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Former senior econ official calls for urgent action on Chinese economy
Yin Yanlin, former Deputy Director of the Office of the Central Financial and Economic Affairs Commission, says the economy is significantly weakening and the downside risks are increasing.
Yesterday, the Academic Center for Chinese Economic Practice and Thinking (ACCEPT), in partnership with Tsinghua University and the School of Economics and Management, invited esteemed experts and scholars from academic, policy and business circles to discuss the Chinese economy at its 45th Tsinghua University Forum of China and the World Economy.
Below is the speech by Yin Yanlin, former Deputy Director of the Office of the Central Financial and Economic Affairs Commission. I thank ACCEPT for providing a transcript of the speech, which is also available in video. - Zichen
I'm glad to participate in today's forum and would like to take this opportunity to share three perspectives on the current economic situation in our country for everyone's research and reference.
First, the current trend of economic operation is not optimistic.
On June 15th, the National Bureau of Statistics released the economic data for May. After experiencing three years of the pandemic, our country's economy has finally set sail this year. As pointed out by the central authorities in their analysis of the first-quarter economic situation, our country has achieved significant and decisive victories in epidemic prevention and control. The economy and society have fully returned to normal operations, and the first quarter showed a positive trend of recovery and improvement, providing a good start to economic operation. However, starting from the second quarter, although the economic recovery continued, it has to be said that from April to May until now, the economy has experienced significant unexpected changes, to the point where some people believe that the initial judgments may have been overly optimistic.
The main changes are as follows: firstly, in terms of production, most industries have maintained stability with a slight decline, and in some cases, there has been a trend of decline. The value added of industrial enterprises above a designated size increased by 3.5% year-on-year in May, a decrease of 2.1 percentage points from the previous month. The industry differentiation is also evident, with an uneven recovery, where the service industry is outperforming the manufacturing industry, large enterprises are doing better than small and medium-sized enterprises, and state-owned enterprises are performing better than private enterprises. State-controlled enterprises grew by 4.4%, while private enterprises only grew by 0.7%. The Purchasing Managers' Index (PMI) for the manufacturing sector in May was 48.8%, a decrease of 0.4 percentage points from the previous month, marking three consecutive months of decline within the year and two consecutive months below the threshold level. The national production index for the service industry in May increased by 11.7% year-on-year, a decrease of 1.8 percentage points from the previous month.
Secondly, in terms of demand, the three major areas of demand have experienced an overall decline. The total retail sales of consumer goods in May increased by 12.7% year-on-year, a decrease of 5.7 percentage points from the previous month. In particular, durable goods consumption, such as home appliances and automobiles, has been sluggish, and the decline in construction and decoration materials has further widened. This is mainly due to the inadequate recovery of the real estate market. From January to May, the sales area of commercial residential buildings decreased by 0.9% year-on-year, while fixed asset investment increased by 4%, but it decreased by 0.7 percentage points compared to the period from January to April. Real estate development investment decreased by 7.2%, while private investment decreased by 0.1%, indicating negative growth. From January to March, the growth rate was 0.6%, and in April, it was 0.4%. In May, it declined by 0.6%. Exports in May decreased by 0.8%.
Thirdly, the job market and price situation are severe. The unemployment rate among young people aged 16-24 reached 20.8% in May, setting a new record high after exceeding 20% in April. This reflects the slowdown in the recovery of labor-intensive service industries and the inadequate absorption of low-educated youth in employment. Typically, the youth unemployment rate increases significantly around the graduation season, reaching its peak in July. However, this year, it has been consistently rising since January. With the approaching graduation season, the pressure on youth employment will further increase. In terms of prices, the Consumer Price Index (CPI) increased by 0.2% year-on-year in May, with a month-on-month decrease of 0.2%, marking four consecutive months of decline. The Producer Price Index (PPI) decreased by 4.6% year-on-year and 0.9% month-on-month, remaining in negative growth for seven consecutive months, the lowest since March 2016. This market trend has put significant pressure on various market participants.
In summary, the current economic activity is significantly weakening, and the downside risks are increasing. Although the year-on-year growth rate in the second quarter may still be relatively high due to the base effect, the foundation of economic recovery is clearly unstable, far from the overall improvement in economic operation as proposed in the Central Economic Work Conference. In particular, there is still a considerable gap in meeting the requirements for ensuring stable development of the real estate market.
The impact of the real estate sector on the economy cannot be ignored. It is not a matter of personal preference; it is determined by economic laws. The downturn in the real estate market not only hinders the recovery of upstream and downstream industries but also restricts the flow of liquidity into the real economy. Additionally, it exacerbates local government debt issues and increases the risk of "gray rhinos" transforming into "black swans." If this situation is not changed quickly, it may lead to the exposure and default of local government investment bonds, resulting in an increase in bad loans for small and medium-sized banks, and inevitably trigger regional or even systemic financial risks.
The second point is that inadequate policy implementation is the main reason.
Insufficient total demand is the prominent contradiction faced by the current economic operation. In response to this contradiction, a series of arrangements were made at last year's central economic work conference. The Political Bureau meeting on April 28 pointed out that the demand is still inadequate and emphasized that the key to continued economic recovery and improvement lies in the restoration and expansion of demand. However, at present, the demand has not been effectively restored and expanded.
The main reasons for this since the beginning of this year are as follows: first, the improvement in expectations has not been sustained. The central economic work conference emphasized the improvement of social psychological expectations and boosting development confidence. Macro policies were studied and front-loaded, but subsequent policies were lacking in strength after entering April. Regarding consumer confidence, the expectation of a warming real estate market did not continue. The real estate sales improved in the first quarter but weakened again afterward. The improvement was limited to first-tier and second-tier cities and did not spread to third-tier and fourth-tier cities. The sales improvement did not drive investment in development. There was an increase in prepayment and regular deposits by residents, indicating weakened consumer confidence.
The improvement in private investment expectations is not evident, and there is insufficient confidence. Consumption activities by private entrepreneurs have increased, but investment vitality has significantly declined. The problem of having the means but not willing or daring to invest still exists.
Second, there are obstacles to policy implementation. The central economic work conference specifically pointed out that there are some restrictive policies in the fields of housing, automobiles, and service consumption that hinder the release of consumer demand. It also required improving consumption conditions to fully unleash consumption potential.
Up to now, there are still obstacles to the implementation of relevant policies. For example, local governments have proposed relaxation policies regarding purchase restrictions, sales restrictions, and price restrictions, but in many places, they are slowly relaxing and waiting, and have not completely reversed residents' expectations of housing consumption. Purchase restrictions and sales restrictions still exist in many major cities.
Moreover, the policy requires financial institutions to increase support for the real economy, especially for small and micro enterprises. However, in the current unfavorable market conditions, it is difficult for enterprises, which poses risks. Some banking institutions emphasize adhering to market-oriented and legal principles, which ultimately results in supportive policies remaining on paper.
Third, there is a lack of clear signals for policy adjustments. The real estate policy adheres to the principle of "housing is for living, not for speculation," which is correct. However, relevant departments have simplified and mechanized this important principle (using quantity as a threshhold), with strong support for the first property, reasonable support for the second property, and no support for the third property in principle, leaving no room for speculators to re-enter the market.
As we all know, the current market is in a slump. Where are the speculators, and where is the room for speculation? Not to mention speculators, even genuine homebuyers are hesitant to enter the market, fearing that they will buy at high points and waiting for further price declines. They will not make a move until the bottom is reached. However, who can tell them where the bottom is?
Recently, some people have also expressed concerns about the recent narratives in the news media, such as suggesting appropriate adjustments to first-tier city purchase restrictions and calling for patience. This has increased doubts about the direction of policies: what is the direction? This is the third point: the lack of clear policy adjustment signals.
The fourth point is that the income growth of the three major economic entities has been affected. Over the past three years of the pandemic, the tourism, transportation, and catering industries, among others, have been severely impacted. Many households not only experienced a decrease in income but also a substantial reduction in the income sources they previously relied on, which has damaged the balance sheets of household assets and liabilities. Currently, per capita disposable income for residents struggles to grow. In the first quarter of this year, per capita disposable income increased by 3.8% year-on-year, which was 1.3% lower than the same period last year and 0.7% lower than GDP growth. Therefore, the improvement in household consumption capacity has slowed down, and enterprise total profits have also declined year-on-year. Industrial enterprise profits in April showed a negative growth of 26.5%. As a result, companies are facing difficulties and unable to operate. Local land fiscal revenue has sharply declined, and local governments are burdened with debt problems, making it challenging for many regions to increase their consumption or investment without financial resources.
The third point is to increase policy efforts and quickly boost overall demand.
Given the high uncertainty in external demand, the recovery of the economy, the alleviation of unemployment, the prevention of deflation, and the resolution of risks all depend on the recovery of domestic demand. Facing the prominent contradiction of insufficient total demand, the solution lies in boosting total demand.
It is necessary to improve market expectations, stabilize market confidence, stimulate the vitality of financial entities, and focus on restoring and expanding demand to promote overall economic improvement.
Firstly, resolutely break the negative cycle of expectations. Confidence can sometimes affect reality, and reality can then affect confidence, which is the self-fulfilling nature of expectations. To prevent the formation of weak expectations leading to weak effects and further strengthening weak expectations, macroeconomic policy should be based on boosting social confidence and improving market expectations, with the key focus on boosting confidence in private enterprises and entrepreneurs. Several landmark measures should be researched and implemented to truly remove legal and regulatory barriers and invisible obstacles that hinder fair competition and common development among different types of enterprises.
Secondly, policies that can be implemented should be effectively put in place. For example, reasonable increase in consumer credit to support consumption such as housing improvement, targeted policies in different cities, relaxation of housing purchase conditions, and reduction of down payment ratios for home-buying. Ensure the completion and delivery of properties, stabilize people's livelihoods, and maintain stability.
Strengthen policy support for the completion and delivery of housing projects and enhance support programs for property completion loans. The government's investment and policy incentives should play a guiding role, effectively driving and stimulating private investment. Relax market access for private investment and encourage more private capital to participate in major national projects and projects that address weaknesses.
Thirdly, while the direction is correct, policies that have not been implemented should be promptly realized and detailed. Some say that the central and local governments have introduced many good policies, but the problem is that they have not been effectively implemented. They have become shadow policies that can be seen but not felt, lacking a sense of reality. For such policies, further classification and specific implementation are necessary so that entrepreneurs not only see the policies being introduced but also truly experience their effectiveness.
Fourthly, policies that are not appropriate should be adjusted as soon as possible. For example, restrictive policies introduced during a real estate boom should be phased out quickly. Policies should follow the demands. Where there is potential demand, controls should be relaxed or removed to achieve targeted results, rather than firing blanks without actual effects. It is illogical to call for expanding domestic demand while blocking the release of demand. Such policies may not be logically sound and may not yield good practical results. For example, since the responsibility for the real estate market lies with local governments, relevant departments should clearly cancel the system of “warning conversations.”
[Zichen: The Ministry of Housing and Urban-Rural Development summons leaders of cities for warnings when it thinks there is a overheat in the city’s real estate market.]
Fifthly, policies that require greater efforts should be pursued without hesitation. Avoid policies as if a person is squeezing the toothpaste. Fiscal policies should better reflect their positive intentions and play a better role in stabilizing expectations and expanding domestic demand. Monetary policies should have greater strength, face market demand directly, and have a stimulating effect. Real estate policies should loosen restrictions and allow the market to breathe. Let the hot regions get hot first and spread to the wait-and-see markets, better meeting the needs of genuine homebuyers and encouraging the release of the widespread improvement-driven demand as soon as possible. In addition, ensure the consistency of macro-level public opinion guidance, review inconsistencies in statements, practices, and measures between local departments and central requirements, strengthen positive guidance, provide clear expectations to society, and truly foster an atmosphere where state-owned enterprises dare to act, private enterprises dare to venture, and foreign enterprises dare to invest.
[Zichen: the last three “dares” is a quote from Xi Jinping in July 2022.]
Finally, I firmly believe that under the strong leadership of the Party Central Committee with Comrade Xi Jinping at its core, as long as we have the right thinking, implement effective measures, work together with unity, and make joint efforts, our country's economy will definitely be put on the track of overall improvement. Thank you, everyone! (Enditem)