As the downward pressure on China's economy in the first half of the year increases, the risk of domestic debt problems are continuously being revealed, and the "pain" that has accompanied the structural adjustment has become more intense. Coupled with the growing trade frictions initiated by the United States, the Chinese economy this year shows new uncertainty. China now faces daunting challenges, so how should the macro policy in the second half deal with these issues?
So far, the Chinese central government has not changed the tone of its macroeconomic policies, and still adheres to the "stable and neutral monetary" and "positive fiscal" policies. However, if economic policies fail to adjust to the changing situations, those policies would become rigid. If the downward pressure on the economy continues to increase, the implementation scale of macroeconomic policies should be changed, and even the policy direction should retain the possibility of adjustment. Of course, policy adjustment must first come from the recognition of the changing situations and problems.
It is worth noting that the macroeconomic department has begun to explore these changes. Ruan Jianhong, director of Financial Survey & Statistics Department at the People's Bank of China, has recently published an article stating that China's leverage ratio has dropped significantly, and the country has entered the stage of "stable leverage". According to the article, since 2017, China's macro leverage rate has slowed down notably. In 2017, the leverage ratio was 2.4% higher than that of 2016. The growth rate was 10.9% lower than the average annual leverage growth rate from 2012 to 2016. In the first quarter of 2018, the leverage ratio was 0.7% higher than last year, and the growth rate was narrowed by 1.7% over the same period last year. Ruan Jianhong believes that the stability of leverage is the result of the rapid growth of the income of enterprises, finances and residents, which helps to digest existing debts; on the other hand, it is also because of the stable and neutral monetary policy, and the effect of effective supervisions that strengthen the finance, as well as the significant decrease of debt growth.
Based on the information tracking of the changes in the situation, in 2017 the central government confirmed that "de-leveraging" will be continued this year and under the situation of prevention of major risks, as well as the central bank officials have clearly stated that China's new judgment of "stable leverage". All these indicate that an important shift might take place in the macroeconomic policy. Although it does not necessarily represent a reversal of policies, it means that the tightening-based regulatory policies are in a time when phased adjustments are needed. How should economic policy be adjusted under "stable leverage"? What are the new considerations in the policy? All these left us some imaginative spaces.
It also happened that after the central bank officials proposed "de-leveraging" moving towards the "stable leverage" stage, the People's Daily had also made a high-profile analysis of this phased change. According to the analysis of the People's Daily, China's overall leverage and leverage structure have shown a good change. For example, in 2017, the leverage growth rate ratio was 10.9% lower than the average annual leverage growth rate in 2012-2016; the leverage growth rate in the first quarter of this year was 1.1% lower than that of the same period of last year.
The leverage structure also shows an optimization trend: (1) the leverage ratio of the enterprise sector declines and the asset-liability ratio of state-owned enterprises declines as well. In 2017, the leverage ratio of the corporate sector fell slightly by 1.4% from 2016, and for the first time since 2011, there was a net decline. Among these, the asset-liability ratio of state-owned enterprises with higher asset-liability ratios has dropped significantly. (2) The rate of increase in the leverage ratio of the household sector has slowed down marginally and debt security is controllable. As of the end of May this year, the growth rate of residential loans has decreased for 13 consecutive months, from the peak of 24.7% in April 2017 to 19.3% in May this year. At the end of 2017, China's household sector loans/deposits were 62.1%, and deposits could cover resident debts. At the end of 2017, the balance of housing loans in China accounted for only 58.3% of the value of collateral, the average contract period for housing loans was 272 months, and liquidity risk was controllable. (3) The leverage ratio of government departments continued to fall. In 2017, the government sector's leverage ratio was 0.4% lower than that of 2016. It has fallen for three consecutive years and dropped further by 0.7% in the first quarter of this year. Among them, the central government leverage ratio was 16.4% in 2017, 0.3% higher than the previous year; the local government leverage ratio was 19.9% in 2017, 0.7% lower than the previous year.
We believe that the statistics quoted by the central bank and the People's Daily are to illustrate one point: de-leverage has achieved results, and the main contradictions of the current economy have been transformed, from easing high-leverage risks to preventing risks of insufficient economic development. If it is confirmed that the situation in the second half of the year is different from that in the first half of the year and last year, then the macro policy and its implementation will need to be changed. We have noticed that the State Council executive meeting held on July 23 has begun to arrange corresponding policy adjustments.
The State Council executive meeting chaired by Premier Li Keqiang proposed several important adjustments: First, the active fiscal policy should be more active. Focusing on tax reduction and fee reduction, on the basis of ensuring that the burden on the main body of the market is reduced by more than RMB 1.1 trillion, and the policy of increasing the deduction rate of R&D expenses to 75% will be expanded from the SMEs to all enterprises. It is estimated that the annual tax reduction will be RMB 65 billion; accelerating the issuance and use of RMB 1.35 trillion of local government special bonds this year. Second, a sound monetary policy should be tight and moderate to maintain a moderate level of social financing and ample liquidity, and unblock the transmission mechanism of monetary and credit policies. Third, speeds up the funding of the National Financing Guarantee Fund and strives to achieve the goal of newly supporting 150,000 small and micro enterprises and RMB 140 billion in loans each year. Fourth, clears out "zombie enterprises" and reduces the use of invalid funds.
Final Analysis Conclusion:
The layers of changes in progressive policies show that the macro-policy focusing on austerity has ended, and the fine-tuning of various policies aimed at stabilizing growth, activating the market, promoting domestic demand, and agglomerating social resources to increase investment will gradually be introduced and implemented.
