to recover in 2021, fiscal policy may not be as proactive as it was in 2020. Monetary policy is not expected to make strong and drastic changes.
Regarding the timing and pace for exiting from various relief measures, the degrees of spontaneous recovery of domestic demand and external demand need to be considered to make sure that there isn’t any sudden policy turns. But there will have to be policy turns anyway. As monetary policy is relatively flexible, the exit from unconventional monetary policy should come before that of fiscal policy. Fiscal policy is relatively rigid, the exit may need to be consistent with the plans to be made at the two sessions in 2021. It will come later and slower compared with exit from monetary policy.
Objectively speaking, the intensity of counter-cyclical fiscal and monetary policies should decrease as nominal GDP goes up. Under the basic tone of making no sudden policy turns, some of the relief measures taken in 2020 should continue. But for industries and regions which have already largely recovered, there is no further need to discuss the necessity to exit from relief measures, as the process has in fact already started. For instance, we are already seeing the smooth and steady withdrawal of some preferential bond financing programs.
Exit from relief policies may vary for industries and regions. For instance, the gradual recovery of foreign economies will facilitate the recovery of the export sector in China’s southeastern regions, hence allowing these regions to exit from business relief policies more rapidly and sooner than other regions.
Q2: What conditions must be satisfied for a smooth exit from the expansionary monetary policy? How to balance economic recovery and risk prevention in this process?
Wu Ge: There are two important preconditions for a smooth exit from expansionary monetary policies. First, the overall economy is bouncing back; second, commodity prices are also picking up. By far, whether compared on a year on year or quarter on quarter basis, economic growth has been on an upward trend, while commodity prices are likely to rise gradually starting in the first quarter, which provide necessary conditions to exit from the relief policies.
Of course, the tradeoff between economic growth and the prevention of risk, particularly credit risk, must be taken into account when exiting from expansionary monetary policies. But a high probability is that credit risk would fall when the economic growth improves. Historically, credit risk is relatively controllable.
Q3: The Central Economic Work Conference also mentioned that money supply and the growth of social financing should match the growth of nominal GDP to keep macro-leverage ratio stable. How to ensure they match and what is your assessment of the macro-leverage ratio in 2021?
Wu Ge: I tend to think that matching money supply and the growth of social financing with the growth of nominal GDP is intertemporal as there is always a time-lag between monetary indicators and economic indicators. For instance, if nominal GDP is high in 2021, the movement of money supply and social financing would have already shown signs of an inflection point.
Regarding macro-leverage ratio in 2021, we believe it may show a slightly downward trend. The numerator in macro-leverage ratio is the debt of micro entities, and the denominator is nominal GDP. Overall, nominal GDP will remain at a relatively high level in 2021 while the expansion of debt will fall compared with 2020. So, macro-leverage ratio may fall to some extent in 2021.
Q4: The growth of social financing decreased for the first time in the whole year to 13.6% in November 2020. What were the reasons? Does it mean social financing has reached an inflection point? As credit condition tightens, will a fall in economic growth follow?
Wu Ge: The reasons behind the fall of the growth of social financing in November include the decrease in the growth of loans and the gradual decrease in bond issuance, both of which can cause the continued slowdown of social financing growth for some time into the future. In this sense, we tend to believe the growth of social financing has reached an inflection point.
However, it should be noted that there could a time-lag lasting one or two quarters between when social financing reaches an inflection point and when the economy begins to fall. We are optimistic about the growth momentum in the first half of 2021, particularly in the first quarter when economic growth is expected to reach a high point. There could be some slowdown in the second quarter, but not by much. I think economic growth may reach a peak and then fall based on the current credit environment and money supply.
Q5: The conference also stressed that fiscal policy should actively promote science and technology innovation, accelerate economic structural adjustment, improve income distribution, and resolve the risk associated with the implicit debt of local governments. How should fiscal policy play an active role? What is your take on the implicit debt of local governments and what can be done to deal with it?
Wu Ge: Accelerating the adjustment of economic structure is an important task for the government in the coming period, and there are still many areas where fiscal policy can play a large and active role, such as industrial policy arrangements, income distribution and tax structure.
Regarding the risk associated with the implicit debt of local governments, we need to dispose of existing debt in a market-based approach, while making sure that restraints on new debt are in place. All in all, the prevention and resolution of the risk associated with the implicit debt of local governments should be carried out steadily and orderly. Even when there is a need to break rigid repayment, the risks should be addressed steadily as required by the Financial Stability and Development Committee.
Q6: The Chinese economy achieved a growth of 4.9% in the third quarter of 2020 from the 6.8% contraction in the first quarter. What are the factors contributing to China’s economic recovery? With the gradual withdrawal of unconventional policies, will the policy support for economic recovery weaken in 2021? What is your assessment of China’s economic growth in 2021? How to prioritize policy efforts to achieve economic targets?
Wu Ge: Three factors are contributing to China’s economic recovery at present. First, external demand has played an important role; second, domestic investment has provided appropriate stimulus; third, the spontaneous recovery in domestic demand.
In 2021, support from external demand is expected to last. Although the pandemic situation is still quite severe overseas, external demand may continue to recover as vaccines gradually become available in more countries. So we should not feel pessimistic about external demand.
What’s more important is to boost domestic demand. Economic sectors which have not yet fully recovered, such as consumption, are expected to provide some support for economic recovery, especially in the first half of 2021, helping the economy achieve a relatively strong performance, but less so in the second half, leading to a slight slowdown.
At present, the market in general expects China’s nominal GDP to grow by more than 10% in 2021. To ensure the stability of the economy, on the one hand, it is necessary to ensure that the exit from unconventional policies is smooth and not too fast; on the other hand, it necessary to avoid drastic adjustment in various policies such as the real estate policy.
Q7: The conference stressed that China will adhere to the supply-side structural reform while paying attention to demand management, addressing the obstacles to economic circulation and improving weak links. What are and how to address the major obstacles to the management of domestic demand? How should China step up policy efforts to further boost consumption?
Wu Ge: The proposal to expand domestic demand through demand management and stimulating domestic circulation came at the right time given the plunge in consumption due to the pandemic. The major obstacle to demand management lies in the consumer sector.
To some extent, many types of demand are suppressed by inadequate supply. For instance, the supply of education, health care and some other services is severely insufficient despite of huge demand. Policy should pay attention to both supply and demand.
On the one hand, the disposable income of middle- and low-income groups should be increased through measures like improving the employment, taxation, transfer payment and social security systems so as to increase the marginal propensity to consume (MPC) of the whole society.
On the other hand, we should adhere to the main task of supply-side structural reform and provide broader and better supply of goods and services to residents based on the trend and potential of consumption upgrade so as to stimulate demand with supply. By increasing effective supply, people’s demand for a better life will be satisfied.
Particularly, from the supply side, monopolies in some of the services industries should be broken so that more firms can enter education and health care services, among others, to provide more effective supply and to unleash people’s consumption potential.
During the process of population aging, new types of consumption related to old age care will emerge. As long as there is sufficient and quality supply, demand will be unleashed and people’s well-being will be improved.
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