Zhang Liqing: Structural reforms should be used to cope with the pressure of slowing economic growth

Professor Zhang Liqing’s Views Professor Zhang Liqing believes that after residents' consumption basically returns to the normal state before the epidemic, continued improvement will depend on medium- and long-term structural factors such as disposable income growth, education, medical care, and social security systems. At the same time, this year’s export situation remains challenging. Therefore, achieving the economic growth target for 2024 will largely depend on the recovery of investment. "The current lack of market confidence and weakening expectations have both cyclical and structural reasons," Zhang Liqing said. For the lack of confidence and weakening expectations caused by institutional and structural reasons, using monetary policy to push up the inflation rate is unlikely to be effective and may instead lead to a "stagflation" situation. Only through extensive and in-depth structural reforms, continuous improvement of the rule of law, fairness, transparency, and the investment and business environment—especially strengthening the protection of property rights and the rights of private entrepreneurs—and truly allowing the market to play a decisive role in resource allocation, can we effectively recover the investment confidence of enterprises and realize the expected strengthening. Interview Details 1. Structural reforms should be used to respond to the pressure of slowing economic growth The Paper: What do you think of the current economic situation? How do you think the economic situation in 2024 will differ from that in 2023? Zhang Liqing: China’s economic growth in 2024 will have many policy opportunities. The Central Economic Work Conference held at the end of last year proposed the need to "seek progress while maintaining stability, promote stability through progress, and establish before breaking." Among them, "promote stability through progress" and "establish before breaking" are new formulations, indicating that this year the government will use more active policies to promote economic growth and maintain a certain growth rate to resolve risks in key areas such as real estate and finance. "Establish before breaking" means that traditional growth momentum will continue to be supported before new growth momentum is established. Looking at the three drivers of growth, statistics show that final consumption expenditure, gross capital formation, and net exports of goods and services drove economic growth by 4.3, 1.5, and -0.6 percentage points respectively in 2023. Thanks to the normalization of consumer activities after the epidemic, consumer spending contributed 83% to economic growth last year. This situation will be difficult to sustain this year because the favorable shock has ended. After residents' consumption basically returns to the normal state before the epidemic, continued improvement will be subject to medium- and long-term structural factors such as disposable income growth, education, medical care, and social security systems. Due to the slowdown in global economic growth and the complex external environment, especially the "friendly shore outsourcing," "de-risking," and "small courtyards and high walls" implemented by some countries against China, the export situation this year remains challenging. Whether economic growth in 2024 can achieve the predetermined target will largely depend on whether investment can be restored. The Paper: Weakening expectations and lack of confidence are prominent problems facing society today, leading to a contraction in consumption and investment. Some people suggest pushing up the inflation rate. What do you think of this? What suggestions do you have for mitigating weakening expectations? Zhang Liqing: The current lack of market confidence and weakening expectations have both cyclical and structural reasons. Slowing economic growth, continued price declines, and rising risks of deflation have led to delays in consumption and investment plans, resulting in overproduction and a lack of orders. In this case, implementing large-scale monetary expansion to push up the inflation rate, thereby inducing changes in consumption and investment expectations while reducing actual financing costs, will indeed enhance domestic demand and promote growth to a certain extent. However, for the lack of confidence and weakening expectations caused by institutional and structural reasons, pushing up the inflation rate through monetary policy is unlikely to be effective and may instead lead to a "stagflation" situation. Only through extensive and in-depth structural reforms, continuous improvement of the rule of law, fairness, and transparency, and the investment and business environment—especially strengthening the protection of property rights and the rights of private entrepreneurs—and truly allowing the market to play a decisive role in resource allocation, can we effectively recover the investment confidence of enterprises and realize the expected strengthening. It is worth emphasizing that to cope with the pressure of slowing economic growth, macroeconomic policies alone are not enough. Without successful structural reforms, relying solely on expansionary stimulus will not only produce no good results but will also impose a huge burden on future growth and development. 2. Further RRR and interest rate cuts are necessary and urgent The Paper: The Central Economic Work Conference stated the fiscal and monetary policies for 2024 as “a proactive fiscal policy must be appropriately intensified, improve quality and efficiency” and “a sound monetary policy must be flexible, appropriate, precise, and effective.” Do you think there is more room for fiscal policy or monetary policy to develop? Zhang Liqing: According to the policy tone proposed by the Central Economic Work Conference, macroeconomic policies this year need to be more loose and proactive than last year. There is a certain amount of room for both fiscal policy and monetary policy, and both need to be coordinated. The fiscal deficit ratio should be maintained at around 3.8% or even higher. For a long time, except for a few years, the fiscal deficit rate of our country's central government has remained below 3%. At present, the downward pressure on the economy is relatively large, and some local governments have heavy debt burdens and are even on the verge of crisis. In response, it will be necessary to obtain more fiscal resources by increasing the fiscal deficit ratio in the coming period. As long as the economy can maintain growth and there are sources to repay principal and interest in the future, it will not be a problem. For a long time, active fiscal policies have often been implemented through large-scale increases in government investment. The most common approach is to use special bond issuance to expand the scale of infrastructure construction. This idea needs to change, because the beneficiaries of large-scale infrastructure construction are mainly large and medium-sized enterprises, especially state-owned enterprises. If more proactive fiscal policies are implemented through tax cuts and fee reductions, small, medium, micro, and private enterprises can benefit more and better promote employment. In addition, fiscal expenditures should be used more for periodic subsidies to downstream manufacturing enterprises and small and micro enterprises, including rent, water, electricity, and even wage subsidies for them. Furthermore, more should be used to strengthen the support of people's livelihood projects such as the social security system, medical health, and elderly care facilities. These supports are of great significance in reducing precautionary savings and expanding consumption. Prudent monetary policy should continue to be reasonably loose. When prices continue to fall and the risk of deflation rises, companies' actual financing costs are often much higher than what nominal interest rates indicate. Compared with large state-owned enterprises, small and medium-sized enterprises face higher financing costs. In addition, this year's more proactive fiscal policy also requires the support of a relatively loose monetary policy. Otherwise, the expanded issuance of special bonds may have a negative impact on enterprises (especially small, medium, micro, and private enterprises) by raising market interest rates. In short, before the risk of deflation disappears, further RRR and interest rate cuts have become a necessary and urgent policy choice. The Paper: Since 2023, the RMB exchange rate has fluctuated greatly. What do you think of the causes of fluctuations and future trends? Zhang Liqing: Since 2023, although the exchange rate of the RMB against the US dollar has fluctuated, it has generally shown a depreciation trend, depreciating from a high of 6.69 yuan at the beginning of the year to 7.35 yuan in early September. The reasons for the depreciation of the RMB include: affected by various factors, both exports of goods and foreign direct investment inflows experienced negative growth; out of the need to digest excess production capacity and ensure supply chain security, some domestic companies’ foreign direct investment increased significantly; the Federal Reserve’s aggressive interest rate hikes and increased expectations of RMB depreciation led to an increase in short-term net capital outflows. The pressure to stabilize foreign trade and foreign investment is still relatively high this year, and the above-mentioned reasons for the depreciation of the RMB will still exist to varying degrees. With U.S. inflation still above its 2% target, the Fed will keep its current policy rate unchanged at least in the first half of this year. Under such circumstances, further interest rate cuts by the People's Bank of China may lead to an increase in short-term capital outflows and increased pressure for RMB depreciation. As a countermeasure, macro-prudential management can be appropriately strengthened when necessary to mitigate the impact of widening interest rate spreads. However, it should be noted that in the face of slowing exports and rising risks of deflation, it is not without positive significance to tolerate appropriate depreciation of the RMB. After all, devaluation can increase the profits of export companies to a certain extent. As long as there is no panic devaluation, the foreign exchange management department should not need to intervene too much. Source: The Paper