3rd Plenum Pulse: What to Expect (5)
Zhang Bin briefed Xi Jinping recently. He just briefed everyone - If you could understand what he is saying.
On May 23, Zhang Bin, Deputy Director-General of the Institute of World Economics and Politics, Chinese Academy of Social Sciences, attended a symposium on the upcoming Third Plenary Session chaired by Xi Jinping as one of nine speakers. According to the official readout of the symposium, his speech centered around 完善宏观经济治理体系 improving China’s macroeconomic governance system
Today, June 26, Zhang published an article entitled 深化新时代宏观经济治理体系改革 Deepening the Reform of the Macroeconomic Governance System in the New Era in Study Times, the official newspaper of the Central Party School of the Central Committee of the Communist Party of China. (As I explained yesterday, the New Era in the Chinese mainland context is understood to be since the 18th National Congress of the Communist Party of China in November 2012, which produced a new leadership headed by General Secretary Xi Jinping.)
The newspaper didn’t say if it was adapted from Zhang’s brief for the General Secretary, but certainly you should read it.
If you want to grab a headline, Zhang unambiguously called for “vigilantly and decisively prevent and stop continuous demand insufficiency” by “using counter-cyclical policies forcefully enough to exceed market expectations,” contrasting with Premier Li Qiang’s words to Summer Davos in Dalian yesterday that “strong treatment cannot be used at this time. A precise, gradual approach is more ideal for recovery.”
As part of his expectation-beating formula, Zhang called for China to lower interest rates. Mindful of the potential negative consequences for the yuan’s exchange rate, possible capital flight due to higher interest over at the Feds, and shrinking profits for banks, Zhang’s insight was
It should be recognized that the fundamental support for the RMB exchange rate, capital flows, and banking operations lies in China's economic fundamentals. Improving economic fundamentals through lowering policy interest rates provides more fundamental support for the exchange rate, capital flows, and banking operations. Monetary policy should prioritize domestic considerations, emphasizing the importance of overcoming low inflation and improving economic fundamentals.
In other words, only lower interest rates can best stimulate the economy and that, instead of the other policy goals named here, should be the top priority.
Zhang’s writing indicates he believes neither the monetary policy nor the fiscal spending as of now is sufficient. Hence his explicit call for "the government needs to expand debt.” And he would like “policy financial institutions” (read: China Development Bank, part of the central government) to shoulder the burden, not other “commercial” banks which lend to local government financing vehicles for “infrastructure construction.”
Shrouded in dry policy language with Chinese characteristics, Zhang stealthily criticized China’s industrial policy by saying
market mechanisms and openness are still indispensable for promoting these new industries' development, but government policies to promote these industries cannot concentrate preferential policies on the industrial sector and investment fields as before.
As the U.S., and to a much lesser extent the European Union, seems hell-bent on beating China by becoming China in industrial policy, Zhang called for Beijing AND local governments to no longer pick winners and stay out of the market’s way
To meet the needs of the new development stage, the government's focus on enhancing economic growth momentum should be on tasks that the market cannot handle or handle well, primarily improving the business environment, promoting fair market competition, enhancing scientific research and technological capabilities, and improving infrastructure and public services. The central and local governments need to divide their responsibilities reasonably: the central government should establish and maintain a unified national market, ensure a fair competitive market environment, promote basic research and major scientific research projects, and improve national major infrastructure construction; local governments should focus on improving the local business environment, infrastructure, and public services, developing the local economy according to local conditions.
He wrote such a long paragraph about what China should do, and industrial policy is conspicuously not in it - as a matter of fact, clearly excluded since his repeated emphasis was “fair market competition,” “unified national market,” and “fair competitive market.”
Zhang would only agree for industrial policy to be left in a few local governments
Some financially capable and experienced local governments can actively cultivate emerging industries.
And he would still qualify that with
Local governments should avoid overstepping their bounds, not competing with the market for profits, and avoiding market distortions.
I’m heartened that social justice, especially for China’s numerous migrant workers, makes up one-third of his policy advice. My colleague Yuxuan Jia and I just shared, in The East is Read, Liu Shijin’s call for subsidies for hundreds of millions of disadvantaged farmers-turned-workers. (Liu is a retired Vice Minister-level researcher in the central government). Similar to Liu, Zhang profoundly recognizes the debt that the People’s Republic of China owes to the laborers who literally built the country to where it is today
China currently has over 180 million rural migrant workers. Most of them cannot return to rural work and life but also find it challenging to settle in the cities where they work and enjoy urban social welfare and various supporting public services. Cultivating this group of rural migrant workers into new urban residents and a new middle-income group, profoundly changing the lives of hundreds of millions of families, is a 人心所向 popular demand by the Chinese people and a significant promotion of social equity.
I put 人心所向 to “popular demand by the Chinese people” but it is a rarely strong expression in the Chinese political lexicon, underscoring the almost universal consensus call for really concretely helping these disadvantaged compatriots, which I certainly hope the powers that be have taken to heart.
Liu Shijin, as we reported in The East is Read, lamented
In recent years, all annual sessions of the National People's Congress and the Chinese People's Political Consultative Conference have proposed various investment projects worth hundreds of billions, but no local government has announced plans to address the basic public service issues for farmer-turned-workers. From the perspective of expanding domestic demand, if a city already has ten subways, it is more beneficial to use that money to solve housing and public service issues for farmer-turned-workers rather than building two more subways. Governmen-subsidized housing would prompt farmer-turned-workers to decorate and buy furniture and bring their families to the city, driving significantly more consumption than additional subways.
Perhaps recognizant of the hesitancy, Zhang devoted an entire paragraph to - and this is my phrasing - plead with the authorities to take a long view and not see de facto welfare spending as wasting money
In the long run, settling rural migrant workers in cities does not increase the public fiscal burden. Rural migrant workers settling in cities will enhance urban economies of scale and consumption capacity, expanding the tax base. Historical and international experiences show that urbanizing more population leads to simultaneous rapid growth in fiscal expenditure and revenue without affecting public finance sustainability.
Maybe out of the awareness that a fundamental shift in fiscal spending from building infrastructure to promoting social justice, Zhang, as a politically savvy government expert does, entices Beijing to “cross the river by feeling the stones”
However, it is also necessary to recognize that changing traditional concepts and practices is challenging and cannot be completed overnight. The reform process should not expect comprehensive changes in all areas overnight. A practical approach is to identify the main contradictions, achieve breakthroughs in specific areas, and use these breakthroughs to drive broader reforms. China's past gradual reform and pilot zone models follow this wisdom and have achieved tremendous success.
In conclusion, Zhang reiterated his call for a “forceful enough” policy to “yield immediate results” for the “urgent short-term challenge.” As for “enhancing economic growth momentum and promoting social equity”? They are “structural reforms and long-term challenges that require persistent efforts.”
Below is a full translation. All the highlights are mine. - Zichen Wang
Just by the way, Yang Liu, Jiang Jiang, and I have inaugurated the three-person talk show “Got China” and we have released two episodes [1] [2] so far. The next episode will be aired soon and it will be an accessible introduction to the Third Plenary Session of the 20th Central Committee of the Communist Party of China. Check it out!
深化新时代宏观经济治理体系改革
Deepening the Reform of the Macroeconomic Governance System in the New Era
During a meeting with entrepreneurs and experts, General Secretary Xi Jinping emphasized the importance of further comprehensive reforms, focusing on the main contradictions and key aspects. Among these, he clearly stated the need to improve the macroeconomic governance system. Over the past decade, China's economy has continued to develop steadily, entering a new stage of development. In this new stage, the people's demand for a better life is increasing, the driving force for industrial upgrading is shifting, and the environment for international economic cooperation and exchange has undergone significant changes, bringing new difficulties and challenges. The macroeconomic governance system must be adjusted in a timely manner to address these changes, focus on the main contradictions, and solve critical issues to ensure robust economic growth and strengthen the positive trend of economic recovery.
The reform of the macroeconomic governance system for the new era includes three main objectives: enhancing economic growth momentum, maintaining macroeconomic stability, and promoting social equity. Each of these objectives corresponds to specific policy tools. Enhancing economic growth momentum involves improving the business environment, internal and external trade policies, industrial policies, and infrastructure development to enhance technological levels and optimize resource allocation, thereby increasing production efficiency. Maintaining macroeconomic stability mainly relies on counter-cyclical monetary and fiscal policy tools to balance aggregate demand and supply, stabilize prices, achieve full employment, and ensure reasonable growth in labor income and corporate profits. Promoting social equity focuses on redistribution policies, social welfare, and public services to improve the welfare of low-income groups and provide fair competition opportunities. In practice, it is essential to identify the types of problems and find matching policy tools, ensuring that various policy objectives and tools work in coordination and are not confused.
Aligning with Changes in the New Era to Enhance Economic Growth Momentum
The most significant difference in China's current economic growth momentum compared to the past is that it no longer relies on large-scale investment to drive productivity improvements and economic growth. In the previous period of high-speed economic growth, China's main approach to achieving economic growth was through large-scale investments in the industrial and construction sectors, leading to rapid technological advancements in these fields and quickly narrowing the productivity gap with developed countries. Market-oriented reforms and opening up to the outside world greatly stimulated the vitality of the private economy and ensured the efficiency of this process, while the government's long-standing preferential policies for industrial development and investment served as accelerators.
In the new stage of development, the industrial and construction sectors have reached relatively high productivity levels, creating ample supply capacity that fully meets market demand, significantly reducing the growth potential of these sectors. This phenomenon naturally occurs at a certain stage of economic growth, as seen in Europe, Japan, and South Korea during similar stages of development. Correspondingly, the driving force for economic growth in the new development stage will gradually shift to knowledge- and technology-intensive industries, such as high-end manufacturing, education, scientific research, healthcare, sports and entertainment, commercial services, finance, and social public services. These industries can meet the needs of higher-income levels for consumption upgrades and further industrial upgrades, possessing higher growth potential. These industries' common attribute is the need for more knowledge and technology input and more human capital. Thus, market mechanisms and openness are still indispensable for promoting these new industries' development, but government policies to promote these industries cannot concentrate preferential policies on the industrial sector and investment fields as before.
To meet the needs of the new development stage, the government's focus on enhancing economic growth momentum should be on tasks that the market cannot handle or handle well, primarily improving the business environment, promoting fair market competition, enhancing scientific research and technological capabilities, and improving infrastructure and public services. The central and local governments need to divide their responsibilities reasonably: the central government should establish and maintain a unified national market, ensure a fair competitive market environment, promote basic research and major scientific research projects, and improve national major infrastructure construction; local governments should focus on improving the local business environment, infrastructure, and public services, developing the local economy according to local conditions. Some financially capable and experienced local governments can actively cultivate emerging industries. Local governments should avoid overstepping their bounds, not competing with the market for profits, and avoiding market distortions.
Managing Aggregate Demand to Maintain Macroeconomic Stability
The primary challenge in managing aggregate demand now and in the foreseeable future is preventing economic cooling and low price levels, determined by the characteristics of the development stage. In the early and middle stages of economic development and industrialization, supply capacity is weak, and the economy frequently encounters excessive demand and inflation, characterized by "easily overheating and difficult to cool." After reaching a certain level of economic development and industrialization, supply capacity significantly increases, and the economy more easily encounters insufficient demand and low price levels, characterized by "easily cooling and difficult to heat." The development stage has shifted the main task from preventing overheating in the past to preventing cooling now. Under continuous demand insufficiency, corporate profits and household income growth are weak, new employment is difficult, economic growth lacks a sense of gain [for the people], confidence and expectations for the future weaken, and financial risks and social instability increase. The harm of insufficient demand includes underutilized resources and weakened confidence and expectations. Therefore, it is crucial to vigilantly and decisively prevent and stop continuous demand insufficiency.
Managing aggregate demand effectively requires making full use of standardized monetary and fiscal policy tools. Many factors can trigger insufficient demand, such as a sudden decline in external demand, bursting asset price bubbles, or unsustainable debt. Regardless of the trigger, it will lead to a vicious cycle of declining income, expenditure, and credit tightening. Breaking this cycle is essential to overcoming demand insufficiency. Both international and domestic experiences show that using counter-cyclical policies forcefully enough to exceed market expectations can change market expectations and overcome demand insufficiency.
Monetary policy should maximize the adjustment of aggregate demand through policy interest rates. Policy interest rates are powerful, flexible, and precise counter-cyclical policies, and are the most relied upon and frequently used policy worldwide in counter-cyclical regulation. It should be recognized that the fundamental support for the RMB exchange rate, capital flows, and banking operations lies in China's economic fundamentals. Improving economic fundamentals through lowering policy interest rates provides more fundamental support for the exchange rate, capital flows, and banking operations. Monetary policy should prioritize domestic considerations, emphasizing the importance of overcoming low inflation and improving economic fundamentals.
Fiscal policy should utilize counter-cyclical functions by leveraging government credit and low-cost borrowing to increase expenditure. Currently, the growth rate of China's fiscal revenue is slowing, particularly at the local government level, which significantly affects the ability to increase government expenditure and perform counter-cyclical functions. Under these circumstances, the government needs to expand debt to support government expenditure growth, fully utilizing fiscal expenditure's counter-cyclical function. Lessons from past stimulus policies indicate that for public and quasi-public government investment projects, high-cost, short-cycle financing from commercial financial institutions should be avoided, and policy financial institutions should play a more significant role in financing infrastructure construction.
Helping Migrant Workers Settle in Cities to Promote Social Equity
China currently has over 180 million rural migrant workers. Most of them cannot return to rural work and life but also find it challenging to settle in the cities where they work and enjoy urban social welfare and various supporting public services. Cultivating this group of rural migrant workers into new urban residents and a new middle-income group, profoundly changing the lives of hundreds of millions of families, is a 人心所向 popular demand by the Chinese people and a significant promotion of social equity.
China, now in the mid-to-late stages of industrialization, has the capacity to enable rural migrant workers to settle in cities and enjoy urban life. Ensuring housing security, basic education, medical services, and social welfare for rural migrant workers requires a two-pronged approach. On the one hand, lowering entry barriers to encourage and support non-governmental capital investment and using market forces to meet demand; on the other hand, expanding the supply of residential land in metropolitan areas, improving infrastructure and public services in these areas, and providing appropriate subsidies for newly settled or low-income families.
In the long run, settling rural migrant workers in cities does not increase the public fiscal burden. Rural migrant workers settling in cities will enhance urban economies of scale and consumption capacity, expanding the tax base. Historical and international experiences show that urbanizing more population leads to simultaneous rapid growth in fiscal expenditure and revenue without affecting public finance sustainability.
In this new development stage, many traditional perspectives and practices are no longer applicable, requiring deepened reforms. However, it is also necessary to recognize that changing traditional concepts and practices is challenging and cannot be completed overnight. The reform process should not expect comprehensive changes in all areas overnight. A practical approach is to identify the main contradictions, achieve breakthroughs in specific areas, and use these breakthroughs to drive broader reforms. China's past gradual reform and pilot zone models follow this wisdom and have achieved tremendous success.
Reforming the macroeconomic governance system for the future is a systematic project. Promoting this reform requires ensuring the correct direction and prioritizing tasks based on the macroeconomic environment at the time. Enhancing economic growth momentum and promoting social equity are structural reforms and long-term challenges that require persistent efforts. Achieving macroeconomic stability by boosting aggregate demand is an urgent short-term challenge that can yield immediate results if the policy is forceful enough.
(The author is the Deputy Director of the Institute of World Economics and Politics, Chinese Academy of Social Sciences.)
Yuxuan Jia and I have recently covered Liu Shijin’s thoughts on China’s future reform
And Got China