Abstract: This year’s economic growth target conveys the government’s intention to guide expectations and stabilize confidence, but it will not be an easy task. The contraction of local government financing vehicles (LGFVs) and the decrease in land transfer revenue will restrict to some extent how expansionary broad fiscal policy can be. To offset the tightening effects of deleveraging in the real estate and LGFV sectors and to bring the inflation rate and nominal GDP growth back to more satisfactory levels, a net fiscal expansion of about 7-8 trillion yuan is needed over the years 2024-2025, with a focus on social security and welfare investment.
Monetary policy should play a supporting role and coordinate with fiscal policy. Compared to Japan’s monetary policy moves when the country entered a prolonged period of deflation in the 1990s, China’s current round of monetary policy operations is more appropriate. Looking ahead, if the central government issues more national bonds, whether the monetary authority needs to help through innovative tools is worth studying.
In terms of policy direction, the focus should not return to investment-led stimulus but should shift more towards supporting consumption. In addition to the short-term trade-in subsidies for consumer goods, social security reform is a more meaningful long-term measure, which could unleash consumption willingness by increasing social security spending in medical care, public housing, and education for new citizens, including migrant workers.
To treat “both symptoms and root causes” of risks in key areas such as the real estate market, it is necessary to address how to increase affordable housing and to solve the current problem of oversupply in the real estate market. If the authorities can purchase a portion of commercial housing and convert it into affordable housing, it will help alleviate the short-term real estate liquidity crisis and increase social security benefits for new citizens, including migrant workers.
One of China’s advantages is that the balance sheet of the central government and the overall government balance sheet, including state-owned assets, are relatively healthy. This allows for market-oriented reforms of state-owned enterprises aimed to improve ROE, strengthen dividend ratios, and bring more dividends to shareholders such as the social security fund to fill the fiscal gap. Enhancing the returns from state-owned assets and reforming state-owned enterprises may be a necessary part of China’s fiscal reform.
