盛松成：今年全年GDP的占比会呈现逐季提高的态势 - 2020-06-10

Author: Sheng Songcheng
Executive Vice Dean of CEIBS Lujiazui International Finance Research Center
In the government work report, the Chinese premier said, “The specific target for the annual economic growth has not been proposed, mainly because the global epidemic situation and the economic and trade situation are highly uncertain.” China’s development is facing some unpredictable factors, and, by doing so, it will help us concentrate our efforts on ensuring stability on the “six fronts” and security in the “six areas.” I think this reflects the realistic and prudent approaches that the central government has adhered to in the face of the current economic situation at home and abroad and greater uncertainty in the future.
Of course, not setting specific targets for economic growth does not mean that we should not strive to pursue stable economic growth. The government work report also mentioned that “whether it is to maintain employment and people’s livelihood, to achieve the goal of poverty alleviation, or to prevent and mitigate risks, there must be economic growth support, and stable economic operation matters a lot to the overall stability.” Steady growth remains our goal and direction. Other targets set out in the government work report also require our economy to maintain a certain growth rate this year, otherwise how can the target of adding 9 million new jobs be achieved? In the case of China’s GDP growth rate of 6.1% last year (at constant prices, that is, the actual GDP growth was above 5.1 trillion yuan), 13.61 million new jobs were added. With a simple calculation, in order to achieve this year’s employment target, the actual annual GDP growth rate may need to reach 3.8%. Of course, the actual situation is far more complicated than this. China’s economic structure is constantly changing. For example, the proportion of the tertiary industry in our economy has been increasing year by year, and its ability to provide jobs is stronger. However, the increasing proportion of the tertiary industry may lead to slower economic growth. So new jobs and economic growth are not in a simple linear relationship. In addition, China has been constantly deepening reform and opening-up, and these measures will help the economy unleash greater growth potential.
 
Although the country posted negative economic growth in the first quarter, I think we cannot infer the annual economic growth rate solely based on the GDP growth rate in the first quarter. Starting from the second quarter, the country’s economy will gradually stabilize and improve, the impact of the epidemic on the economy will decrease quarter by quarter, and the economic strength will increase quarter by quarter. We should also notice that the quarterly proportion of the total GDP this year will vary, showing a rising trend quarter by quarter. As the country firmly implements the strategy of expanding domestic demand and improving effective investment, the GDP growth rate this year will likely reach about 3%.
The key to avoiding a long-term economic recession is to ensure that enterprises survive
Since the beginning of this year, the COVID-19 epidemic has caused a great impact on the country’s economy. As early as the end of January, I proposed in an article that we should pay close attention to economic weaknesses. The reason is that if we want to limit the impact of the epidemic on the economy to a short term and within a limited range, rather than allowing it to develop into a long-term economic recession, the key is to ensure that enterprises can survive, because they are the most basic units of economic operation.
This year’s government work report makes “stabilizing enterprises and ensuring employment” the priorities. Where there is life, there is hope. The main purpose of supporting market entities is to ensure jobs and people’s livelihood. Among all types of market players in the country, small and micro enterprises are the market players most vulnerable to the epidemic. From the perspective of employment, small and micro enterprises should be given priority. At the same time, in the process of China’s industrial transformation and upgrading, private enterprises continue to grow and develop. One of the advantages of “made in China” is the integrity of the industrial chain, which can meet the needs in various stages of R&D, design, production and commercialization, and can also adapt to the complex division of labor in the global industrial chain. The epidemic has raised concerns about global demand decline and the relocation of the industrial chain. Therefore, stabilizing these market players can also help to stabilize the supply chain and the industrial chain.
In order to stabilize enterprises and ensure employment, this year’s government work report identified a number of measures that deserve attention. For example, the annual burden on enterprises is expected to be cut by more than 2.5 trillion yuan, and the policy of tax and fee reduction due before June (including exemption of pension, unemployment and work-related injury insurance contribution for small and medium-sized enterprises; reduction of value-added tax for small taxpayers; exemption of service VAT on public transportation, catering and accommodation, tourism and entertainment, cultural and sports sectors; reduction and exemption of civil aviation development fees and port construction fees) will be extended to the end of this year. The income tax payment by small and micro enterprises and sole traders will be delayed to next year. The policy of reducing industrial and commercial power price by 5% will be extended to the end of this year, and the average tariff for broadband and dedicated lines will be reduced by 15%. In addition, the growth rate of loans provided by large commercial banks to small and micro enterprise should be higher than 40%. Subsidies will be provided to leverage training to stabilize employment. In this year and next year, 35 million people are expected to participate in vocational skills training. Higher vocational colleges will expand the enrollment by 2 million people, so as to make more laborers have improved skills and good jobs.
Proper coordination of fiscal and monetary policies
According to the trend of fiscal and monetary policies and “toolkits” disclosed in the government work report, it can be said that under the impact of the epidemic that has brought unprecedented challenges to the economy, we are in a state of perseverance and staying focused. The government work report extends the takeaways from the previous Politburo meetings of the CPC Central Committee, proposing that “the positive fiscal policy should be more proactive and effective” and “the stable monetary policy should be more flexible and accommodative.” That is to say, the stance is still based on a proactive fiscal policy supported by a prudent monetary policy.
As far as fiscal policy is concerned, in addition to the forementioned full-year burden reduction for enterprises by more than 2.5 trillion yuan, this year’s budget deficit rate is planned to be arranged at more than 3.6%. The fiscal deficit scale will be increased by 1 trillion yuan compared with last year. A trillion-yuan epidemic-relief special treasury bonds will be issued, together with special local government bonds worth 3.75 trillion yuan, an increase of 1.6 trillion yuan over last year. Investment spending within the central government budget will be 600 billion yuan. Given the increase in the proportion of special bonds that can be used as project capital, as well as the fact that China has lowered the proportion of capital requirements for some projects, improved the market-based investment and financing mechanism, and offered private enterprises equal opportunities to participate in construction of related projects, we’d like to see a considerable impact by leveraging fiscal policies to spur capital expenditure and effectively expand investment.
At the same time, the government work report particularly emphasizes vigorously optimizing the structure of fiscal expenditures. Basic livelihood expenditures will only increase rather than decrease. Expenditure in key areas must be effectively guaranteed, and general expenditures must be firmly reduced. Governments at all levels must strive to cut their spending, and the central government should take the lead. The central government’s expenditure should have negative growth compared with the current level, and non-urgent and non-rigid expenditures should be reduced by more than 50%. In addition, the newly added 1 trillion yuan in fiscal deficit and 1 trillion yuan in special anti-epidemic government bonds will be transferred to local governments, while a special transfer payment mechanism will be established, with funds directly reaching the primary levels in cities and counties, and directly benefiting enterprises and people, which also reflects the emphasis on the efficiency of capital use.
As far as monetary policy is concerned, the government work report clearly proposes the comprehensive use of means such as the reduction of the reserve requirement ratios and interest rates, as well as refinancing to guide the growth of broad-based money supply and total social financing to be significantly higher than last year. As for monetary policies, innovative policy tools will be created to directly reach the real economy, support enterprises to have easier access to loans, and drive interest rates to continue to fall.
When the economic growth rate this year is lower than last year, the growth rate of the broad money supply M2 and the scale of social financing should be significantly higher than last year, which means that monetary policy will be looser marginally, and it also reflects the appropriate coordination between fiscal policies and monetary policies.
The central bank’s direct subscription of government bonds in the primary market lacks market mechanism constraints
No matter in theory or in practice, there is only one case of monetizing the fiscal deficit, that is, the central bank directly purchases government bonds in the primary market, which is called “helicopter money.” It is fundamentally different from the usual purchase of government bonds through the secondary market. The most crucial point is that the central bank’s direct subscription of government bonds in the primary market lacks market mechanism constraints. From the perspective of “quantity,” the direct purchase of government bonds by the central bank in the primary market will passively expand the central bank’s balance sheet by the same amount, while in the case when the central bank purchases government bonds through the secondary market, the central bank can decide the amount of bonds it needs to purchase in line with the need of money supply, and it can choose the timing, say today or tomorrow, or choose to buy long-term government bonds or short-term government bonds, so as to ensure the independence of the central bank’s monetary policy. From the perspective of “pricing,” the secondary bond market has many professional investors, together with active and transparent transactions, and good “price discovery” functions, which can effectively restrain the government’s debt issuance. If the central bank directly subscribes to government bonds in the primary market, this pricing mechanism will be difficult to function. The interest rate for government bonds could even be zero, which will also restrict the room for monetary policy operations. For example, the distorted operations that the US Federal Reserve has adopted (selling short-term treasuries and buying long-term treasuries to drive long-term interest rates downward) proved difficult to implement. The central bank’s direct purchase of government bonds from the primary market will also affect the formation of the normal government bond yield curve, seriously restrict the effective implementation of monetary policies, and hinder the reform of price-based regulation in monetary policies.
At present, China’s policy space is still relatively sufficient. For example, the statutory reserve requirement ratio of small and medium-sized deposit financial institutions has not yet been lower than 6%. The 7-day reverse repurchase rate is 2.2%, and the 6-month MLF interest rate is 3.05%. The yield on 10-year treasuries is around 2.7%, and the interest rate on one-year time deposits is 1.5%. All these are within the normal ranges. At the same time, the country’s fiscal deficit rate is not high, the market’s demand for national debt is relatively strong, and the issuance of treasuries is smooth. The country’s current monetary policy regulation is shifting from a quantity-based model to a price-based model. Monetizing fiscal deficits hastily will lead to chaotic market signals, price distortions, currency over-issuance, and fiscal imbalances, thus laying hidden systemic risks. Therefore, at present, the country should not implement “monetization of fiscal deficits”.
Leveraging reform to unleash the potential of economic growth
This year’s government work report has proposed that the country “must use reform and opening-up to stabilize employment, protect people’s livelihood, promote consumption, boost markets, stabilize growth, and open a new way to effectively deal with shocks and achieve a virtuous circle.” To put it simple, it means leveraging reform to unleash the potential of economic growth. Emphasizing reform and opening-up is a major feature of this year’s government work report. In recent years, the country’s economic downturn has been due to structural contradictions and changes in development methods, in addition to cyclical factors. It is necessary to keep adjusting the economic structure. Promoting reform and further opening-up will enable China’s economy to release greater potential. It should be noted that the government work report emphasizes “promoting reform and development through opening-up.”
The fourth part of this year’s government work report specifically addressed the issue of “relying on reform to stimulate the vitality of market players and enhance the new growth momentum.” Efforts include deepening the reform to delegate power, streamline administration and optimize government services, promoting the reform of market-based allocation of factors, improving the effectiveness of the reform of state-owned assets and state-owned enterprises, optimizing the development environment of the private economy, promoting the upgrading of manufacturing industries and the development of emerging industries, and improving the support capacity for technological innovation. Prior to this, China had also issued two important documents, namely “Opinions on Construction of More Established Market-based Allocation System and Mechanism for Factors” (April 9) and “Opinions on Accelerating the Improvement of the Socialist Market Economic System in the New Era” (May 18), both by the Central Committee of the Communist Party of China and the State Council. Both documents once again emphasized the great significance and important measures for upholding and strengthening reform and opening-up under the new situations.