How to Prioritize Stability While Pursuing Progress
Author:Zhong Wei , Li Xunlei , Zhang Ming
In December 2021，the annual Central Economic Work Conference was successfully held to set the national agenda for the economic work in 2022. The meeting pointed out that China is still in a period of strategic opportunity despite the triple pressures of contraction in demand，supply shocks and lowered expectations. It emphasized that China had to keep economic development as its central task，and ensured stability on the six fronts (ensure stability in employment，financial operations，foreign trade，foreign investment，domestic investment，and expectations) and security in the six areas (ensure security in job，basic living needs，operations of market entities，food and energy security，stable industrial and supply chains，and the normal functioning of primary-level governments). China will prioritize stability while pursuing progress in 2022，when it would face both external challenges and internal obstacles，including pandemic prevention and control and the Federal Reserve’s policy change.
At a roundtable discussion organized by China Forex，Zhong Wei，the Deputy Editor of China Forex，Li Xunlei，the Chief Economist of Zhongtai Securities，and Zhang Ming，the Deputy Director of the Institute of Finance and Banking，Chinese Academy of Social Sciences shared their views on stability which were frequently mentioned in the Central Economic Work Conference. The conversation，which follows in edited form，was moderated by Zhong Wei.
01
Zhong Wei: Welcome to this roundtable discussion. In the annual Central Economic Work Conference in December 2021，the phrase "stability" was mentioned more than 20 times during the conference. It is often said that the economic growth rate should be kept within a reasonable range. What are the specific indicators for economic stability? For example，should the economic growth rate be kept near the potential growth rate? Should it be maintained at a growth rate that keeps narrowing the economic gap between China and the US? Should it be held based on the overall situation under the Two Centenary Goals，the 14th Five-Year Plan，and the Long-Range Objectives Through the Year 2035，or on the overall social stability? In your opinion，what does "stability" mean? Are there any qualitative or quantitative indicators?
Li Xunlei: The economic stability is mainly reflected by employment and inflation，as well as the fluctuation range and direction of the GDP growth rate. For example，there was still concern whether the monetary policy would be tightened despite China’s GDP growth rate of only 2.3% in 2020，because the growth rate had went up in the second half of 2020. Relatively high though it was，the economic growth rate in 2021 declined month-on-month. Moreover，increasingly obvious problems such as a high producer price index (PPI)，low consumption，weak investment willingness，and the employment issue of young people，also highlight the urgent need to stabilize the economy.
From the perspective of specific indicators，if the exchange rate of renminbi against the US dollar remains stable，the goal of doubling per capita GDP can be achieved by 2035 as long as the average annual nominal GDP growth rate is maintained at about 4.7%. In the short term，attention should be paid to changes in economic data such as consumption，investment and exports. For example，the growth rate of fixed asset investment is very worthy of attention because consumption，as a slow variable，is unlikely to fluctuate greatly. The real estate investment in 2022 will not grow at a rapid rate，which requires an increase in the growth rate of infrastructure investment to make up for it. Therefore，the latter must be maintained at 6% at least.
Zhang Ming: Through the lens of macroeconomics，"stability" has at least two meanings: first，the current economic growth rate should not significantly deviate from the potential growth rate; second，the current economic growth rate should not fluctuate greatly. Failing to achieve "stability" in either aspect may lead to resource misallocation or waste. However，it has so far been difficult to measure the potential economic growth rate accurately. For instance，from 2007 to 2019，China's GDP growth rate dropped from 14.2% to 6.1%，a decline of more than half. The average GDP growth rate in 2020 and 2021 was only around 5.2%. Whether China's potential economic growth rate is around 6% or 5% is still inconclusive in the industry. Under this premise，the second meaning of "stability" figures prominently. Currently，expansionary macroeconomic policies can be introduced to prevent the short-term economic growth from plummeting as long as the core inflation rate does not soar. Inflationary pressures will not be of grave concern to a large developing country like China if the core inflation rate is below 4%. In November 2021，China's consumer price index (CPI) and core CPI rose by 2.3% and 1.2% respectively，which has provided room for the counter-cyclical macroeconomic policies after the Economic Work Conference this year.
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Zhong Wei: Looking ahead to China’s economy in 2022，Premier Li Keqiang emphasized that China is in a crucial period during which challenges need to be overcome，namely triple pressures of contraction in demand，supply shocks and lowered expectations. How to interpret the triple pressures? Macro-level proactive fiscal policies and prudent monetary policies will be adopted in response. The former should improve its efficiency and sustainability，while the latter should continue to maintain a reasonable and sufficient liquidity. Which of the two policies in 2022 will have mediation space? What strategies are expected to stabilize the growth?
Li Xunlei: In the short term，both fiscal and monetary policies need to be moderately loose，but the fiscal policy may play a greater role because it can increase the total amount of economic input and improve the structure. Meanwhile，the monetary policy，which mainly functions as an aggregate policy，may fail to play its part when facing insufficient demand or too many constraints. For example，the liquidity released by requirement reserve ratio (RRR) cuts may form financial bubbles instead of flowing completely into the real economy when its return on investment (ROI) is low. The fiscal policy is also subject to certain constraints. For instance，the debt pressure of local governments leads to limited spending capacity，and infrastructure investment will also be under pressure from cash flow returns. However，considering the fiscal surplus in 2021，it is expected that efforts will be made to reduce the cost of small and medium-sized enterprises，and increase infrastructure investment and consumption in 2022，including tax and fee cuts for enterprises，moderately advanced infrastructure investment，and the “home appliance going to the countryside” policy.
Zhang Ming: In my opinion，contraction in demand mainly covers two aspects. First，the growth of household consumption has been weak so far. Second，the strict regulations on real estate and local government debt have significantly hampered the growth of investment in real estate and infrastructure. Supply shocks mainly refer to the sharp rise in global commodity prices against the background of supply and demand mismatch，which has obstructed the development of mid- and downstream enterprises. Lowered expectations suggest the current diminished expectations of micro-entities for economic growth and market expansion in the short term.
There is more space for fiscal policy than monetary policy in 2022. In terms of monetary policy，there have been two RRR cuts in 2021，and is expected to be one or two more in the first half of 2022. There will also be room for interest rate cuts，especially the medium-term lending facility (MLF) interest rate. The scale of directional operations may also rise. In terms of fiscal policy，as it has been normalized in 2021，revenue growth has significantly outpaced expenditure growth，which has created room for fiscal policy expansion in 2022. It is expected that the tax and fee reduction，transfer payments，and local government special bonds issuance will be scaled up without ruling out the possibility of a significant increase in the government bonds issuance in 2022.
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Zhong Wei: The property market is of common concern to the public. This meeting highlighted the importance of providing affordable housing to address the reasonable housing needs of residents，and guiding the virtuous circle and healthy development of the real estate industry. Besides，the large-volume and wide-ranging real estate with long upstream and downstream industrial chains takes a crucial role in economic growth，local finance and the financial sector，according to Han Wenxiu，deputy director of the Office of the Central Financial and Economic Affairs Commission. As China's economy transitions from high-speed growth to a new stage of development，what changes will the real estate industry that has been criticized for financialization and bubbles face in the future?
Li Xunlei: Real estate has a wide-ranging and large-scale impact on China's economy. For example，its direct and indirect contribution to GDP is estimated to be around 30%，and the average contribution to local finance is more than one-third. Therefore，we will strive to prevent it from extreme ups and downs，and its investment from stalling in 2022. However，it is undeniable that the high dependence of China's economy on real estate is not conducive to economic transformation and high-quality growth. With the aging of the population and the general trend of population flow to big cities，the real estate industry also needs to adjust its structure，that is，megacities and big cities especially need to provide adequate affordable housing to meet the needs of the stock and new population，while small and medium-sized cities with a net outflow of population today and in the future should open household registration and optimize the structure of real estate investment.
A general trend is that both the dependence of China's economy on real estate and the financial attributes of real estate will decline with the aging and decrease of the population，which alerts us to the potential risks in the real estate market. In the past，real estate made a great contribution to the sustained and high economic growth in the process of urbanization through the pull of upstream and downstream industries. In the future，we should minimize the negative impact on real estate companies，financial institutions and even the national economy due to the downturn in the real estate industry or the decline in regional housing prices.
Zhang Ming: Over the past two decades，the real estate market has partially experienced financialization and bubble effects，but has also contributed to economic growth，urbanization，and the wealth of residents. In the future，on the one hand，the Chinese government will stick to the policy that "houses are for living in，not for speculation" to curb the speculative demand for real estate; on the other hand，it will also adjust some of the previous strict control measures to create space for the normal development of the real estate industry. In addition，the over-tight policy on credit resources some time ago will also be adjusted to meet the normal and compliant financing needs of developers and the loan needs of home buyers. Concentration management measures for real estate loans of commercial banks may also be appropriately relaxed.
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Zhong Wei: This meeting reiterated that China has to keep economic development as its central task，a statement made in the Central Economic Work Conferences in 2014 and 2018 respectively. At present，what are the external "unstable" factors with spillover effects? Meanwhile，China is deepening the supply-side reform，and the three major industries of the Internet，finance and real estate have undergone drastic changes with "unprecedented" advancement of technology and innovation，which were emphasized twice in the meeting. What factors do you think will help stabilizing China's economy in 2022?
Li Xunlei: At present，the economics gap between China and the United States is narrowing with the growth of China’s economy. The United States has adopted many restrictions on China's development in various fields，including trade，technology and even the capital market. At the same time，the lasting COVID-19 pandemic has led to long-term stagnation of the global industrial and supply chains，which has also held back China's economy. For example，a sharp increase in PPI has hindered China's mid- and downstream companies as well as small and medium-sized enterprises. These unfavorable external factors will persist in 2022. With little pressure to reach the economic growth targets，2021 has actually become a "time window" for many reforms，for example，the de-leveraging of government departments，regulations on Internet industry，actions in education and training，and that of medicine.
In 2022，China's fiscal and monetary policies should be more “active”. For instance，the fiscal expenditure in 2022 can be increased considering the huge budget surplus in 2021 as clarified before. The price scissors between PPI and CPI hit a record high in 2021，but are expected to narrow in 2022，which may help mid- and downstream enterprises to reduce costs. Inflationary pressures in 2022 are generally modest，leaving room for rate cuts. The different economic cycles between China and the United States can guarantee the independence of the monetary policy of PBC. The uncertainty，of course，lies in how much the real estate sector will change. In addition，with the decline of economic growth，the issue of employment stability should also be placed on the agenda.
Zhang Ming: At present，there are at least three external unstable factors. First，the pandemic is raging on with mutant strains emerging one after another，posing a tough challenge to the epidemic prevention and control in 2022. Second，against the backdrop of a rapidly rising domestic inflation rate，the Federal Reserve has accelerated the normalization of monetary policy. It will reduce bond purchases more quickly in the first half of 2022，and may raise interest rates two or three times in the second half of 2022. In general，China may confront short-term capital outflows，a depreciation in the renminbi against the US dollar，and a heightened foreign currency debt burden due to the Fed’s tightening of monetary policy. Third，continuous high global commodity prices will place China's economy under imported inflationary pressure.
In 2022，the factors conducive to China's economic "stability" include at least a few aspects. First，the whole country has a unified understanding to make appropriate policy adjustments in 2022 after this Central Economic Work Conference. Moreover，the restrained implementation of the previous macroeconomic policies has provided ample room for improvement in both fiscal and monetary policies at present. Third，the continuous and long-term prospect of Sino-US conflicts have made the whole country realize the importance of independent technological innovation and strengthening the chain. The official and private investment in science and technology and innovation will increase accordingly，and the stock market innovation represented by the registration system reform will facilitate direct financing for technological innovation.
Zhong Wei: Thank you both for participating. The annual Central Economic Work Conference in 2021 held slightly earlier than in previous years reflects the central government's effort to plan ahead for economic stability. Both of you pointed out that in 2022，China has more space for policy mediation，and a slack policy can be expected if the core inflation does not shoot up.