What other incremental policies can we expect?

Abstract

Recently, various ministries of the country have made intensive statements, and incremental macro policies have attracted much attention. This article first reviews the monetary and financial measures proposed at the press conference of the State Council Information Office on September 24, and then analyzes the nominal GDP growth situation in the second half of China, focusing on the landing effects of previous macro policies and proposing corresponding policy recommendations.

Monetary and financial policies are implemented in advance. On September 24, the "one bank, one commission, one association" proposed measures in three aspects. In terms of loose money, measures such as reserve ratio cuts, interest rate cuts, and reduction of existing housing loan interest rates were introduced, with a loosening intensity exceeding market expectations. In terms of supporting the real estate sector, credit support was enhanced for various aspects such as real estate sales, property management, land acquisition, and land use. In terms of stabilizing the stock market, efforts were made to encourage long-term funds from financial institutions to enter the market, activate industrial capital, and create monetary policy tools to provide incremental funds for the A-share market.

China's economy still needs policy support. It is expected that China's nominal GDP growth rate will be below 4% in the third quarter. On the one hand, the GDP deflator may hover at a low level. Despite the support from rising food prices, industrial prices are falling rapidly, and the support from service prices is weakening. On the other hand, there is downward pressure on China's real GDP growth rate. We estimate that the monthly GDP growth rates in July and August were 4.8% and 4.5% respectively, and high-frequency data since September show that there is still significant downward pressure on the economy. In the third quarter, China's economic growth momentum weakened, but exports still have short-term resilience, and fiscal measures support growth. Without incremental policies, China's nominal GDP growth rate in the fourth quarter may further decline: First, in terms of remaining issuance quotas, the support of fiscal expenditure for economic growth may weaken. Second, from the perspective of the base effect from last year, overseas PMI, and economic and trade relations, the downward pressure on external demand may gradually increase. Third, the GDP deflator may further decline, and it is expected that food prices in the fourth quarter will be difficult to offset the decline in industrial and service prices.

The early implementation of monetary and financial policies helps reduce the debt burden of the real economy, but boosting total demand still requires additional policy support.

Recommendation 1: Strengthen support for household consumption. 1) Expand the scope of consumer subsidy policies to small and frequent service consumption, while increasing the subsidy ratio. 2) Link consumer subsidy policies with housing purchases and policies for migrant workers to settle down, unleashing the consumption potential of groups with the demand for "settling down and homeownership." 3) Encourage local governments to actively issue consumer vouchers, relax restrictions on provident fund withdrawals and usage, etc.

Recommendation 2: Expand the use of local special bonds. In the short term, the scope of special bond usage can be expanded to support local real estate acquisitions, provide consumer subsidies by local governments, invest in public sectors, etc. For projects encouraged and supported by policies, if short-term returns are difficult to achieve self-balance, a certain percentage of interest support from the central government can be provided. In the medium to long term, the increase in special bond quotas should be controlled, and the government debt structure should be optimized Recommendation Three: Issue special national bonds as early as possible. Due to the decline in tax and land revenue, there is significant pressure on fiscal revenue reduction, which restricts the intensity of fiscal expenditure. Since June, 40% of the new special bonds have been used to resolve existing debts, and the broad fiscal support for economic growth is insufficient. Considering the long lag time for fiscal policies to be implemented, early planning should be made to issue special national bonds of 1 to 2 trillion RMB in scale for ultra-long terms to prepare in advance.

Recommendation Four: Optimize the policy for destocking in the real estate sector. 1) Include state-owned enterprises' inventory purchases in the scope of local government special bonds, providing a 1-2 percentage point fiscal interest subsidy for affordable housing loans. 2) Expand the scope of acquisition targets and purposes of the policy, which can be combined with the "trade-in old for new" policy. 3) Activate "land that has been sold but not yet developed" to support real estate companies in optimizing land reserves.

Recommendation Five: Encourage enterprises to expand overseas and engage in mergers and acquisitions. Encouraging enterprises to expand overseas helps to withstand uncertainties in the foreign trade environment and also benefits the domestic market. Encouraging mergers and acquisitions among enterprises to integrate advantageous resources and eliminate outdated production capacity.

Main Text

Since the third quarter of 2024, China's economic growth data has weakened, posing a certain challenge to achieving the annual real GDP growth target of around "5%". The necessity of intensifying growth-stabilizing policies has gradually increased. On September 19, the National Development and Reform Commission stated, "Strengthen policy research and reserve, timely introduce a batch of operational, effective, and tangible incremental policy measures that can be felt and perceived by the public and enterprises." On September 24, the State Council Information Office held a press conference inviting the Governor of the People's Bank of China, Pan Gongsheng, the Director of the China Banking and Insurance Regulatory Commission, Li Yunze, and the Chairman of the China Securities Regulatory Commission, Wu Qing, to introduce incremental policy measures in the monetary and financial sectors.

This article first reviews the monetary and financial measures proposed at the press conference on September 24 by the State Council Information Office, and then focuses on the support and drag on nominal GDP growth in the third and fourth quarters of China, observes the problems facing China's economic growth, evaluates the effectiveness of previous macro policies, and makes policy recommendations based on this. We believe that China's real GDP growth rate in the third quarter may fall below 4.6%, and the nominal GDP growth rate may fall below 4%; without more incremental policy measures, the real and nominal GDP growth rates in the fourth quarter may further decline. As the "vanguard" of monetary and financial policies is implemented first, it helps reduce the debt burden on the real economy, but boosting total demand requires additional policy support. Subsequent macro policies need to focus on five aspects: increasing support for consumption promotion policies, expanding the use of local special bonds, issuing a batch of ultra-long-term special national bonds as soon as possible, optimizing the policy for destocking in the real estate sector, and encouraging enterprises to expand overseas and engage in mergers and acquisitions.

I. Monetary and Financial Policies Implemented First

From the content of the press conference on September 24, the focus of this round of monetary and financial policy reinforcement is in three directions: easing monetary policy, stabilizing the real estate market, and stabilizing the stock market.

In terms of loose monetary policy, reserve requirement ratio cuts, interest rate cuts, and reduction of existing housing loan rates have been fully implemented, exceeding market expectations.

First, the reserve requirement ratio will be reduced by 0.5 percentage points in the near future, providing approximately 1 trillion yuan of long-term liquidity; further reductions of 0.25-0.5 percentage points in the reserve requirement ratio will be considered later this year based on market liquidity conditions.

Second, the policy interest rate has been lowered, with the 7-day reverse repurchase operation rate reduced by 0.2 percentage points, expected to drive a 0.3 percentage point reduction in the medium-term lending facility (MLF) rate, and loan prime rate (LPR), deposit rates, etc., are also expected to decrease by 0.2 to 0.25 percentage points.

Third, commercial banks are guided to lower existing housing loan rates to levels near new loan rates, with an average expected decrease of around 0.5 percentage points, benefiting 50 million households and 150 million people, reducing annual interest expenses by approximately 150 billion yuan.

In terms of real estate support, in addition to guiding banks to lower existing housing loan rates, the central bank and the China Banking and Insurance Regulatory Commission have also introduced four measures to enhance credit support for real estate sales, property, inventory, land, and other aspects.

First, the minimum down payment ratio for housing loans is unified at 15%. To better support the rigid and diversified housing needs of urban and rural residents, commercial individual housing loans nationwide will no longer distinguish between first-time and second-time home buyers, with the minimum down payment ratio unified at 15% (previously 25% for second homes).

Second, the deadlines for two real estate financial policy documents have been extended. The People's Bank of China and the China Banking and Insurance Regulatory Commission have extended the deadlines for the "16 Financial Measures" and commercial property loan policies from December 31, 2024, to December 31, 2026.

Third, the policy for refinancing affordable housing loans has been optimized. The proportion of the 300 billion yuan policy for refinancing affordable housing loans contributed by the People's Bank of China has been increased from the original 60% to 100%, enhancing market incentives for banks and acquiring entities.

Fourth, support for acquiring real estate companies' existing land. In addition to using some local government special bonds for land reserves, research is being conducted to allow policy banks and commercial banks to provide loans to support conditionally enterprise market acquisitions of real estate company land, revitalizing existing land use and easing the financial pressure on real estate companies. When necessary, the People's Bank of China can also provide refinancing support for this policy, and the central bank and the China Banking and Insurance Regulatory Commission are studying this together.

In terms of stabilizing the stock market, promoting the entry of medium- to long-term funds from financial institutions into the market, activating industrial capital, and creating monetary policy tools to jointly provide incremental funds for the A-share market.

Central Bank: For the first time, two new monetary policy tools have been created to support the stable development of the stock market, namely 500 billion yuan in securities, fund, insurance company swaps and 300 billion yuan in stock repurchase and increased refinancing, with the possibility of expanding the scale as needed. Regarding the establishment of the stabilization fund, People's Bank of China Governor Pan Gongsheng mentioned that it is currently under study CSRC: First, recently issued the "Guiding Opinions on Promoting the Entry of Medium and Long-Term Funds into the Market", focusing on vigorously developing equity public funds, improving the institutional environment for "long-term money, long-term investment", continuously improving the capital market ecosystem, and other measures. Second, researching and formulating the "Opinions on Deepening the Market Reform of Mergers and Acquisitions of Listed Companies", proposing six measures to promote mergers and acquisitions, better leveraging the role of the capital market as the main channel in mergers and acquisitions. Third, will publicly solicit opinions on market value management guidelines, requiring long-term companies trading below net asset value to develop value enhancement plans, evaluate implementation effects, and publicly disclose them to form market constraints; requiring major index component companies to take up responsibilities, establish market value management systems, clarify responsibilities and response measures, and regularly disclose implementation status.

CBIRC: First, expand the pilot reform of insurance funds' long-term investment, support other qualified insurance institutions to establish private equity investment funds, further increase investment in the capital market; Second, supervise and guide insurance companies to optimize assessment mechanisms, encourage and guide insurance funds to engage in long-term equity investments; Third, encourage wealth management companies and trust companies to enhance equity investment capabilities, issue more long-term equity products, actively participate in the capital market, and cultivate patient capital through multiple channels.

In addition to the above three aspects, the China Banking and Insurance Regulatory Commission stated that the country plans to increase the core Tier 1 capital of six large commercial banks to consolidate and enhance the ability of large commercial banks to operate steadily; appropriately relax the amount and proportion limits of equity investments, encourage the development of venture capital; establish a working mechanism to support the financing coordination of small and micro enterprises, optimize the policy of non-repayment and continuous lending, further remove obstacles and bottlenecks in the financing of small and micro enterprises.

Regarding the macroeconomic operation, loose monetary policy is the core focus of this policy arrangement. We believe that the unexpected implementation of loose monetary policy this time is based on the joint consideration of internal and external factors. The Fed unexpectedly cut interest rates by 50 basis points in September, opening up external space for China's monetary easing. The actual interest rate level in China is still relatively high, with significant pressure on debt repayment for various sectors. In the second quarter of 2024, although the general loan rate announced by the central bank has dropped to a historical low of 4.13%, the year-on-year growth rate of the GDP deflator announced by the National Bureau of Statistics for the same period is only -0.73%, corresponding to an actual interest rate close to 4.9%, higher than the 4.7% actual GDP growth rate in the second quarter.

Firstly, for government departments, loose monetary policy helps reduce government debt interest payment pressure, in coordination with further fiscal policy efforts. In the first half of 2024, debt interest payments accounted for 6.5% of public fiscal expenditures, and in 2023, China's general government debt interest payments accounted for 4.5% of GDP, and the interest rate cut helps alleviate government debt interest payment pressure.

Secondly, for the household sector, loose monetary policy can effectively reduce the pressure of debt repayment, helping to unleash consumption potential.

At a press conference on August 21st, the China Banking and Insurance Regulatory Commission stated that commercial banks issued new personal housing loans totaling 31 trillion yuan from January to July this year (assuming loans were evenly distributed each month, with approximately 26.6 trillion yuan issued in the first half of the year). However, the "Report on the Allocation of Financial Institutions' Loans in the Second Quarter of 2024" released by the People's Bank of China on August 30th revealed that the balance of personal housing loans in the first half of 2024 decreased by a total of 380 billion yuan compared to the end of the previous year. Combining the two figures, the total principal repayment of personal housing loans (excluding loan interest) in the first half of 2024 reached 3.04 trillion yuan, accounting for 12.9% of the total retail sales of consumer goods during the same period. The inverted old and new housing loan interest rates objectively exacerbate the "early repayment" behavior, which is detrimental to the stability of residents' consumption confidence and expectations.

With a relatively high household debt repayment ratio, actively "deleveraging" makes it difficult to fully unleash consumption potential. Our calculations show that the annual principal and interest repayment scale of the household sector in the first half of 2024 is approximately 13.9 trillion yuan, and the household sector's debt repayment ratio (the proportion of the repayment scale to the total disposable income) has reached 17.5%. Since 2024, the year-on-year growth rate of RMB loans to the household sector announced by the central bank has significantly declined (3.82% in June, dropping to 3.55% in August), consistently lower than the growth rate of per capita disposable income of residents announced by the National Bureau of Statistics during the same period (4.45% in the second quarter of 2024), indicating a trend of active "deleveraging."

In 2023, the central bank's promotion of the reduction of existing housing loan interest rates directly and indirectly supported the recovery of residents' consumption. In terms of direct impact, the central bank's monetary policy implementation report stated that the reduction of housing loan interest rates in 2023 would reduce borrowers' annual interest expenses by approximately 170 billion yuan. A sample survey conducted by the Chongqing Branch of the People's Bank of China on the adjustment of existing housing loan rates involving homebuying families showed that over 30% of the surveyed residents planned to use the saved interest expenses to increase consumption, including daily expenses, travel, and children's education. In terms of indirect impact, according to the "China Regional Financial Operation Report (2024)" released by the central bank, the amount of early repayment of personal housing loans nationwide reached 432.45 billion yuan in August 2023. After the policy was introduced on August 31st, from September to December, the average monthly amount of early repayment of housing loans decreased by 10.5% compared to August.

Thirdly, for the corporate sector, reducing financing costs helps alleviate its operational pressure. With the continuous decline in corporate investment returns and increasing operational pressure, there is a need to further reduce financing costs. In July 2024, the central bank cut interest rates by 10 basis points, but it was still insufficient to offset the decline in the net asset return rate of industrial enterprises. The Return on Equity (ROE) of industrial enterprises above a certain scale in July 2024 decreased by 19 basis points compared to the end of 2023, with private enterprises experiencing a 36 basis points decline The central bank announced a 20 basis point interest rate cut this time, which will help alleviate the operating pressure on private enterprises and hedge the weakening profitability.

II. China's Economy Still Needs Policy Support

It is expected that China's nominal GDP growth rate in the third quarter will decline from the second quarter.

On the one hand, the GDP deflator may hover at a low level. Despite the support from rising food prices such as pork and vegetables, industrial prices are falling rapidly, service price support is weakening. It is expected that the year-on-year CPI growth rate in the third quarter will increase by 0.2 percentage points from the second quarter to 0.5%, while the year-on-year PPI growth rate will decrease by 0.2 percentage points from the second quarter to -1.8%; the GDP deflator's year-on-year growth rate will be around -0.7%, basically unchanged from the second quarter (see the report "China's Price Trends: Characteristics and Trends" for details).

On the other hand, there is downward pressure on China's real GDP growth rate. We estimate that China's monthly GDP growth rates in July and August 2024 were 4.8% and 4.5% respectively (see the report "Urgency to Stabilize Growth - Interpretation of Economic Growth Data in August 2024"), which is lower than the annual GDP growth target of "around 5%". It is expected that China's real GDP year-on-year growth rate in the third quarter will be between 4.4% and 4.6%, a slight decrease from the second quarter. From high-frequency data, the downward pressure on the Chinese economy has remained high since September, with weak industrial production, limited support from infrastructure and real estate investment for raw material demand; economic activity offline has declined after the summer, which is not conducive to the recovery of the service industry.

The drag on China's real GDP growth in the third quarter is due to the continuous weakening of endogenous economic growth momentum, manifested in the increasing downward pressure on real estate investment, the slight deceleration of manufacturing investment, and insufficient consumer confidence.

1) Regarding real estate, in the third quarter, the boost to real estate sales from the "5.17" new policy has faded, and the year-on-year performance of commodity housing sales remains weak due to a low base. According to data from the National Bureau of Statistics, in July and August 2024, the sales area of commodity housing decreased by 53.5% and 52.2% respectively compared to the same period in 2019-2021, with a larger decline than the 48.1% in the second quarter; in August 2024, real estate development investment accumulated a year-on-year growth rate of -10.2%, slightly expanding the decline from the first half of the year by 0.1 percentage points, hovering at a low level. According to statistics from CRIC, in July and August, the sales scale of the top 100 real estate companies decreased by 19.7% and 26.8% year-on-year respectively; in August, the month-on-month land acquisition amount of 30 key monitored real estate companies decreased by 77% year-on-year, with the land acquisition area decreasing by nearly 90% 2) In the manufacturing sector, the pressure of overcapacity has not been relieved, and there is uncertainty in the future growth of exports, which suppresses the willingness to invest in manufacturing. Although policies such as refinancing and interest subsidies for technological innovation and technological transformation have been introduced, the growth rate of medium and long-term loans in the manufacturing sector has declined rapidly (as of the end of June, the balance of medium and long-term loans in the manufacturing sector increased by 18.1% year-on-year, lower than 31.9% in 2023). The overall momentum of credit growth is slowing down, weakening the boost to manufacturing investment at the margin.

3) In terms of household consumption, the current "bottleneck" lies in the growth of household employment and income, both of which are slow variables that are difficult to improve in the short term. According to data from the National Bureau of Statistics, the total retail sales of consumer goods in July and August 2024 increased by 2.7% and 2.1% year-on-year, respectively, lower than the year-on-year growth rate of 3.7% in the first half of the year. Although the policy of "replacing old with new" to stimulate consumption is actively implemented, the scale of the long-term special national debt subsidy for replacing old with new arranged in the "Measures to Support Large-scale Equipment Renewal and Replacement of Consumer Goods" is only 150 billion yuan, and it will take time to implement, making it difficult to offset the impact of households repaying mortgages early in the short term.

However, in the third quarter, exports showed resilience, and fiscal measures to stabilize growth provided some support. 1) In terms of exports, the logic of overseas inventory replenishment, the rebound of export "price" and "exchange rate", and the possibility of "export rush" before the US presidential election all support the growth rate of exports denominated in US dollars. 2) In terms of fiscal policy, based on the issued scale, planned issuance scale, and seasonal patterns, the net financing scale of government bonds in the third quarter may reach 3.8 trillion, which is 1.2 trillion higher than the same period last year.

If there are no incremental policies introduced, the nominal GDP growth rate in China in the fourth quarter may further decline.

First, the support of fiscal expenditure for economic growth may weaken. Based on the remaining issuance quota, it is expected that the net financing scale of government bonds in the fourth quarter will be 1.5 trillion yuan, which is 2.1 trillion lower than the third quarter. In particular, in the fourth quarter of last year, local governments issued special refinancing bonds on a large scale to supplement their finances, and the central government issued trillions of national bonds, with a net financing scale of government bonds reaching 3.6 trillion yuan, effectively filling the fiscal gap.

Second, the downward pressure on external demand may gradually increase. In the fourth quarter of 2023, China's exports showed signs of stabilization on a month-on-month basis, indicating that the base for the year-on-year export growth rate in the fourth quarter of 2024 is rising; after the results of the US presidential election are announced, there is a possibility of further escalation of external trade frictions; at the same time, the global manufacturing PMI weighted by China's export share fell below the boom-bust line from July to August 2024, indicating uncertainty in external demand growth Third, the GDP deflator index may further decline. Looking ahead to the fourth quarter, the upward trend in food prices will be difficult to offset the continued decline in industrial goods and service prices. It is expected that the year-on-year growth rate of CPI will increase by 0.3 percentage points from the third quarter to 0.8%, while the year-on-year growth rate of PPI will decrease by 0.8 percentage points to -2.6%. The GDP deflator index is expected to decrease by 0.2 percentage points from the third quarter to -0.9%.

III. What other macro policies can we look forward to

Monetary and financial policies, as the "vanguard," are landing first, helping to reduce the debt burden on the real economy. However, "money is like a rope, it can be pulled but not pushed," and boosting total demand requires the cooperation of other policies. We believe that we can expect macro policies in five aspects in the future: increasing the support for consumption policies, expanding the use of local special bonds, issuing a batch of ultra-long-term special national bonds as soon as possible, optimizing the real estate destocking policy, and encouraging enterprises to go global and engage in mergers and acquisitions.

1. The need to increase the intensity of consumption support policies

The Central Political Bureau meeting in July emphasized that the focus of economic policies should shift more towards benefiting the people and promoting consumption. Measures such as "Several Measures to Support Large-scale Equipment Renewal and Trade-in of Consumer Goods" on July 24 and "Opinions on Promoting the High-Quality Development of Service Consumption" on July 29 were successively introduced, directly allocating around 150 billion yuan of ultra-long-term special national bond funds to localities to support the implementation of consumer goods trade-ins and help consolidate the foundation of consumption recovery.

Compared to previous plans, the subsidy intensity of the trade-in policy has been enhanced this time. We estimate that the trade-in subsidy policy can theoretically achieve a leverage of over 5 times, with a direct pull on commodity consumption of around 750 billion yuan, accounting for about 1.8% of the 2023 social retail sales.

The subsidy ratio for home appliances has been increased from the previous 10% to 15-20%. The standard for trade-in subsidies for cars has doubled (new energy vehicles increased from 10,000 yuan to 20,000 yuan, and fuel vehicles increased from 8,000 yuan to 15,000 yuan). In addition, the trade-in policy also supports the scrapping of agricultural machinery, the renewal of new energy buses and power batteries, trade-ins for electric bicycles, renovation of old houses, kitchen and bathroom upgrades, home aging-in-place renovations, and other areas. Provinces such as Beijing, Shanghai, Zhejiang, and Anhui offer subsidy ratios of 15-20% in other areas.

The Ministry of Commerce announced on September 19 that during the Mid-Autumn Festival holiday, the national commercial system used 640 million yuan in central subsidy funds to support approximately 600,000 consumers in purchasing nearly 800,000 units of eight major categories of home appliances, driving sales of over 3.3 billion yuan, with an estimated leverage of around 5 times; the car trade-in information service platform has received over 1.04 million subsidy applications, driving new car sales of around 130 billion yuan, estimating an average sales price of 124,000 yuan per car driven by the trade-in policy, with a leverage of around 7 times from fiscal funds The implementation of the trade-in policy may face two issues: First, there is still room for improvement in the policy intensity. A discount of 15-20% may still have limited appeal to consumers, and there may be cases where merchants first cancel previous discounts and then advertise prices after subsidies. Second, the limited selection of new products, incomplete old product recycling systems, complex processes, especially in rural and central-western regions where logistics and recycling systems are weaker, make it more difficult for residents with higher marginal consumption tendencies to participate in the trade-in policy.

From the perspective of automobile consumption observation, the trade-in policy has not yet reversed the downturn in automobile retail sales. According to data from the National Bureau of Statistics, the year-on-year growth rate of retail sales of automobiles above quota in August was -7.3%, an increase of 2.4 percentage points from July.

1. In terms of quantity data, the trade-in policy has significantly boosted automobile sales. According to data from the Ministry of Commerce's national automobile trade-in platform, as of 10 a.m. on August 31st, over 800,000 applications for car scrappage and renewal subsidies had been received, an increase of about 350,000 from August 2nd. The additional subsidy scale during this period accounted for 18% of the narrow passenger car retail sales in August, but narrow passenger car retail sales in August still decreased by 1% year-on-year (July -2%, June -8%).

2. In terms of price data, the trade-in policy has driven down the average retail price of automobiles, possibly attracting more "price-sensitive" consumers, thus having limited impact on automobile retail sales. According to the Ministry of Commerce's announcement, the average selling price of cars driven by the trade-in policy was 124,000 yuan per unit, lower than the retail average of 179,000 yuan per unit for passenger cars in the first 8 months of 2024.

We believe that there is still room for optimization and improvement in consumption promotion policies.

Currently, policies are more focused on trading in goods for new ones. However, there are two issues with subsidies for current durable goods consumption: First, the increase in current consumption actually borrows from future demand and growth space. Second, the policy only supports certain goods, leading to the "crowding out" of consumption of other goods not benefiting from the policy. Looking at retail data for goods above quota, in August, consumption of household audio-visual equipment and communication equipment supported by policy subsidies grew relatively fast year-on-year, contributing 0.7 percentage points to the month-on-month growth rate of goods above quota retail, an increase of 0.4 percentage points from the previous month. However, retail sales growth of goods such as daily necessities, sports and entertainment products, cosmetics, and jewelry that did not benefit from policy subsidies declined year-on-year, dragging down goods above quota retail by 0.3 percentage points, an increase of 0.2 percentage points from the previous month.

We propose the following recommendations:

First, expand the scope, target audience, and intensity of consumption subsidy policies, further covering small and sticky service consumption, focusing on college students and young people with purchasing power and growth potential, while increasing the subsidy ratio.

Second, link consumption subsidy policies with other policies. For example, after signing contracts for new and second-hand houses, or after migrant workers settle down, issue consumption vouchers ranging from thousands to tens of thousands of yuan with time limits to unleash the consumption potential of groups with demands for "settling down and homeownership" Third, unleash the enthusiasm of local governments and explore various ways to boost consumption. For example, in the distribution of consumption vouchers, utilize big data technology and cooperate with e-commerce platforms to improve distribution efficiency and coverage; relax the restrictions on provident fund withdrawals and usage appropriately, allowing them to be used in more consumption scenarios to enhance residents' actual purchasing power. At the same time, encourage local governments to explore personalized consumption support policies, establish an evaluation mechanism for consumption promotion policies, commend and promote policies with better practical effects.

2. The use of local special bonds needs to be expanded.

In the first four months of 2024, the issuance progress of local government special bonds was slow. As good projects that meet the requirements of self-balancing of income have been gradually explored in the early stage, the number of projects that meet the requirements for the use of special bonds has decreased. Currently, the fiscal requirements for self-balancing of special bond projects are strict, but the returns on infrastructure investment are relatively low, making it difficult to resolve this contradiction.

Since the second half of 2024, the issuance of special bonds has accelerated significantly, but some bond issuances have not disclosed the "one case, two books," or have been used to repay existing debts. According to Enterprise Early Warning Tong statistics, as of September 5, 2024, 48 special new special bonds have been disclosed this year (including planned issuances), with 8 in September, 24 in August, 15 in July, and 1 in June, with a total issuance scale of 629.6 billion yuan. Since June 2024, the total issuance scale of new special bonds by local governments (including planned issuances) has reached 1.6 trillion yuan, with special new special bonds used to repay existing debts accounting for 39.4%.

In this regard, we propose two suggestions: in the short term, the scope of special bond usage can be temporarily expanded, such as supporting local real estate inventory, using it for local government consumer subsidy distribution, and investing in public sectors (including vocational education, healthcare, culture, tourism, etc.). For these policy directions that are encouraged and supported, if the short-term returns on projects are difficult to achieve self-balance, a certain percentage of interest support from the central government can be provided.

In the medium to long term, considering the limited number and scale of agreeable projects, the addition of special bonds needs to be controlled to optimize the government debt structure.

On one hand, some of the special bond quotas can be converted into general bond quotas to supplement grassroots financial resources. General bonds are more flexible than special bonds, and local governments can flexibly allocate funds based on their actual financial gaps and the priority of urgent affairs to cope with grassroots financial pressure and better support local economic development.

On the other hand, moderately control the addition of special bond quotas and increase the issuance of ultra-long-term special national bonds. Ultra-long-term special national bonds can focus on the implementation of major national strategies and the construction of security capabilities in key areas, while local debt funds focus on supporting local public services and urban infrastructure construction. By stripping the national debt attributes from local debts, it helps alleviate the debt repayment pressure on local governments. The results of statistics by Mao Jie and others show that during the period of 2019-2022, the proportion of the number and amount of special bonds supporting six major national projects (including the Belt and Road Initiative, the development of the Yangtze River Economic Belt, the Beijing-Tianjin-Hebei development strategy, the Guangdong-Hong Kong-Macao Greater Bay Area, the integration of the Yangtze River Delta, and the governance of the Yellow River Basin) were 3.61% and 9% (about 1.17 trillion yuan), respectively

3. Proposal to Increase the Issuance of Treasury Bonds

In the second half of the year, China's nominal GDP growth is under pressure and requires support from the central government. The uncertainty in the external economic and trade environment is accumulating, while the internal circulation is hindered by low inflation. As of the second quarter of 2024, the GDP deflator index has experienced negative growth for 5 consecutive quarters. We estimate that the negative growth of the GDP deflator index will continue in the third and fourth quarters. In a low inflation environment, consumer confidence index has plummeted, businesses are experiencing "increased revenue but not increased profits," and local governments are facing dual pressures of debt conversion and revenue shortfall. Among all sectors of the economy, only the central government has the ability to "leverage up" to resist the contraction of other sectors' balance sheets, avoiding the economy falling into a "paradox of thrift." The Fiscal Theory of the Price Level (FTPL) provides a new perspective, suggesting that the price level is not solely determined by monetary policy, but also by fiscal policy through influencing the real value of government debt and the present value of the basic fiscal surplus.

Due to the decline in tax and land revenues, there is significant pressure on fiscal revenue reduction, constraining its expenditure level. Since June, 40% of the new special bonds have been used to resolve existing debts, and the overall fiscal expenditure support for economic growth is insufficient. In the first 8 months of 2024, the scale of general fiscal revenue is approximately 17.45 trillion yuan, with a year-on-year growth rate of -6%. The budgeted value of general fiscal revenue at the two sessions increased by 2.5% compared to the previous year's final accounts. By estimating the difference between budgeted and actual growth rates, the reduction in general fiscal revenue in the first 8 months reached 1.6 trillion yuan. We believe that incremental fiscal policies should be planned in advance, issuing an additional 1 to 2 trillion yuan of ultra-long-term special national bonds to make up for the fiscal revenue shortfall. Especially since the implementation of fiscal policy has a relatively long lag time (the decision to increase bond issuance was made at the end of October 2023, but full-scale projects did not commence until the end of June 2024), it is necessary to prepare in advance to deal with overseas uncertainties, rather than leaving fiscal space until the end of the year or early next year.

4. Optimization Needed for Real Estate Destocking Policies

On April 30, 2024, after the Central Political Bureau meeting set the tone for "coordinating the digestion of existing housing and optimizing policies for new housing," the focus of real estate policies shifted to "destocking." On May 17, the national video conference on ensuring the delivery of housing was held, proposing 300 billion yuan in re-loans for affordable housing and a package of related policies, with various regions starting to promote the work of state-owned enterprises in purchasing inventory.

Since the new policy on "517," the focus of real estate policies has shifted to "destocking," but its positive effects have not yet been evident.

On one hand, the total inventory of new homes has decreased, mainly due to supply contraction. With the continuous decline in newly started construction area, the supply area of new homes is decreasing faster than the sales area, leading to a reduction in overall inventory, especially a decrease in "started but unsold inventory." 1) According to the "National Top 100 Cities Residential Inventory Report" by E-house Research Institute, in July 2024, the total inventory of new commercial residential properties in the top 100 cities in China was 464.64 million square meters, a year-on-year decrease of 3.5%, compared to a decrease of 7.1% at the end of April. In July 2024, the supply area of new commercial residential properties in the top 100 cities in China was 11.82 million square meters, a 38% decrease from April; the transaction area of residential properties in July was 16.8 million square meters, a 6.9% decrease from April's 18.04 million square meters, indicating an accelerated decrease in supply compared to transactions.

2) According to the China Index Research Institute, as of the end of July 2024, the national residential inventory (referring to unsold inventory of completed projects, cumulative newly started area of commercial residential properties - cumulative sales area of commercial residential properties, accumulated since 1998) was 2.52 billion square meters, a 5.2% decrease from the end of 2023; among which, the "completed but unsold inventory" was 380 million square meters, further accumulated from the end of 2023.

3) According to CRIC by Ke Research, in 2023, the supply area and sales area of commercial residential properties in the top 100 cities decreased to 260 million square meters and 290 million square meters, respectively, a 50% and 43% decrease from 2021. In the first half of 2024, the supply and sales area of commercial residential properties in the top 100 cities were 90 million square meters and 100 million square meters, respectively, with supply continuing to lag behind sales, leading to a decrease in inventory.

On the other hand, the turnover period of commercial housing is still lengthening due to slow sales speed. 1) According to the China Index Research Institute, the turnover period of "completed but unsold inventory" in July 2024 was about 3.4 years, an increase of 0.6 years from the end of the previous year. 2) According to the "National Top 100 Cities Residential Inventory Report" by E-house Research Institute, the turnover period of new commercial residential properties in the top 100 cities in China in July was 26.6 months, 0.1 month higher than in April. Among them, 44 cities had a turnover period of over 36 months, 33 cities were in the 18-36 month range, and the remaining 23 cities had a turnover period of less than 18 months. 3) According to Ke Research statistics, in August 2024, among the key 30 cities, 21 cities had a residential turnover period exceeding the "warning line" of 18 months, compared to 23 cities at the end of April According to Pengpai News statistics, as of August 25th, more than 80 cities have announced their support for state-owned platform enterprises to acquire commercial housing. According to the China Index Research Institute, by the end of August, about 30 cities have issued announcements for the collection of commercial housing for affordable housing. According to the People's Bank of China, as of the end of June 2024, only 12.1 billion yuan of the 300 billion yuan of affordable housing refinancing has been used. The pace of policy implementation is relatively slow, possibly due to challenges such as the difficulty in matching investment returns with the "destocking" policy, limited scope of acquisition and usage, among other issues.

To help reduce housing inventory, we propose the following suggestions:

First, increase financial support from the government, follow up with financial interest subsidies, and expand the scale of affordable housing refinancing.

Taking into account operating costs, vacancy rates, and rental returns, the current operating income of affordable housing may not necessarily cover the interest costs of loans. According to the Zhuge FindHouse Data Research Center, the rental yield in the first half of 2024 in the top 50 cities is about 2.03%. Assuming that commercial banks provide funds at the same interest rate as personal housing loans (3.35% in August 2024), considering the costs of renovating, operating, and vacancies for rental housing, there is still a gap of 1.5%-2% from breaking even, which requires interest subsidies from the central government. If state-owned enterprises' acquisitions are included in the local government's special bond funding areas, providing 1-2 percentage points of financial interest subsidies for affordable housing loans, etc.

The amount of funds required for real estate "acquisitions" is significant. Assuming that each region acquires housing based on the average price of second-hand homes, aiming to bring the inventory turnover cycle back to a reasonable range, then the residential inventory that needs to be "acquired" within a year reaches close to 16 million square meters, corresponding to a required acquisition fund of 2.7 trillion yuan. If the acquisition price is discounted by 20% based on the average price of second-hand homes, the required funds would exceed 2.1 trillion yuan. Taking into account the issue of increasing the number of listed second-hand homes (which will squeeze new home sales), the scale of funds needed will be even larger. Therefore, the current 300 billion yuan allocated by the People's Bank of China for affordable housing refinancing is still insufficient and there is room for expansion.

Second, expand the scope of policy acquisition targets and usage, which can be combined with the "trade-in old for new" policy.

The People's Bank of China has set up affordable housing refinancing mainly to support local state-owned enterprises to acquire completed but unsold commercial housing at a reasonable price for use as affordable housing. From the 20 key cities' acquisition announcements compiled by CRIC, most cities focus on acquiring "completed but unsold existing commercial housing," prioritizing the acquisition of "whole buildings," "small and medium-sized units below 120 square meters," "convenient transportation with parking spaces," with relatively strict requirements, and the usage is mainly focused on raising funds for affordable housing. So far, the number of cities that have publicly announced completed acquisitions is relatively limited, including Zhengzhou, Jinan, Chongqing, Fuzhou, Qingdao, Tianjin, etc., all of which are among the first batch of pilot cities for the national rental housing loan support program, with most projects used for rental rather than sale We suggest expanding the scope of property acquisition to include unfinished inventory under strict financial supervision (as practiced in Hangzhou); combining with the policy of trading in old for new, residents who sell their properties are planning to purchase new second-hand homes (as practiced in Zhengzhou, Suining, Chuzhou, etc.); expanding the usage of acquired inventory properties, prioritizing them for demolition and resettlement housing to avoid redundant construction; using existing housing for affordable housing, increasing the rent-to-own program, and broadening residents' choices.

Thirdly, revitalize "land that has been sold but not developed" to support real estate companies in optimizing land reserves. On June 24th, the Ministry of Natural Resources issued 18 policy measures to support local governments in disposing of idle residential land that has already been sold through methods such as repossession and acquisition to help companies overcome difficulties. By the end of August 2024, Yuexiu announced that the Guangzhou Land Development Center had reclaimed 3 plots of land on Guanglong Road from the company for 7 billion yuan. On September 2nd, Yuexiu announced again that the land use rights for the second plot of land north of Jinan University in Guangzhou would be acquired by the Land Development Center for 5.003 billion yuan. It is worth noting that Yuexiu's land withdrawals are compensated in the form of "notes payable," equivalent to receiving "land vouchers" for the company to purchase land in Guangzhou in the future. It is recommended to promote Guangzhou's "land voucher" exchange program to help companies improve their land inventory structure, enabling the revitalization and optimization of land resources for real estate companies without increasing the government's financial burden.

5. Encourage companies to expand overseas and engage in mergers and acquisitions

Chinese manufacturing companies are facing dual pressures internally and externally:

On the one hand, the insufficient utilization of manufacturing capacity suppresses product prices and corporate profitability. In particular, industries such as photovoltaics and steel have excess capacity, but with slowing downstream demand, inventory accumulates passively, leading companies to lower prices to clear inventory, resulting in significant losses. As of the first half of 2024, the average industrial enterprise capacity utilization rate announced by the National Bureau of Statistics was 74.8% over the past four quarters, at the 20th percentile since 2006; according to iFind's calculation of financial statements of listed companies, the fixed asset turnover rate of listed manufacturing companies in the first half of 2024 was 291.5%, a decrease of 62.5 percentage points from the first quarter of 2022, at the 23rd percentile since 2006. For industries with overcapacity, the depth and timing of industry adjustments are often inversely related. Accelerating the clearance of outdated production capacity will help reduce waste of social resources and inefficient competition in the industry.

On the other hand, uncertainties in the external economic and trade environment are accumulating. An important concern of the October U.S. presidential election is where U.S.-China economic and trade conflicts will head under the new U.S. president. If Trump returns, it may mean higher tariffs, stricter rules of origin, and export controls on high-tech products. Since the start of the U.S.-China trade war in 2018, Chinese exports of high-tech manufactured goods and automobiles have largely shifted towards reliance on the European market, while recent EU anti-subsidy investigations on Chinese photovoltaic products and imposition of tariffs on Chinese new energy vehicles have added uncertainty to China's export prospects During the process of resolving overcapacity around 2015, exports once provided important demand increments.

We suggest that local governments and financial institutions reduce the transfusion of backward production capacity to industries with overcapacity, encourage large enterprises to merge and reorganize, integrate high-quality resources as soon as possible, and go into battle lightly. At the same time, encourage enterprises to "go global" to resist the uncertainty of the foreign trade environment, promote the signing and upgrading of bilateral and multilateral investment agreements, improve the efficiency of foreign direct investment approval, take the lead in establishing overseas investment consulting agencies, and provide comprehensive services to overseas enterprises through multiple channels.

It should be emphasized that overseas enterprises can also contribute to the domestic market and may not necessarily lead to hollowing out of the manufacturing industry.

In terms of research and technology, after going global, enterprises have a broader market, which helps accelerate their technological research and innovation, thereby promoting the upgrading of the domestic manufacturing industry. For example, automakers such as Changan, Geely, and SAIC have established research and development centers overseas, using local technological accumulation and advantageous resources for research and development. Some technological achievements are applied to domestic production, enhancing the competitiveness of enterprises in the domestic market and driving the development of domestic intelligent driving technology.

In terms of supply chain coordination, overseas enterprises often maintain close ties with domestic upstream and downstream enterprises. The production bases of overseas enterprises require raw materials, components, and other supplies from domestic sources, which drives the development of related industries domestically. For example, Chinese mobile phone manufacturers such as Xiaomi, OPPO, and vivo have built factories in India, Vietnam, and other places, but key components like phone screens are mainly purchased from domestic suppliers such as BOE, Tianma Microelectronics, etc. Domestic component suppliers supply overseas factories, thereby gaining stable orders and markets, promoting the continuous development of the industry.

In addition, strengthening the subsequent supervision of foreign direct investment, establishing mechanisms for guiding and supervising the flow of funds, overseas earnings, and tax returns of overseas enterprises, can achieve the return of foreign earnings to the domestic market.

Article Author: Zhong Zhengsheng S1060520090001, Zhang Lu S1060522100001, Chang Yixin S1060522080003, Article Source: FICCRUC, Original Title: "Zhong Zhengsheng | What other incremental policies can we expect"