China still needs expansionary economic policies
Text/Yu Yongding
Issued in the 993th issue of China News Weekly on 2021.4.26
According to data released by the National Bureau of Statistics on the 16th, the GDP in the first quarter rose 18.3% year-on-year, achieving a steady start.
This strongly shows that China has recovered from the impact of the new crown epidemic, although this data will steadily decline in the remaining three quarters of this year and eventually stabilize.
At the National People's Congress meeting held last month, Premier Li Keqiang announced that China's 2021 growth target was "over 6%."
Although China’s current economic growth momentum is strong, there are signs that it may be too early to tighten fiscal and monetary policies.
According to data from the Ministry of Finance, this year's general budget revenue will grow by 8.1%, while general budget expenditure will only grow by 1.8%.
It is rare that government expenditure growth is so much lower than budget revenue growth.
Although the government plans to issue 7.2 trillion yuan in bonds in 2021-this amount is still huge, but it is far below the 8.5 trillion yuan issued last year.
At the same time, the central bank may maintain its monetary policy stance or even tighten the currency.
The Chinese government's cautious attitude towards expansionary macroeconomic policies reflects its vigilance against inflation and financial risks.
However, although inflation may worsen in the near future, it is unlikely to destabilize the economy.
Although China should attach great importance to the issue of high leverage, its financial vulnerability has been exaggerated.
An economy with high savings, high growth, huge amounts of state-owned assets and limited external debt is unlikely to be dragged down by a systemic financial crisis caused by high leverage.
Therefore, the macroeconomic policy in 2021 should focus on promoting growth based on the potential growth rate of the economy, rather than stabilizing or reducing the leverage ratio.
Assuming that China’s potential growth rate is 6%, rough calculations show that taking into account the base effect, this year’s economic growth rate should exceed 8%.
China's growth in 2020 will be driven by fixed asset investment and exports, but this model is not ideal.
Unless the steady increase in disposable income brought about by strong GDP growth is enough to convince consumers that the economic outlook continues to be bright, they are unlikely to increase spending and consume savings.
In terms of total retail sales of consumer goods, the growth of household spending has weakened in the first two months of this year.
In addition, due to the global economic recovery and the base effect, the contribution of exports to GDP growth this year may be lower than last year.
Fixed asset investment, which consists of the three main categories of real estate, manufacturing, and infrastructure, has grown strongly, but its continuous growth rate has begun to decline.
In addition, whether manufacturing investment can become a pillar of investment growth is still unknown.
Therefore, in order to make up for the lack of aggregate demand, the government has no choice but to use expansionary fiscal and monetary policies to support infrastructure investment.
Whether the government budget plan is appropriate depends on the country’s indicative or mandatory growth targets.
In order to achieve an annual growth rate of 8% in 2021, it is necessary to achieve a much higher growth than last year in the field of infrastructure investment.
In addition, this type of investment should be directly funded through the government budget, rather than through bank loans to local governments.
In hindsight, instead of allowing local governments to borrow from banks and use local government financing tools to finance infrastructure investment, the central government should have issued enough bonds to fund the 4 trillion yuan stimulus plan between 2008 and 2010.
This approach can avoid financial vulnerabilities caused by local government debt and shadow banking, and provide ideal development opportunities for the government bond market.
In 2021, the government may need to issue more bonds than planned, and the People's Bank of China may need to lower interest rates to facilitate this.
If necessary, the People's Bank of China will even need to implement a variant of quantitative easing.
Of course, macroeconomic policies alone are not enough.
The government should implement more structural reforms so that all economic actors, especially local governments, can receive appropriate incentives and respond positively and reasonably to stimulus measures.
In order to consolidate its growth momentum in the post-2021 epidemic period, China should not rush to withdraw its expansionary fiscal and monetary policies.
China News Weekly, Issue 15, 2021
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