If there is a sufficiently large package of measures to expand domestic demand, coupled with monetary policy, then there should be sufficient confidence in the stabilization and recovery of China's economy.

After the introduction of a major new monetary policy by the central bank, the meeting of the Political Bureau of the CPC Central Committee has attracted extraordinary attention.

On September 26, the Political Bureau of the CPC Central Committee held a meeting to analyze and study the current economic situation and to deploy the next steps in economic work. The meeting pointed out that it is necessary to effectively implement existing policies, intensify the introduction of incremental policies, further improve the targeting and effectiveness of policy measures, and strive to complete the annual goals and tasks of economic and social development. According to this year's two sessions, the economic growth target for 2024 is around 5%.

The expressions of the Political Bureau meeting on fiscal policy, monetary policy, and real estate policy include: it is necessary to issue and use ultra-long-term special government bonds and local government special bonds well, and better play the leading role of government investment. It is necessary to reduce the reserve requirement ratio and implement a strong interest rate cut. It is necessary to promote the real estate market to stop falling and stabilize, strictly control the increase in commercial housing construction, optimize the existing stock, improve quality, increase the loan distribution of "white list" projects, and support the revitalization of idle land.

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Previously, monetary policy had taken the lead. On September 24, the governor of the central bank, Pan Gongsheng, announced three major supportive monetary policy measures at a press conference of the State Council Information Office. The first is the total amount of reserve reduction and interest rate cut, including reducing the reserve requirement ratio by 0.5 percentage points. The second is five policies to support the real estate market, including guiding commercial banks to reduce the interest rates of existing housing loans. The third is to create two major tools, "Securities, Fund, Insurance Company Swap Convenience" and "Stock Repurchase and Increase Special Re-lending," to support the stock market.

The space for China's monetary policy is opening up. Since March 2024, economic entities such as Sweden, Switzerland, Mexico, Canada, the United Kingdom, and the Eurozone have successively announced interest rate cuts. In the early morning of September 19, Beijing time, the Federal Reserve announced a 50 basis point reduction in the target range of the federal funds rate, marking the first interest rate cut since the outbreak of the COVID-19 pandemic four years ago. External analysis suggests that the narrowing of the China-US interest rate differential and the weakening of exchange rate constraints will correspondingly reduce the constraints on the monetary policies of other countries.

The ensuing discussion is whether China's macro policies can open up more stimulus space. On September 24, Liu Shijin, former deputy director of the Development Research Center of the State Council, suggested at the China Macroeconomic Forum (CMF) that funds should be raised mainly by issuing ultra-long-term special government bonds to form an economic stimulus scale of no less than 10 trillion yuan within one to two years. With a GDP total of 126 trillion yuan in 2023, it is possible to determine the scale of the stimulus plan according to a proportion of 10% of GDP (Gross Domestic Product).

A series of measures have released positive signals, and China's stock market has soared accordingly. The CSI 300 Index and the Hang Seng Index in Hong Kong have risen sharply in the past few days, and the Shanghai Composite Index has recovered to 3,000 points. Scholars interviewed said that it is key to boost market sentiment and public confidence at present, and more importantly, the implementation of measures, while dealing with some challenges that may arise during the implementation process.

View the current economic situation objectively and calmly.Data from the National Bureau of Statistics shows that in the first quarter, China's GDP grew by 5.3% year-on-year, and in the second quarter, it grew by 4.7%. The China Macroeconomic Forecast (CMF) quarterly report estimates that the growth rate in the third quarter will be around 4.7%.

At present, macroeconomic data is not optimistic. Taking consumer spending close to residents' daily lives as an example, the growth rate once reached 10.1% in November last year, and then the numbers continued to decline, hovering around 3%. In August, the total retail sales of consumer goods grew by 2.1% year-on-year. At the same time, prices are still hovering at a low level. In August, the national consumer price index (CPI) rose by 0.6% year-on-year.

The enthusiasm for investment by private capital and foreign capital is low. According to data from the Ministry of Commerce, from January to August 2024, the actual amount of foreign capital used in China decreased by 31.5% year-on-year. From January to August, the growth rate of private investment in fixed asset investment was negative, at -0.2%.

The growth rate of corporate profits has slowed down. From January to August, the total profit of large-scale industrial enterprises above the designated size across the country grew by 0.5% year-on-year. At the same time, the latest unemployment rate data released by the National Bureau of Statistics for different age groups in August shows that the unemployment rate for the labor force aged 16-24 (excluding students) in August increased by 1.7 percentage points to 18.8%, the highest since the data was announced in December 2023.

Economist Ren Zeping's team analyzed that the producer price index (PPI) has been negative for more than 20 consecutive months, and the CPI is hovering around zero, which is rare. The stock and real estate markets have been declining for nearly three years, with major stock indices generally falling by more than half, excluding bank stocks, and the ChiNext index has fallen by more than half; from January to August, the sales area of newly built commercial housing decreased by 18.0% year-on-year, with the average price drop in first and second-tier cities being around 30%, and the price drop in remote suburban areas and third and fourth-tier cities is even more significant. China's short-term economic operation is not optimistic.

In the view of Teng Tai, Dean of the Wanbo New Economic Research Institute, compared to 2008 and 2009, the economic challenge we face this time is not external shocks but structural insufficient domestic demand—on the one hand, because the peak of industrialization and urbanization has passed, and investment has been excessive; on the other hand, the growth of residents' income is slow, and residents' consumption is insufficient.

Teng Tai pointed out that the annual decline in economic growth, low prices, negative growth in real estate investment, long-term decline in the stock market, high unemployment rate among young people, increased debt burden of local governments, and the expansion of fiscal expenditure gaps, these situations bring more severe challenges than the external shocks of 2008 or 2009.

Teng Tai pointed out that in order to provide better employment and development prospects for young people; to boost consumption and allow corporate products to be better sold; to resolve real estate risks and boost stock market confidence, allowing families to have more property income; to avoid the risk of deflation and reverse the decline in corporate profits or even losses; to change the trend of decline in corporate and household balance sheets, and to improve the fiscal revenue and expenditure gap of local governments as soon as possible, a large-scale plan to expand domestic demand should be launched as soon as possible.

In fact, in recent years, the Chinese government has introduced a series of measures to expand domestic demand, including fiscal, monetary, and other stimulating policies.

Taking fiscal policy as an example, in the special period of 2020, the deficit ratio was increased from 2.8% to more than 3.6%, and the deficit scale increased by 1 trillion yuan compared to 2019, reaching 3.76 trillion yuan. In 2020, 1 trillion yuan of special treasury bonds were issued, and in 2023, an additional 1 trillion yuan of treasury bonds were issued (managed as special treasury bonds). In the 2024 National People's Congress, it was decided to issue ultra-long-term special treasury bonds for several consecutive years starting this year, with 1 trillion yuan to be issued this year. In addition, there are trillion-yuan-level tax reduction and fee reduction preferential policies every year.Many policies to expand domestic demand include not only consumption vouchers in various regions but also central government measures to boost the private economy, encourage private investment, allocate central investment for work-relief programs, support large-scale equipment upgrades, and promote the exchange of old consumer goods for new ones.

In recent years, China's monetary policy has been relatively cautious compared to developed countries, but the recent changes have far exceeded market expectations.

Morgan Chase's Chief Economist for China, Zhu Haibin, pointed out that the central bank's latest policy can be said to be the most comprehensive easing policy since 2015. Although some measures are not surprising (such as interest rate cuts, reserve requirement ratio reductions, mortgage financing, and lowering the down payment requirements for second-home mortgages), the overall intensity is higher than Morgan Chase's forecast (for example, the reduction in the reserve requirement ratio basis points, policy interest rate cuts basis points, and second-home mortgage down payment regulations). At the same time, the adoption of a comprehensive package of measures is clearly aimed at restoring market confidence.

The signal of a stronger stimulus release

Experts interviewed said that the decision-making layer's thinking began to change, which is a very good time to boost market confidence.

Real estate and consumption are one of the key sources affecting China's economic lifeline. According to the new policy of the central bank, the existing mortgage loan interest rate will be reduced to close to the newly issued loan interest rate, and it is expected that the average decline will be about 0.5 percentage points. This will benefit 50 million households and 150 million people, reducing the total interest expenditure of families by about 150 billion yuan per year on average.

Zhu Haibin believes that the impact of this measure on promoting consumption remains to be observed. First, because the beneficiary families may choose to save, especially in the case of weak income and employment expectations; second, the decline in deposit interest rates and stable net interest margins indicate that this is actually a cross-subsidy of residents' savings to mortgage borrowers, so its net impact on consumption may be limited.

It is worth noting that the central bank's new policy also announced that the minimum down payment ratio for second-home mortgages at the national level will be reduced from 25% to 15%, unifying the minimum down payment ratios for first and second homes. In this regard, Zhu Haibin analyzed that the central bank had previously created a 300 billion yuan re-lending mechanism to support affordable housing, providing 60% of bank loan principal to regional state-owned enterprises for the purchase of unsold houses. It is worth noting that by the end of the second quarter, only 12.1 billion yuan of the 300 billion yuan re-lending quota had been used. In September, housing sales were lower than expected, and traditional demand-side easing measures (relaxing mortgage policies and home purchase restrictions) are difficult to solve problems such as weak income and housing price expectations and concerns about housing delivery.

Not stopping at the real estate market, Yu Yongding, a member of the Chinese Academy of Social Sciences, recently suggested in an interview that the government announce a large-scale, comprehensive package of stimulus plans to release a strong signal to the market, enhance confidence, and boost morale. "If it's too late this year, continue next year. Actions should not be rushed, but the release of policy signals cannot be delayed."

Yu Yongding believes that from the current situation, it is quite difficult to achieve an economic growth rate of 5%. Under the current "quasi-deflation" situation, the role of monetary policy is limited. The next step is to significantly increase the expansion of fiscal policy. According to the calculation at the beginning of the year, if the consumption growth rate in 2024 is 5% (in line with the planned GDP growth rate), and the growth rates of real estate and manufacturing investment are the same as in 2023 (-9.6% and 6.5%), to achieve a 5% GDP growth target, the growth rate of infrastructure investment should reach double digits, and the scale should reach more than 20 trillion yuan.Liu Shijin suggests that an economic stimulus and reform package could help bring the economy back onto a path of expansionary growth. Unlike 2008, the focus should be on shoring up the weaknesses in basic public services, with an emphasis on human capital investment. He recommends that at the micro level, efforts should be made to stimulate consumption, while also driving investment in real estate, infrastructure, and services to a certain extent, effectively expanding domestic demand.

Liu Shijin believes that the lack of overall demand in the macroeconomy is a fundamental fact, and there is almost no dispute about this. It is also common sense to adopt stimulus policies when overall demand is clearly insufficient. However, it is important to distinguish the problems caused by insufficient total demand from the causes of the insufficiency, especially to clarify what factors have led to the lack of total demand. Otherwise, even if stimulus policies are adopted, they may not be effective, and could even exacerbate the problems rather than solve them, missing the opportunity to act favorably.

The 10 trillion yuan stimulus scale that Liu Shijin refers to has two major breakthrough directions. First, there should be a significant increase in the level of basic public services for new citizens, mainly migrant workers in cities, in areas such as affordable housing, education, healthcare, social security, and elderly care. The short-term focus should be on the government purchasing unsold housing and converting it into affordable housing for new citizens. Improved housing drives consumption in decoration, furniture, and home appliances, family reunions drive demand for education, healthcare, and elderly care, and a comprehensive social security system can alleviate后顾之忧.

Second, the construction of small and medium-sized towns within the scope of metropolitan areas should be accelerated to drive the second wave of urbanization in China. He points out that, based on international experience, core cities within urban agglomerations and metropolitan areas usually account for about 30% of the urban population. There is still a huge development space for small and medium-sized towns outside the core cities, which can accommodate more than 60% of the urban population; they are also suitable for the concentration of manufacturing and lower-end service industries. In this range, there is still some room for development in real estate and infrastructure.

However, many economists remain cautious about large-scale economic stimulus, especially the continued expansion of infrastructure investment. Li Daokui, Dean of the Institute for Economic Thought and Practice at Tsinghua University, points out that the Chinese economy does not need strong stimulus. Just like a weak patient who cannot function well when taking too many supplements, it is more likely to cause new problems.

Li Daokui believes that China's economic infrastructure is already quite complete, and continued investment in infrastructure will bring greater problems. The social service level of local governments certainly needs to be improved, but if a large amount of money is suddenly spent to improve social welfare and public services, the subsequent financial resources may not keep up, leaving long-term hidden dangers. The current problem of the Chinese economy is the poor circulation and blockages, with the cash flow of the real economy being extremely short, while on the other hand, bank funds are hoarded in large amounts. Issuing long-term government bonds is the solution. Financial institutions purchase long-term government bonds, and the central government uses long-term government bonds to replace local debt, which can unblock the circulation.

Li Daokui believes that the infrastructure cycle combined with the real estate cycle leads to a colder economy. The infrastructure that has lasted for nearly twenty years has led to the pressure of short-term debt repayment, and the upsurge in urbanization and real estate construction has come to an end. He suggests that the country should issue debt, and banks should use money to buy long-term central debt to offset the impact of the cycle and restore the local governments' economic vitality.

Boosting confidence and reversing the income distribution pattern

Economists say that the stimulus plan is mainly "injecting liquidity into the market". Next, it is predicted that China still needs "a package of reforms to fundamentally reshape the economy and release the potential for consumption growth". It is urgent to reform and improve income distribution and improve residents' consumption.

Wang Xiaolu, Deputy Director of the National Economic Research Institute, remains cautious about expanding infrastructure investment. Wang Xiaolu said that according to Keynesian theory, when the market's effective demand is insufficient, the government should adopt expansionary fiscal policies, either by the government directly expanding investment or by using expansionary monetary policies to stimulate investment, in order to expand total demand and maintain stable economic growth.Wang Xiaolu believes that Keynesian policies are merely short-term policies applicable under certain special conditions. Unrestrainedly stimulating investment will lead to an increasingly high investment rate and a decreasing consumption rate, resulting in over-expansion of production capacity. It would be better to focus government spending on addressing livelihood issues to alleviate concerns about social security. This would actively improve income distribution and boost consumer demand. During the Great Depression in the United States in the 1930s, the Roosevelt New Deal primarily promoted economic recovery through policies that improved people's livelihoods and stabilized the financial system, such as providing relief for the unemployed and establishing a social security system.

Wang Xiaolu stated that the Roosevelt New Deal has been misunderstood as a Keynesian macroeconomic policy. In fact, government investment during the New Deal era was limited, and monetary policy was very restrained, fundamentally different from Keynesian expansionary policies.

Wang Xiaolu reviewed that during the New Deal period (1934-1940), the annual growth rate of the U.S. government's social welfare expenditure reached 10.2%. In 1932, public welfare expenditure accounted for 34.6% of government spending, and this proportion rose significantly to 45.5% in 1934. The increased welfare expenditure during the crisis, especially unemployment relief, later shifted towards establishing a social security system. The proportion of many other expenditure items decreased. This means that during the New Deal period, the structure of government spending was adjusted to focus on improving people's livelihoods. With these measures, the U.S. economy began to recover strongly from 1934, with an average growth rate of 7.0% from 1934 to 1940.

Liu Shijin also pointed out that the current basic situation in China is that the middle-income group accounts for about one-third, around 400 million people; below this, there are more than 900 million low-income groups, accounting for two-thirds. The Gini coefficient has remained above 0.4 for many years, and some studies believe it is at a level of 0.45 or higher. The current demand shortage is directly related to this demand structure.

Liu Shijin analyzed that, based on international experience, economies with moderate growth over a long period generally have a low Gini coefficient (below 0.4). A larger middle-income group can release a larger scale and longer-term demand, supporting moderate growth over a long period. On the contrary, if the income gap is large and the middle-income group is small, when the demand potential of this group is largely released, it is easy to experience a significant deceleration in growth, leading to a situation of low speed or even stagnation and regression.

Liu Shijin pointed out that after World War II, dozens of economies began industrialization, but very few economies entered the high-income stage from the middle-income stage, with only Japan and South Korea among the large economies. Around 10,000 U.S. dollars is a special unstable node, and more countries experience fluctuations or regression at this node, falling into the so-called "middle-income trap." It is suggested that taking the implementation of an economic revitalization plan as an opportunity, efforts should be made to increase the middle-income group population from 400 million to 800-900 million in about ten years.

Wang Xiaolu pointed out that improving social security is currently an urgent task. There are about 460 million urban workers in China, of which one-quarter to one-half are not covered by urban social security. According to urban employment statistics, in 2021, the proportion of those not included in the basic pension insurance for urban workers was about 25%, the proportion not included in the basic medical insurance for urban workers was about 24%, and the proportion not included in unemployment insurance was about 51%. On the basis of market allocation of resources, the government should maintain good rule of law and take more responsibility to solve livelihood issues.

Teng Tai also said that if there is a sufficiently large package of measures to expand domestic demand, accompanied by monetary policy, then there should be enough confidence in the stabilization and recovery of China's economy. Decades ago, China had no technology, no talent, and no manufacturing capabilities. The chips and industrial software went from nothing to something, and the current difficulties are just a need to boost demand and smooth the economic cycle.