On July 23, the Chinese State Council executive meeting issued several important instructions, namely maintaining macroeconomic stability, fiscal and financial policies working together to serve the real economy more effectively, macroeconomic situation to be served more vigorously, and active fiscal policy would become more proactive. How then, should active fiscal policy be more proactive?
Jia Kang, former head of the Chinese Academy of Fiscal Studies, a think tank within the country's Finance Ministry, said that the active fiscal policy should not only be expansive but also play an irreplaceable structural optimization function, which will make it more proactive. There are fundamentally four aspects in this regard. The first is the arrangement of deficits that appropriately increase China's deficit rate. The official report this year indicates it is 2.6%; if necessary, it can be raised to at least 3% next year and more in the following year, though this should be done cautiously. The second is the debt arrangement. If the public sector debt is less than 40% of the GDP as stated officially, it can be said that this is within a relatively conservative state in the security zone. This can be appropriately increased to 40%, 45% or even 50% in the future, if necessary. The third is structural tax cuts, further creating a "low tax burden" environment. R&D investment in businesses can be increased to 150%, and then to 175%, or even possibly to 200% and 250%. Finally, for businesses to reduce their burdens, they should not merely look at taxes; businesses should consider all kinds of other burdens other than the tax to understand the overall situation.
The resumption of the relaxation of fiscal policy has shown that the deficit policy at the beginning of this year did not estimate there would be the slowdown of the economic growth this year, and the result was that it has become passive. Since the double-digit growth of the Chinese economy in 2010, the Chinese economy has been seeking a soft landing, basically forming an L-shaped conversion. From the second half of 2015 to present, there have been 12 quarters, and China's macroeconomic operation is in the range of 6.7% to 6.9%. This has fully demonstrated that the slowdown in China's economic growth has taken shape. In this case, in particular, it is necessary to guard against economic uncertainties caused by various uncertainties (such as this year's trade frictions). At this time, the fiscal policy should remain positive, but China's fiscal policy has begun to contract, and the fiscal deficit rate has dropped from 3% in the previous two years to 2.6% this year. Especially when monetary and fiscal policies are tightened at the same time, there is less room for China in the macro-control, which further increases the downward pressure on the economy. In the past, the tightening of the deficit was actually problematic. China knew that the economic growth rate would slow down in 2018, and at the same time, it should adjust the structure and de-leverage, yet it still reduced the deficit; this is due to the lack of pre-judgment on macroeconomic policies.
The domestic Chinese and international situation has increased the pressure on the economic downturn, and it may take a long time to maintain a proactive fiscal policy. First of all, the economic situation in China is getting more and more serious. GDP in the first half of 2018 increased by 6.8%, slightly lower than the same period last year by 0.1%. However, the GDP deflator has fallen significantly, and the nominal GDP growth has fallen back to 9.8%, the first time in the last six quarters to be below 10%. Consumption increased by 9.3% in January-July, and the growth rate dropped to single digits, lower than the same period of last year, with a monthly growth rate of 8.5% in May, the lowest in 15 years; and fixed asset investment increased by 5.5% in January-July, being 0.5% lower than 6% from January to June, and the lowest values since the statistics have existed. Another worrying change is that the unemployment rate in the urban survey rose sharply in July, from 4.8% in June to 5.1%. The rise in the unemployment rate reflects the lack of vitality in the real economy. Second, the U.S.-China trade frictions have intensified. Since 2018, the U.S.-China trade frictions have intensified. On August 23, a new round of mutual tariffs between China and the United States came into effect. The two sides decided to impose a 25% tariff on the US$ 16 billion product, which is the second round of sanctions after the first round of tariffs on the US$ 34 billion product. So far, the two sides have been exchanging tariffs to expand to US$ 50 billion of goods. At the same time, the United States will hold a six-day public hearing on the $US 200 billion Chinese goods subject to a maximum import tariff of 25%. Some analysis shows that the hearing may only be a façade, and the possibility of collecting tariffs is very high. The domestic and international situation is increasing the downward pressure on the Chinese economy, which makes it possible for China to take a longer time to maintain a proactive fiscal policy.
China's hunger for aggressive fiscal policy seems to be surprising. In terms of the overall scale, Anbound has stated at the end of 2017 that China needs 30 trillion to 50 trillion "major release" in the future. Many officials believe that this is not feasible because the "major release" is questioned against the policy shift of "de-leveraging" in 2018. However, from the current situational changes, the policy tone is shifting towards the direction that Anbound had proposed. Anbound's seemingly "aggressive" proposal is a pre-judgment after a rational analysis of China's economic and social system. China's current economic volume is sharply larger than the "4 trillion" policy, and now it's over 80 trillion, so 4 trillion "release" is insufficient. On deficit rate, according to the research and calculations of the Anbound's research team, China will have room to expand the deficit rate in the future. When it concerns balancing economic growth and controlling fiscal risks, the government's fiscal warning line for the next period should be set at a fiscal deficit rate of 4.5% and the government debt burden rate of 55%. This means that in the coming period, the Chinese government's fiscal deficit can still have room for continuous growth.
Final Analysis Conclusion:
Facing downward pressure on the economy, China's proactive fiscal policy must aim for long-term and leave room for macroeconomic regulation and control to enhance its ability to respond to sudden events.
