China's Incremental Fiscal Policy Measures to Boost Economy: Background...

China's Incremental Fiscal Policy Measures to Boost Economy: Background, Effects, and Future Directions

——An exclusive Interview with YIN Yanlin, Vice Chairman of the Economic Committee of the 14th National Committee of the Chinese People’s Political Consultative Conference

By GAO Zhanjun YIN Yanlin

Since late September, China has introduced a package of incremental economic support policies, shaking the global economy and financial markets. On September 24, at a State Council press conference attended by the People's Bank of China, the National Financial Regulatory Administration, and the China Securities Regulatory Commission, China announced a package of monetary and financial policies, including aggregate measures such as a reduction in the reserve requirement ratio (RRR) and interest rate cuts, financial support policies for the real estate sector, and newly created tools to activate capital markets, which far exceeded expectations. On September 26, the Political Bureau of the Communist Party of China (CPC) Central Committee held a meeting, emphasizing the need to enhance the sense of responsibility and urgency in doing economic work and to step up efforts to roll out incremental policies. Since then, the relevant departments have introduced more incremental policies, have introduced more incremental policies, ranging from fiscal, monetary to real estate market stabilization measures, which have attracted a lot of attention. So, how should we view the background of this incremental package of policies? What has been the market response, economic effects, and sustainability of these policies? How should we understand future policy space and the next steps in policy direction? In an exclusive interview with China Forex, YIN Yanlin, Vice Chairman of the Economic Committee of the 14th National Committee of the Chinese People's Political Consultative Conference, shared insights on these issues with Gao Zhanjun, the Executive Editor-in-Chief of China Forex.

Question 1

Background of the Package of Incremental Policy Measures

GAO Zhanjun: Since late September, China has gradually introduced a package of incremental economic policies, which has effectively boosted market confidence, and economic indicators have shown some improvement. What do you think of the background of the incremental policy package?

YIN Yanlin: This fully demonstrates that the decision-making body at the central government has a very objective and accurate understanding of the current difficulties and problems. The meeting of the Political Bureau of the CPC Central Committee held on September 26 was actually ahead of schedule, because it was originally scheduled to be held in October. The policy content released by three ministries on September 24 should have been approved or recognized by the central government, indicating that the difficult economic situation has received great attention from the central government. These difficulties can be summarized as follows. First, the growth trend is not optimistic. According to statistics, GDP growth in the third quarter was 4.6%. Given the current situation, it will be difficult to achieve the annual target of about 5%. The executive meeting of the State Council held on October 25 also stressed that efforts should be focused on achieving the annual economic growth target, indicating that there are still challenges in achieving this goal. Second, employment pressure on young people has increased. In August, the youth unemployment rate was 18.8%. Although it declined in September, it still reached 17.6%. The actual situation may be more severe than the data suggest. Third, there is significant downward pressure in the real estate market. Fourth, market expectations have not fundamentally changed. Previously, both the PMI index and the stock market have shown a downward trend, and the gap between M1 and M2 in monetary supply data is widening. From January to September, household loans increased by 1.94 trillion yuan, while deposits increased by 11.85 trillion yuan. The CPI continued to decline, with evident pressure on low prices. The GDP deflator index was negative for six consecutive quarters.

The above problems highlight that China is currently in a very difficult situation, specifically manifested in the following ways. First, the enterprises face operational difficulties. Data from September show that in the first three quarters, cumulative profits of industrial enterprises above designated size declined by 3.5% year-on-year, marking the first significant decline in profits this year. Second, residents' incomes are growing slowly. In the first three quarters, the per capita disposable income of urban residents increased by 4.2% year-on-year in real terms, a decrease of 0.3 percentage points compared with the first half of the year, and net property income grew by 0.2%, a decrease of 1 percentage point. Third, fiscal difficulties are beyond expectations, with slow tax recovery, which has still showed negative growth. From January to September, tax revenues nationwide fell 5.3% year-on-year, with both value-added tax and income tax experiencing negative growth. Local debts require repayment of principal and interest. Therefore, local governments have to prioritize debt repayment, making it impossible to initiate new projects. Some localities are experiencing difficulties with the "three guarantees (sustaining basic livelihoods, wages, and transportation)", leading to irregular government behavior such as retroactive tax payments and arbitrary fees. This reflects the fact that some areas are already unable to meet their objectives.

Investment and consumption both depend on expectations. Expectations are key, and the expectations of businesses and residents alike need to be changed. This incremental package of policies is precisely designed to reverse pessimistic expectations and restore confidence in the economic outlook.

Question 2

Fully Recognizing the Positive Changes in Economic Performance

GAO Zhanjun: As we enter the latter half of the fourth quarter, it is vital to assess the impact of the series of incremental policy measures implemented over the past two months. Has the government's strategy succeeded in reversing public sentiment?

YIN Yanlin: The package of comprehensive incremental policies proposed by the Political Bureau of the CPC Central Committee on September 26 is very appropriate, and the policies stated so far have become more specific, directly boosting the capital market. Trading volume on the stock market has surged, and market sentiment has improved significantly, indicating that targeted policies are in line with market expectations. It is evident that there has been a downturn in macroeconomic policies. Apart from the stock market, many economic indicators also show marginal positive changes.

However, it will take some time to move from macroeconomic policy bottlenecks to market bottlenecks and then to economic bottlenecks. Currently, China's economy is in a difficult situation for enterprises, residents and the government. To change this situation, major policy adjustments must be implemented. As to whether these difficulties can be rapidly improved, I think it requires a process to implement these policies or improve local fiscal revenue and other issues.

Question 3

The Biggest Challenge Facing the Current Economy

GAO Zhanjun: Absolutely, the transition from macroeconomic policies to market and economic fundamentals will be a challenging endeavor. However, the key issues and potential risks affecting current economic operations are directly linked to the sustainability and effectiveness of policies, and indirectly to the robustness of economic recovery and the long-term performance of capital markets. Identifying and addressing these challenges is therefore critical to maintaining stability and growth. What do you think is the biggest challenge facing the economy today?

YIN Yanlin: Currently, China is facing two challenges: insufficient demand and excess supply, especially insufficient effective demand. Last year, the Central Economic Work Conference listed insufficient effective demand as the top challenge to economic improvement.

This indicates that domestic demand is still insufficient. This is a fact and a common understanding. We should have a sufficient understanding of the severity and harm of this problem. The urgent task is to stabilize and enhance overall demand as soon as possible to promote a price rebound.

To understand this issue at a deeper level, we should see that the current focus of economic development is still on exports, indicating that we still need to rely on external circulation, while internal circulation has encountered problems. Although there are many new drivers of growth, demand is not there; the main body of demand is still in traditional industries. The basic supply should be in line with residents' demand; if basic demand is suppressed and cannot be released, this part of the supply will lose its foundation. For example, housing demand is suppressed, leading to growing pains from the transformation. The real estate industry has a long chain, and when related upstream and downstream industries encoun