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These economists spoke to China's Premier on Thursday. What's their view on the economy recently?
Analysis from Yuan Haixia, Qin Hailin, Lu Ming, and Zhao Wei.
During the symposium, experts including Liu Shangxi, Luo Zhiheng, Tian Xuan, Huang Xianhai, Yuan Haixia, Qin Hailin, Lu Ming, and Zhao Wei spoke. The official readout didn’t elaborate on what they said at the meeting, but below are some of what they said recently about the Chinese economy before the meeting.
Below are some of what they said recently about the Chinese economy.
In recent years, due to increased downward pressure on the economy, the implementation of large-scale tax cuts, adjustments in the real estate market, and a prolonged slump in land sales, local governments in China have experienced significant revenue reductions. Against the backdrop of further highlighted fiscal imbalances, local government debt has grown rapidly, leading to an increase in debt risk. In 2022, the balance of local government debt exceeded 35 trillion yuan, with a local government debt-to-GDP ratio of 29% and a debt ratio of 125%. Overall, the risks are considered controllable. However, when considering hidden debts, the risks increase significantly. According to calculations by China Chengxin International, the scale of hidden local government debts in 2022 ranged from 52 trillion yuan to 57 trillion yuan, with a broad debt-to-GDP ratio of 72% to 76%. Even after excluding certain strong platforms in economically robust regions, the hidden debt is estimated to be around 39 trillion yuan to 47 trillion yuan, and the adjusted broad local government debt-to-GDP ratio is still high, ranging from 61% to 68%.
Regionally, debt risks have increased to varying degrees in different areas, and the divergence has further intensified.
In 2022, against the backdrop of local government revenue reductions and a record-high issuance of local government bonds, coupled with an accelerated process of debt securitization, regional debt risks in China continue to diverge. Looking at the categorization of provincial debt ratios into "red, orange, yellow, and green" tiers, based on the explicit debt calculation, the overall debt risks of provinces in the country are generally controllable, with most provinces falling into the yellow and green tiers, with more than 60% in the yellow tier. However, when considering hidden debts, the broad debt risks of provinces have further increased, with nearly half of the provinces in the red tier. The color categorization of debt tiers exhibits a "deeper in the south, shallower in the north" pattern, indicating more prominent risks in terms of broad debt.
In 2023, against the backdrop of economic recovery, the contradiction between local government revenue and expenditure is expected to be alleviated to some extent. However, due to the continued downturn in the real estate market, limited expansion of central transfer payments, and other constraints, local governments still face pressures. The regional risk divergence is likely to continue. Additionally, the new issuance limit for local government debt remains at a relatively high level, and with the upcoming peak of local government debt maturities, coupled with the ongoing process of explicit debt securitization, local government debt will continue to expand. It is necessary to pay attention to interest payment pressures on key regional debts. Furthermore, as the process of resolving hidden debts continues, some regions may face increased pressure in rolling over debts. The transmission of risks between regional state-owned enterprises and the risk of "platformization" should also be monitored.
First, under the weakened land finance and limited expansion of central transfer payments, local fiscal capacity remains under pressure, and further differentiation in regional risks should be monitored. In 2023, with continued economic recovery, the revenue and expenditure contradictions in various regions are expected to be marginally alleviated.
However, there are still many constraints, and the regional differentiation pattern may continue. On the one hand, local-level revenues are still under pressure due to the continued downturn in the land market. With the implementation of supportive policies for the real estate market, the decline in local government non-tax revenues is expected to narrow this year compared to the previous year. However, the substantial stabilization of the real estate market will take time, and under the background of a deep adjustment in the real estate market, the stability of land finance faces significant challenges. It may be difficult for land revenue from land transfers to improve significantly, and the recovery of local-level fiscal revenue remains constrained.
Particularly noteworthy are the central and eastern regions that are highly dependent on land finance. Under a higher base, land revenue may not improve significantly. Most economically developed provinces have negative growth rates in the budgets of government funds this year, and the associated regional debt risks may rise due to the drag of the land market. On the other hand, while central transfer payments continue to expand, the overall scale is still limited.
This year, the scale of central transfer payments to local governments further increased, reaching a record high of 10.16 trillion yuan. However, the growth rate has significantly declined by over 10 percentage points compared to last year, and the overall expansion is relatively limited. Against this backdrop, some western provinces that heavily rely on transfer payments may experience a slowdown in the growth of their local comprehensive fiscal capacity, potentially leading to a decrease in their debt service capabilities. Further differentiation in regional debt risks should be monitored.
Second, with the pressures of maintaining stable growth and accelerated debt securitization, local government debt will continue to expand, and interest payment pressures on debt in "yellow-orange" regions should be monitored. Against the backdrop of ongoing pressure to maintain stable economic growth and fiscal constraints, the pressure to refinance existing debt while issuing new debt will increase, and the debt limit for new issuances remains high this year as active fiscal measures are taken to improve efficiency. The scale of new local government debt issuances is expected to exceed 4 trillion yuan. As the peak of maturities approaches, the pressure to refinance maturing bonds increases. In 2022, the proportion of local government debt refinancing reached 88.24%, and under fiscal pressures, the issuance of refinancing bonds for debt repayment is expected to continue to grow, postponing the debt repayment burden and exacerbating the overall interest payment burden of local government debt.
Additionally, the process of resolving hidden debts is reaching its halfway point, and some regions have proposed measures such as converting debts at the county level to promote the transformation of hidden debts into explicit debts. The issuance of refinancing bonds for repaying existing debts will continue, further increasing the balance of local government debt. As local government debt continues to expand, interest payment pressures may increase in regions, particularly in provinces categorized as "yellow-orange."
Looking at individual provinces, those with debt refinancing ratios exceeding 95% in 2022 are mainly located in "yellow-orange" regions. Among the 13 provinces where the utilization ratio of new debt limits exceeded 95%, 9 are in "yellow-orange" regions. Furthermore, provinces such as Guizhou, Qinghai, and Inner Mongolia, which are classified as "yellow-tier," have also proposed pilot projects to transform hidden debts into explicit debts. Against the backdrop of continued fiscal pressures, interest payment pressures on regional local government debts may further increase, requiring ongoing attention.
Third, the pressure of debt roll-overs may increase in "red-orange" regions, and risks of transmission between regional state-owned enterprises and the "platformization" phenomenon should be monitored. In 2023, the strict supervision of hidden debts will continue, with multiple high-level meetings and government work reports emphasizing the prevention and resolution of hidden debts. The focus is on "curbing the increase and resolving existing debts," optimizing the debt maturity structure, reducing interest burdens, and strengthening the management of local government financing platforms.
Under the requirement of "firmly curbing the increase," the tight financing situation of urban investment companies remains unchanged, and the debt roll-over pressures in regions with relatively high broad debt ratios become more prominent. It is worth noting that among the 11 provinces with negative net financing for urban investment bonds in 2022, over half of them have broad debt ratios in the "red-orange" categories. The pressure of refinancing-related risks should be continuously monitored. Under the continuous pressure of debt roll-overs, the probability of tail risks in related regions, such as non-standard debt and bill defaults, may increase. As the promotion of debt transformation through the capabilities of urban investment companies becomes increasingly challenging, local governments will intensify their efforts to manage debt risks. This may involve providing debt relief to urban investment companies through state-owned enterprises and public institutions.
During this process, caution should be exercised to prevent the transmission of risks from urban investment companies, especially in weak regions where mutual guarantees and joint guarantees are prominent. In addition, under fiscal pressures, the possibility of local enterprises and institutions becoming "platformized" [used as a platform for raising money] should be closely watched, and the risks of adding hidden debts through unauthorized use of credit funds or irregular financing leases should be guarded against.
Qin Hailin is the chief engineer of the China Center for Information Industry Development (CCDI) under the Ministry of Industry and Information Technology.
Qin told a CCDI forum at the end of 2022
The development of digital trade in China exhibits three main characteristics.
Firstly, the scale of China's digital trade continues to expand. Public data shows that in 2021, the total volume of China's digital service trade reached $360.52 billion, exceeding the overall service trade's compound annual growth rate by 10.5 percentage points. The total volume of China's digital goods trade reached $1.6 trillion, with a year-on-year growth of 23.1%.
Secondly, China's digital trade is entering a period of transition between old and new driving forces. On the one hand, digitalization of trade methods has become more mature, shifting the development focus towards digital transformation of industries. China has remained the world's largest online retail market for nine consecutive years, with an e-commerce penetration rate of 82% on the consumer end and an electronic payment penetration rate of 88%. The digital trade methods have deeply reconstructed the operational mode of the industrial chain and supply chain, with an e-commerce penetration rate of 65% on the industrial end and a total of 250,000 e-commerce apps.
On the other hand, the structure of trade objects has become more structured, and digital trade in services has become a stable driving force for growth. The compound annual growth rate of digital service trade in the past five years reached 14.7%, which is 5.4 percentage points higher than that of digital goods trade. The trade surplus in digital service trade has been expanding year by year, becoming a key factor in narrowing China's overall service trade deficit.
Thirdly, the capabilities of digital trade enterprises are continuously improving. Chinese digital trade enterprises actively aggregate upstream and downstream companies in the industrial chain through platforms, helping small and medium-sized enterprises integrate into the global value chain.
At the same time, the overseas expansion capability of Chinese digital trade enterprises is also constantly strengthening. For example, Chinese games account for more than 20% of the market share in overseas markets, making China the global leader.
By actively introducing digital technology and vigorously developing digital trade, China can effectively resolve domestic excess capacity, alleviate the pressure of structural adjustment on the supply side, and create time and space for domestic reforms. It can also promote the smooth operation of the national economic circulation through the introduction of advanced international products and services, while simultaneously strengthening complementary and coordinated development with the global industrial chain.
LU Ming is Distinguished Professor of Economics, Director of Shanghai Institute for National Economy (SHINE), and research fellow of the China Institute of Urban Governance at Shanghai Jiao Tong University. He worked as a Fulbright Scholar at Harvard University and National Bureau of Economic Research (NBER).
The Chinese policy direction on urbanization has long been subject to a fierce debate of whether to pop up, by state intervention, mid- and small-sized cities or to encourage the concentration of human and other resources in megacities. In my reading, Lu, known for his signature slogan 大国大城 Great Cities for Great Nation, clearly favors the latter
Last month, Lu wrote an article in the Caixin magazine
Given the gradual characteristics of post-industrialization in China's current economy, it is necessary to focus on constructing metropolitan areas centered around core megacities, forming growth poles that lead modern development. This not only meets the continuous development needs of the Chinese economy but also conforms to the laws of urban development globally. Government policies should align with the trend of economic development, focusing on addressing infrastructure and public service shortcomings, reducing direct control over population size and land development intensity. Based on the significant role of central cities, efforts should be accelerated to build modern metropolitan areas.
In 2017, Lu published a paper arguing against China’s conventional and mainstream view on analyzing the population outflow and industry decay in the rust belt of Northeastern China.
On the factors that have led to the decline of Northeast China, including population outflow, system, culture, state-owned enterprises, and corruption, Lu Ming believes that evaluating the issues in Northeast China requires a shift in thinking and the establishment of a "global" perspective and a "broad historical" perspective.
Firstly, the "global" perspective entails evaluating based on maximizing social welfare and optimizing resource allocation, rather than solely focusing on economic growth or investment. In fact, population outflow is a common issue in China's urbanization process, and the outflow of people from Northeast China receives more attention because of the structure of the outflow population. It is not migrant workers who are leaving but rather highly educated individuals. Therefore, to maximize social welfare, instead of emphasizing how to retain college graduates in Northeast China, it is better to create conditions that allow low-skilled labor and college graduates to pursue higher incomes and better lives together.
Secondly, from a "broad historical" perspective, since the mid-1990s, the Chinese economy has integrated into the global division of labor, leading to a decline in the status of Northeast China's manufacturing sector. The so-called population outflow in Northeast China is a manifestation of the optimization of human resources allocation amidst changing comparative advantages and the reshaping of the entire economic geography. Therefore, population outflow from Northeast China may be a positive outcome rather than a negative problem.
The real hidden concern in Northeast China lies in the increased investment in uncompetitive sectors amid population outflow, low investment returns, and decreased production driving force. This approach may have short-term effects but in the long run, it means using a problematic approach to solve problems, akin to taking poison to quench thirst. Ultimately, it hampers the improvement of industrial competitiveness and burdens the government with high debt, exacerbating the issues.
ZHAO Wei is the Chief Economist of Sinolink Securities. Zhao published a report on July 4 that says China’s economy may have entered a "post-real estate" era and there is an urgent need to cultivate new sources of growth.
It is crucial to contain secondary risks from the real estate sector in the medium to short term and stabilize the foundation of consumption, while in the medium to long term, innovation should be promoted to achieve multipolar growth. Containing the contraction of the balance sheet resulting from the real estate issue is a key step in entering the "post-real estate" era. Currently, China's economic growth has significantly reduced its reliance on real estate, but local governments and banks remain highly dependent on it. It is crucial to avoid balance sheet contraction, and stabilizing the foundation of consumption is also necessary. In the medium to long term, through technological innovation, promoting multipolar growth in manufacturing and production services is essential to enhance the ability to withstand internal and external shocks.
(Does the “balance sheet contraction” sound familiar? Today, his WeChat blog just recommended Nomura Economist Richard Koo’s books.)
At present, China's manufacturing industry, represented by new energy sector, has started to break through, but it is not enough to compensate for the decline of traditional economic drivers. It is necessary to develop strong industries centered around equipment manufacturing and cultivate and strengthen producer service industries. Industries related to new energy, such as electrical machinery, automobiles, and non-ferrous metals, have shown promising production and investment performance in recent years. However, achieving high-quality economic development requires the construction of diversified innovative industrial clusters. The high-quality development of manufacturing relies on the support of producer services, including information services and commercial services. China should also deepen its participation in global division of labor by promoting the internationalization of the service industry.
For the publicly available analysis of the remaining experts- Liu Shangxi, Luo Zhiheng, Tian Xuan and Huang Xianhai - about the Chinese economy, go to Pekingnology, a sister newsletter.