Hu Zhihao: Transforming Long-term Positive Fundamentals into High-quality Development Outcomes
Faced with deep-seated chronic ailments [1] and short-term shocks, we must—based on a full recognition of difficulties, pressures, risks, and hidden dangers—see that China's economic base is stable, its advantages are numerous, its resilience is strong, and its potential is vast. The supporting conditions and fundamental trend of long-term improvement remain unchanged. At present, it is especially necessary to distinguish between the primary and the secondary, persist in addressing both symptoms and root causes [2], and rationally guide expectations to translate long-term positive fundamentals into tangible high-quality development results.
Prioritizing Nominal Growth —— Looking back at 2021, the Central Committee clearly designated the "14th Five-Year Plan" and the "Long-Range Objectives Through the Year 2035" as the programmatic documents guiding national economic and social development for the next 5 and 15 years, respectively. This reflects our Party’s determination to follow one blueprint to the end [3]. The basic realization of socialist modernization by 2035 is the result of high-quality economic and social development, which involves certain quantitative indicators that must be clarified. For example, by the end of the "16th Five-Year Plan" period, China's per capita GDP needs to reach the level of a moderately developed country, requiring the economic growth rate to be maintained at a relatively reasonable level.
Maintaining continuous nominal growth not only allows economic agents to form positive expectations but also helps consolidate a country's exchange rate level. Reality shows that the relationship between a country's price levels, interest rates, and exchange rates has never been a simple linear one. Currently, implementing more proactive and effective macroeconomic policies to activate nominal output is conducive to the stability of the RMB exchange rate.
However, we must also clearly recognize that the nominal growth rate depends on the sum of real growth and inflation. Mild inflation helps output show positive growth at both nominal and real levels; however, growth brought about by hyperinflation or cost-push factors is not only unsustainable but will also bring disastrous consequences to economy and society. This is precisely why the Central Committee, when emphasizing demand-side stimulation, has repeatedly mentioned "establishing the new before breaking the old" [4] and developing new quality productive forces. While stimulating demand, we must focus on ensuring high-quality development on the supply side to form a virtuous cycle in the national economy.
Utilizing Policy Tools Effectively —— Implementing a more proactive fiscal policy, "increasing the fiscal deficit ratio and ensuring that fiscal policy continues to exert force and becomes more effective," shows that we have a more profound understanding of the relationship between debt and growth. It implies the need to establish debt-ceiling constraint mechanisms more scientifically. Currently, as the output growth rate is lower than the potential growth rate and interest rates are low, we have the conditions to promote economic growth through fiscal expansion.
Implementing a moderately loose monetary policy and strengthening extraordinary counter-cyclical adjustments demonstrate the Central Committee's scientific judgment of the economic situation and the policy determination made on this basis. A moderately loose monetary policy is expected to provide more ample liquidity to the economic and financial system, improve capital accessibility, and reduce financing costs, thereby providing the necessary support for restoring economic vitality. Previously, the People’s Bank of China has implemented several cuts to the reserve requirement ratio (RRR) and interest rates. Under the guidance of these policy directions, 2025 will see even larger RRR and interest rate cuts.
On the basis of the specific requirements put forward by the Central Committee for various areas of macroeconomic regulation, all departments should focus on deploying a good "policy combination punch." In recent years, the Central Committee has repeatedly proposed enhancing the consistency of macroeconomic policy orientations and has highlighted the coordination and cooperation between fiscal and monetary policies. In a certain sense, the coordination of these two major policies has transcended the choice of policy orientation and entered the "deep-water zone" [5] of coordinating policy transmission mechanisms and operational procedures.
Currently, total demand has been significantly suppressed. Relying solely on loose monetary policy can no longer effectively stimulate total demand; fiscal policy is required to spend directly to form actual demand. Typically, fiscal expenditure requires raising funds, which involves the government issuing bonds; this process requires the cooperation of the financial sector. Simultaneously, the yield curve formed by government bonds becomes the cornerstone for pricing the entire financial system. The People’s Bank of China’s previous routine purchase of treasury bonds through open market operations is a vivid example of the cooperation between these two major policies. It fully reflects the continuous maturation of macroeconomic regulation concepts and means, as well as the deepening grasp of the objective laws governing economic work.
Taking the Activation of Consumption as the Lead —— In recent years, the proportion of China's consumption expenditure to GDP has basically remained around 55%. Among this, household consumption accounts for nearly 40% of GDP, and government consumption accounts for about 16%. The proportion of Chinese household consumption to GDP is not only far lower than the approximately 68% in the United States but also lower than the 55% and 50% in Japan and South Korea, respectively. Grasping consumption to drive total demand should be seen as "grabbing the ox by the nose" [6].
In 2025, the state will allocate more funds for special actions to boost consumption, include more consumer goods in the scope of support, and optimize the subsidy distribution process. While boosting the improvement of marginal consumption, we should also pay more attention to the continuous enhancement of consumption capacity. Within this, stabilizing income expectations is the top priority, and improving the income distribution system is an essential part of the task. At the same time, we must build a more complete social security net to transform more savings pressure into consumption momentum and continuously improve the capacity, willingness, and level of household consumption.
Another factor affecting household consumption that must be mentioned is the wealth effect. According to the analysis in the National Balance Sheet of China 1978-2022 published by the Chinese Academy of Social Sciences (CASS), the total assets of Chinese residents reached 564 trillion yuan by the end of 2022. After deducting liabilities, the net assets (total wealth) were nearly 482 trillion yuan. Compared to 1978, the total wealth has grown 2,280 times, with an average annual compound growth rate of 19.2%. Currently, total household assets mainly consist of housing assets and financial assets. At the end of 2022, these two categories of assets reached 267 trillion yuan and 277 trillion yuan, respectively. If asset prices fluctuate significantly, it will inevitably impact the wealth status of residents, thereby affecting their willingness to consume. In this sense, we should be able to more comprehensively understand the profound significance of "stabilizing the property and stock markets and maintaining financial market stability."
Another noteworthy figure is the international comparison of the ratio of household debt to disposable income. Since the international financial crisis, this ratio in China has continued to rise. This indicates that even if a loose financial environment is provided, the space for residents to use debt to expand consumption is actually constrained. To create a more benign and healthy national economic cycle, it is necessary to steadily increase the share of household disposable income in national income distribution. Ultimately, through the dual improvement of income and wealth, we can maintain the steady enhancement of residents' consumption capacity and willingness.
(The author is the Deputy Director of the National Institution for Finance & Development and a specially invited researcher at the Shanghai Academy of the Chinese Academy of Social Sciences—Shanghai Municipal People's Government.) Source: Jiefang Daily (February 11, 2024) Web Editor: Huihui