Two Sessions Preview – In the end, we only have the word “trust.”
What should we expect from the Two Sessions? We still adhere to our logic that short-term economic fluctuations are data-driven, while long-term is characterized by the word “potential.” The Two Sessions undoubtedly address short-term issues. In comparison to the Economic Work Conference, the key increment lies in defining the government’s policy agenda. How will short-term and long-term strategic issues be connected?
We believe the most challenging aspect lies in real estate. The logical dilemma is stimulating the economy, improving the social welfare system, and questioning the source of government funds. Currently, the market and theoretical circles lean towards fiscal policy as the solution for China’s economic revival, with structural policies also in consideration. In practice, it might be a hybrid strategy, combining overall and structural approaches. Taking monetary policy as an example, the overall policy mainly involves reserve ratio cuts, MLF (Medium-term Lending Facility), and LPR (Loan Prime Rate), while structural monetary policy refers to PSL (Targeted Medium-term Lending Facility) and specific re-lending tools.
We observe continuous efforts in implementing these monetary tools. However, for China, long-term issues seem critical, especially concerning population concerns. If the focus remains solely on monetary policy, lowering short-term interest rates to zero, and observing whether real interest rates decrease, what happens if the population continues to decline? Where does the optimism for China’s long-term economic growth lie in the eyes of various market participants?
Currently, various signs indicate that local governments primarily balance their standard debt through refinancing, with non-standard operations becoming a bad debt, leading to uncertainties similar to the “Liupanshui” incident. In such a financially tight situation, centralizing national welfare expenditures by the central government poses a significant problem.
Professor Cai Fang’s new article seems aimed at dispelling such concerns. Fiscal balance should not be based on an annual basis but on economic cycles. Fiscal system welfare expenditures have an investment attribute, not just a financial expenditure attribute. From an economic cycle perspective, there is no need to significantly increase fiscal deficits in the short term. Simultaneously, expanding the tax base, particularly through progressive taxes represented by real estate, can balance short-term real estate development and signal the release of economic growth potential in the long run to society.
In simple terms, there’s no need to worry that a substantial increase in the deficit rate in the short term implies a simultaneous increase in tax rates. From the perspective of the economic cycle, the issue of raising tax rates can be addressed during economic expansion. However, this framework requires a feasible analysis framework that can communicate fully with various market participants, reassuring everyone about the swift introduction of real estate taxes.
We can draw inspiration from Powell’s concept of “balanced inflation.” Powell, in response to significant economic fluctuations and high inflation, shifted the Fed’s communication framework to a “balanced inflation” framework. In essence, Powell’s Fed allows inflation to significantly exceed 2% for a period (measured annually), followed by raising interest rates to bring inflation back below 2%. This “balanced inflation” framework maintains transparent communication with the market. The task for China now is to adopt a fiscal policy based on a cross-economic cycle philosophy. What indicators describe China’s economic cycle position? We propose CPI, PMI, and unemployment rate as alternative indicators. What is the “2%” for these indicators? This is not just a theoretical question but also a crucial policy practice.
Meanwhile, whether the Renminbi will no longer be strong poses some resistance to the internationalization of the Renminbi. The Renminbi is more of a transaction medium, and the key issue lies in the assets behind it, with potential being the core. A potential-rich industry attracts massive investment, accumulating wealth and naturally supporting a strong Renminbi in terms of liquidity. The ultimate key is still the word “potential.” The core of potential lies in trust, and only with trust can the courage for continuous investment be nurtured. Having gone through the process of investment and entrepreneurship, we know that a company’s investment in technology has already undertaken significant risks. If future industrial policy expectations are also unstable, combining technological risk with policy risk will raise the overall financing cost of the economy.