Liu Yuanchun: This time is not about "going easy" or simple policy stimulus. We must see the determination and profound connotations of this round of policy adjustments

On September 26th this year, the meeting of the Political Bureau of the CPC Central Committee was held, and a major policy shift occurred in China. A series of incremental policies began to be introduced one after another, helping the economy develop in a better direction and stabilizing market confidence. Starting from late September, various departments such as the People's Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Housing and Urban-Rural Development successively made statements, systematically implementing measures related to the package of incremental policies.

Liu Yuanchun believes that currently, various departments have made a lot of policy inputs around stabilizing the real estate market, boosting the stock market, implementing counter-cyclical adjustments, expanding domestic demand, and introducing a series of policies to help enterprises. These policies are not "emergency measures" or simple short-term policy stimuli. If this is like what many people say, a mode of "adding some water" and letting everyone "take a breather", then we don't need to make major adjustments to the policy framework. In this package of incremental measures, there are not only short-term demand expansion measures, but also a large number of reform and structural adjustment measures. In fact, it is a cocktail-style combination.

Liu Yuanchun said, this time, there is indeed a fundamental change in behavior patterns and incentive systems. We must see the determination reflected in this round of policy adjustments, as well as the profound implications of structural and institutional adjustments implied in this round of policy adjustments. For example, in terms of building the bottom of the stock market, changing the behavior patterns of stock investors, encouraging the restructuring of listed companies and long-term funds, and adjusting the entire capital market structure. For example, the restructuring of local government debt schemes and functions, changing the current situation where local governments are "stalling".

The picture is a screenshot of the FutureChina Global Forum 2024 hosted by the Singapore non-profit organization Tongshang China. The forum opened on October 18, 2024.

I believe that everyone here has three questions about the current economy, especially the Chinese economy. The first question is, why did the Chinese government make a major adjustment to its policies on September 26th and introduce a package of incremental policies? The second question is, what is the nature of this package of incremental policies? Is it an emergency measure, or does it mean that the Chinese government has indeed elevated stabilizing growth to a particularly high level and wants to comprehensively reverse the current situation? Of course, the third question that everyone will focus on is, what's next, and what else is there in the package of incremental policies? What will be the effect? So, I will give a brief answer in 5 minutes.

Why the policy shift?

The meeting of the Political Bureau on September 26th actually gave a very clear answer, which is that the Chinese economy has encountered a series of new phenomena and problems. What are the new problems? First, our growth in the second and third quarters did not meet the target, contradicting the 5% target set at the beginning of the year. The second new problem is that the stock of policies we laid out since the end of last year did not achieve the expected results, especially the 517 policy. Our new real estate policies. There is no sign of narrowing in real estate parameters, and of course, there are also some difficulties in fiscal layout. Local governments not only face the problem of not having money to use but also the problem of having money but not being able to use itThis is a new phenomenon that we hadn't thought of before. Besides these issues, what is more important is the new phenomenon that many of us may not have paid attention to?

The third one is that domestically, there has been a new consensus on China's economic issues. This new consensus, meaning that from the real estate adjustment in 2021 to now, everyone has deeply realized that this round of real estate adjustment is not a simple one. Therefore, the logic of short-term stability in the Chinese economy is not to prioritize real estate capital market from mid-term structural adjustment and institutional reform in the traditional sense. On the contrary, it is recognized that real estate adjustment, real estate stability, capital market reform, and capital market stability are actually the focus of stabilizing expectations, enterprises, and confidence, as well as a prerequisite for expanding domestic demand. Therefore, you will see that there has been a significant adjustment in the short-term policy framework. But what is the premise of this adjustment? Everyone has reached a consensus, which is to position the stability of the real estate capital market from a mid-to-long-term perspective to a comprehensive short-term perspective, which is very important.

What is the fourth new phenomenon? It is our window of opportunity, meaning that our policies must have space, they must have a certain window of opportunity. So, this window of opportunity is very important due to the Fed's rate cuts and the monetary policy entering a downward channel globally due to sustained economic weakness, thereby providing space for us to make a series of adjustments in the external environment. Therefore, everyone must realize that it is about new phenomena, new issues, rather than simply thinking that our GDP growth rate is not meeting the target, in fact, there are deeper (phenomena), this is one reason.

Are these policies emergency measures? Are they short-term actions?

The second important point is that around September 26th, our financial authorities, Ministry of Finance, National Development and Reform Commission, and Ministry of Housing and Urban-Rural Development held a series of press conferences and put forward a series of policy tools. These tools are very important, centered around stabilizing the real estate market, boosting the stock market, a lot of policy inputs were made, and at the same time, a series of policies were introduced for counter-cyclical adjustments to expand domestic demand and to provide relief for our entire enterprise, so are these policies emergency measures? Are they short-term actions? Without follow-up, it is difficult to touch upon some of our fundamental parameters, which is a matter of great concern.

So, I think we must see what the logic behind these policies is? What do they mean? The logic of these policies is very important, there is a major adjustment, the first adjustment is to stabilize the real estate market, stabilize the capital market, which becomes a very important prerequisite for expanding domestic demand. This understanding is profound. You will see in the financial regulatory meetings these past two days, Governor Pan Gongsheng and Chairman Wu Qing both mentioned that, whether domestic or foreign, currently in macro-control, stabilizing the real estate market, stabilizing the stock market, are crucial variables for stabilizing confidence, and stabilizing confidence is a prerequisite for stabilizing short-term demand, this logic is very clear.The second one marks a shift in our fiscal and monetary policy framework. When it comes to the shift in fiscal and monetary policy, everyone should pay attention to two focal points. The first focal point is the two structural monetary policy tools proposed around revitalizing the capital market. These policy tools include the repurchase and re-lending policy, as well as our lending facility and asset mortgage. Professionals in the field will know that this actually marks the beginning of our central bank's asset purchases through indirect channels. So, the purchase is very important, especially repurchase. What is the basic design principle behind it? It is when continuous market distortions and market failures occur in the pricing of China's capital market. Before September 25th, over 5,000 listed companies in China, nearly 800 of which were trading below net asset value. Additionally, there were nearly 100 listed companies trading below net asset value with a dividend yield exceeding 5%. Investors will know that this phenomenon, if persistent, implies systemic distortions in China's capital market pricing. How to correct it? The central bank intervenes in the market, with a key focus on encouraging major shareholders to repurchase shares and encouraging eligible institutions to increase their shareholdings. This measure is crucial in establishing a visible bottom for China's capital market, What is this bottom? This bottom means preventing the widespread and persistent occurrence of trading below net asset value. In this regard, it is fundamentally important for our capital market to function and for investor behavior to return to a rational state. Therefore, this adjustment of paradigm is very important.

The second point is that the Ministry of Finance and the People's Bank of China have established a working group on government bond open market operations. This institution should not be underestimated, as it signifies a significant adjustment in the future positioning of our fiscal and monetary policies. This major adjustment is closely related to the comprehensive improvement of our modern central banking system, including the market-oriented interest rate system and the comprehensive expansion of the depth and breadth of the government bond market. This provides a pivotal change for the operation of monetary policy and the future changes in the fiscal policy framework.

Therefore, you will see that if we are in a state of emergency and simply implement stimulus policies, we do not necessarily need to make major adjustments to the policy framework. At the same time, it is important to note that within a package of incremental measures, there are not only short-term demand expansion measures but also a large number of reform measures, structural adjustment measures, which actually form a cocktail-style combination.

This model is not as some people say, just adding some water to ease the situation. No, it is indeed aiming for a fundamental change in behavior patterns and incentive systems. For example, the construction of the bottom of the stock market changes the behavior patterns of stock investors, encourages the restructuring of listed companies and long-term capital, and adjusts the entire capital market structure. Of course, at the same time, there are debt conversion plans for local governments, functional restructuring to change the current situation where local engines are extinguishedThis actually implies a lot of future reforms. Therefore, we must see the determination reflected in this round of policy adjustments, as well as the profound implications of structural and institutional adjustments implied by this policy adjustment.

Real Estate, Expanding Domestic Demand, and the Stock Market

At the same time, we must also see some new phenomena in the changes of micro-subject behavior. Therefore, we will recently see that the first step in stabilizing the real estate market is to stabilize the first-tier real estate and leading enterprises, a goal that has been basically achieved at the moment. This is also what we will see as the Minister of Housing and Urban-Rural Development mentioned, the process of China's real estate hitting bottom has fully begun. This is a crucial judgment basis, so everyone needs to understand this signal clearly.

Another very important aspect is that based on expanding domestic demand and demand, we are actually expanding consumption on the basis of social construction and improving people's livelihood, rather than simply expanding capacity through the implementation of new policies. Therefore, what we are actually talking about in promoting consumption is very important for the future long-term income growth, and the comprehensive repair of our balance sheet, among other premises. This theoretical logic actually forms a new consensus, so from these perspectives, we will see many policies in this recent round continue to retreat quickly, and there will be continuous incremental policies to consolidate the current policy orientation. Therefore, I think everyone may need to maintain such confidence, and also understand that the implications here are different from the general stimulus package.

Of course, we believe that the current volatility in the stock market has left many people feeling uncertain. However, remember, from September 23rd until now, the policies announced by the central bank have not been fully implemented yet. So, what about today? The Governor of the central bank mentioned that the first round of repurchase loans has started. If the money hasn't arrived yet, how are we doing? We have already experienced a roller coaster ride, but when the money arrives, we need to think about the next steps, which may not be quite in line with some of the common understandings. These are some of the perspectives I wanted to share with you