China’s Current Macroeconomic Situation Calls For New Policy Support – Analysis

By Wei Hongxu*

The latest data from China’s National Bureau of Statistics showed that its economy grew by 4.8% in the first quarter, basically maintaining stable economic growth and picking up from the fourth quarter of last year. However, amid the intensifying geopolitical conflicts in the world and the increasing pressure on domestic pandemic prevention and control, on the one hand, the consumption data show negative growth in total retail consumption in March, and on the other hand, the real estate market is still in a downward trend with a sharp contraction in sales. Under such circumstance, China’s domestic economic situation cannot be described as “optimistic”. The impacts of internal uncertainties such as COVID-19 prevention and control measures are gradually emerging; the external situation will also become more complicated in the future, and there may be a “double tightening” in international economic growth and currency. In this context, more policy tools are needed to stabilize the country’s domestic economic fundamentals.

For the current Chinese economy, a top finance official recently said that the triple pressure of macroeconomic operation still exists in the first quarter of this year, while the pandemic and economic growth have also emerged some new situations and changes that require attention. In addition, there are also clearly defined corresponding policies to coordinate with economic and social development under the pandemic, while promoting economic operation to maintain a reasonable range. At present, all measures are being carried out in accordance with the requirements of making advance efforts and taking targeted measures, and more policy combinations are being studied and prepared. Researchers at ANBOUND have mentioned that the current economy needs systematic policy support, which should be reflected in policy beyond the existing overall macro policy tone.

As far as monetary policy is concerned, the People’s Bank of China (PBoC) has taken measures to lower the reserve requirement ratio (RRR). However, the central bank also said that the current liquidity is already at a reasonably abundant level. On the one hand, the RRR cut will improve the capital structure and release long-term funds; on the other hand, it is to reduce the cost of capital for financial institutions. RRR cuts are not sufficient for systemic easing. Under the external situation of rising global inflation and monetary tightening by major central banks, the room for further expansion of aggregate policy is limited. In the future, monetary policy should pay more attention to structural policies and support SMEs and some emerging strategic industries through re-lending and other tools. At the same time, monetary policy tools will support the reform of the financial system and provide a stable monetary environment for systemic reform.

In terms of fiscal policy, on the basis of a deficit-to-GDP ratio of 2.8% this year, the current policy focus is on reducing taxes and fees and investing in special bonds to help ease the burden on the real economy, and ensuring economic and fiscal stability through investment-driven growth. However, judging from the current performance of central and local state-owned enterprises, state-owned enterprises still maintain a rapid momentum of development this year, and they still make a certain contribution to government finance. At the same time, the top finance official also mentioned the possibility of raising funds in the form of short-term treasury bills, if necessary, to help stabilize government finance. Therefore, the strength of fiscal policy is expected to be further increased in the future, and fiscal policy will also play the main role of the new policy tool.

Looking at the policy relaxation in the real estate market since the beginning of this year, the current risk prevention policy needs to accelerate the market clearing of real estate enterprises, so as to remove the obstruction, reverse the downward trend of the real estate market the soonest possible, and help stabilize the overall economic demand. In terms of the financial sector, the non-performing assets of commercial banks and non-bank financial institutions related to real estate have been gradually exposed. With the gradual implementation of the Financial Stability Law and the establishment of the financial risk prevention framework, accelerating the merger and reorganization of the real estate market and unloading the burden of the market should be the focus of future risk prevention policies, which is also conducive to the realization of a “soft landing” of the macroeconomy.

To achieve stable economic growth, China needs not only monetary and fiscal coordination, but also more reform tools to smooth the market cycle. This is reflected not only in the field of commodity circulation, but also in the further reform of capital markets and the development of various regional markets. In the central government’s proposal to build a “unified market”, these contents have been laid out, and will be implemented with various relevant policies in the future. Therefore, institutional reform and construction will be the focus of releasing market space and enhancing endogenous growth. Finance officials expect financial institutions to provide more financial services to key logistics, warehousing, and e-commerce enterprises, and support these enterprises to better leverage the driving effect and clustering effect for smooth logistics and supply chains. This will require not only further reform of the financial system, but also new incremental capital to meet the needs of the new economy. An indispensable component of this would be market opening-up and policy relaxation to guide financial resources toward related fields.

Based on the expectation and judgment of the changes in the Chinese economic situation, systematic easing is still needed to support the economy and avoid the stall of economic growth. As things stand, this need has become increasingly urgent. To keep the economy running in a reasonable range, the country not only needs to continue to promote structural reforms and make cross-cyclical adjustments, both aggregate and structural policies also need to strengthen their counter-cyclical adjustments, promote demand in emerging and conventional sectors, resolve the prominent contradiction, and achieve a new balance of supply and demand in a higher level.

*Wei Hongxu, A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK