Two-third of 2018 has passed; the statistics of previous seven months of Chinese economy show that there are the trends of increasing economic downward pressure, a decrease of economic activity, and an increase of difficulty in economic transformation and structural adjustment. This situation has already taken shape; the U.S.-China trade friction initiated by the United States is worsening, bringing great external uncertainty to this year's economy and increasing the pressure of economic downturn.
The situation and pressure faced by the Chinese economy are undoubtedly a challenge to this and next year's macroeconomic policies. Judging from the changes in the first eight months, China's macro policy has begun to change the direction. Although the "stable and neutral monetary policy" and "positive fiscal policy" are still adhered in the official formulation, at the actual implementation level, policy relaxation has begun, and it is gradually moving toward the "major release" policy as suggested by Anbound at the end of last year.
Observations on the situation of China show that after experiencing the RMB 4 trillion stimulus package China has added an instinctive fear to the "major release" policy. The RMB 4 trillion stimulus package was considered to be a policy that represents "excessive panic" and "inappropriate" and "caused a very negative impact"; it has also been concluded that such policy was a failure. However, Anbound's research team has different views on this issue. Macroeconomic regulation and control are the products of the historical background. When the world was facing the tsunami of the financial crisis, the world's major central banks had adopted the policy of "major release". China cannot be free of such historical background; therefore, labeling of the RMB 4 trillion stimulus policy as a failure was not objective to the decision-making level at that time.
Under such situation, some macro policy decision-makers appear to have a phobia of the RMB 4 trillion stimulus policy; all relaxation policies are avoided to be labeled as "major release". Our observations indicate that there are two main concerns for the policy department. First, policy adjustments can neither be in conflict with the Central Government's established policies of capacity reduction, de-stocking, deleveraging, cost reduction and improving underdeveloped areas; nor can such adjustments aggravate the debt crisis and financial risks. Second, the adjustments cannot be in conflict with what has been put forward by the top leadership. In the past, the top leaders have expressed their position that macroeconomic policy adjustments will not engage in strong stimulus policy. Therefore, avoiding strong stimulus policy has become a "political taboo" for the adjustments of current economic policies.
On August 21, at the policy briefing held by the State Council, Zhu Hexin, deputy governor of the People's Bank of China, pointed out that since 2018, the domestic and international situations faced by monetary policy regulation have become more complicated, and external uncertainty has also increased significantly. There is a certain downward pressure on the economy, and the factors affecting the transmission mechanism of monetary policy have increased. The People's Bank of China has promulgated and implemented a series of policies and measures aimed at alleviating the difficulty and cost of financing. On the one hand, it maintains a reasonable and sufficient liquidity, enhances the financial services entity's economic ability, and appropriately hedges various internal and external factors. The People's Bank of China implemented the reserve requirement ratio (RRR) cuts in January, April and July 2018, and used the medium-term loan facilitation (MLF) tool to increase medium- and long-term liquidity supply. This year, the net investment of RMB 2.4 trillion has increased significantly. On the other hand, the policy takes the lead in exerting policy synergies and increasing financial support for key areas and weak links. Comprehensive use of targeted RRR, re-lending, rediscounting, priority sector lending (PSL) and other tools, and dynamically adjust the macro-prudential assessment (MPA) related parameters are used to guide the financial institutions to increase the credit support on small and micro enterprises, "three rural issues", poverty alleviation, rural water conservancy, dual innovation, environmental protection and other fields.
It is worth noting that Zhu Hexin has pointed out that in the next stage; the People's Bank of China will improve the forward-looking, flexibility and effectiveness of the policies, and to do well in implementing such policies, as well as improving financial services to the real economy. On the one hand, it is necessary to strengthen overall coordination, not only to form policy synergies but also to prevent policy superposition. On the other hand, the People's Bank of China must grasp the situation and maintain strategic strength, and control the monetary provision, as well as maintain a reasonable and abundant liquidity, but not engaging in strong stimulus. It would be necessary to balance the relationship between multiple objectives, unblock the transmission mechanism of monetary policy, improve the ability and willingness of financial services to the real economy through mechanism innovation, and effectively alleviate the problem of difficulty in corporate financing.
The policy information announced by central bank officials, on the one hand, shows the policy shift under the changing situation, the domestic and international economic situation is grim for China and its macro policy has to be relaxed. On the other hand, it insists on never engaging in strong stimulus, and there is the need to balance a number of goals; this also indicates the cautiousness and hesitation of the central bank in its policy shift. It is indeed rather difficult for the central bank to achieve these two goals. When the downward trend of the economy is certain, the turn of the macro policy will inevitably have obvious tendencies and policy objectives. However, the statement of the central bank officials can also be interpreted in another way. The central bank denied the stimulus, but did not imply there should not be a "release". Judging from the policy adjustment, it is almost certain that there is definitely the "release", but the direction of such "release" is yet to be known.
It is understandable that the authority does not wish to commence the strong stimulus, yet the question is; can the "major release" policy be done accurately? We have also suggested that the relaxation policy should give priority to the areas that have long-term benefits, little impact on the future financial situation, and are in line with the social and economic development, such as urban governance, commercial and street vibrancy, forests and greening, ecology and environmental protection, pension and health, medical and pharmaceutical, rural revitalization, education and technology. If the "major release" policy focuses on the above-mentioned areas, there will bring a series of positive outcomes; one is to focus on long-term benefits, the other is to improve the business environment, the third is to strengthen the market, and the fourth is to alleviate social problems. It should be noted that proposing a priority area for government development does not mean that macro policies should dominate industrial development with the precise guidance on investment. Anbound's chief researcher Chan Kung pointed out that the more emphasis is placed on policy accuracy, the more the relationship between the fiscal and central banks will be in confusion. From the perspective of monetary policy, there is no way to be completely precise; this is theoretically unreasonable.
In summary, facing the unprecedentedly complicated economic situation, China needs to turn to macroeconomic policies. However, when macroeconomic policies are adjusted, it should not be too entangled with whether or not it is "strong stimulus". For a huge economy like China, China should be more concerned with policy relaxation, invigorating the domestic market, stimulating domestic demand, and expanding space for domestic consumption. With external trade friction pressure, expanding the domestic market space should be the right way.
Final Analysis Conclusion:
The policy priority is not strong stimulus; the focus should be expanding the domestic market.
