Economics, what are we expecting?

Key Points:

1. Resolving existing issues while focusing on new growth. Recently, there have been clear signals of policy shifts, with comprehensive measures being introduced by central authorities. This is undoubtedly the first step towards addressing challenges. However, questions remain about the extent of fiscal measures, the adequacy of monetary policies, and the potential breakthroughs in the real estate sector. Ultimately, the substantial improvement in expectations depends on the targeted and effective nature of policy measures.

2. In terms of policy priorities, the emphasis is on addressing existing issues. Increasing the scale of debt limits and replacing local hidden debts can alleviate short-term liquidity pressures, but local governments remain the main debtors. Historically, during debt restructuring periods with limited fiscal expansion, short-term growth-boosting expenditures, such as infrastructure investments, tend to decline.

3. Regarding the real estate sector, the focus is on "acquiring and storing" special bonds (i.e., local governments purchasing existing commercial housing for affordable housing purposes) to increase effective demand. However, ensuring "balanced financing returns for projects" remains a key consideration for local governments in their "autonomous decision-making and voluntary implementation." The emphasis on "strictly controlling the increase in commercial housing construction" aims to reduce supply, which may further impact local land fiscal revenues.

4. Looking ahead, "significant interest rate cuts" are worth anticipating, but the extent to which past internal and external constraints can be significantly alleviated remains to be seen. Based on over forty years of successful experience in reform and opening up, the ultimate effectiveness of incremental macroeconomic policies depends not only on addressing historical debt and existing issues but also on the extent to which resources can be increased to drive incremental economic growth.

Main Content:

Recently, there have been clear signals of policy shifts, with comprehensive measures being introduced by central authorities, marking the first step towards addressing challenges. However, the substantial improvement in expectations depends on the targeted and effective nature of policy measures. Questions remain about the extent of fiscal measures, the adequacy of monetary policies, and the potential breakthroughs in the real estate sector.

I. Fiscal Measures: How Much Incremental Progress?

In terms of policy priorities, the emphasis is on addressing existing issues. Increasing the scale of debt limits and replacing local hidden debts can alleviate short-term liquidity pressures, but local governments remain the main debtors. While there are intentions for incremental policies such as tax reductions and livelihood expenditures on the demand side, the scale is relatively limited.

Figure 1. Resolving Existing Issues or Expanding Incrementally?

Historically, during debt restructuring periods with limited fiscal expansion, expenditures, especially in infrastructure investments, tend to decline. In the third quarter, about 20-30% of local new special bonds were directed towards existing government debts. The continuation of allocating a certain amount of bonds annually from the new special bond quota to support the resolution of existing government investment project debts indicates a continued trend of diversion.

Figure 2. During Debt Restructuring, Infrastructure Investments Tend to Weaken

II. Real Estate: Will There Be Breakthroughs?

The focus is on "acquiring and storing" special bonds (i.e., local governments purchasing existing commercial housing for affordable housing purposes) to increase effective demand. However, ensuring "balanced financing returns for projects" remains a key consideration for local governments in their "autonomous decision-making and voluntary implementation." The actual effect of "inventory control" depends on whether it can stimulate compatibility. In addition, "strict control of incremental construction of commercial housing" aims to reduce supply, which may further impact local fiscal revenue and the potential intensity of local counter-cyclical efforts.

Figure 3. If the incremental construction of commercial housing is strictly controlled

III. Is the Monetary Policy Sufficiently Strong?

"The anticipation of a strong interest rate cut" is worth looking forward to, but whether it can break free from the factors that have constrained interest rate adjustments in China in the past remains to be seen. Especially when uncertainties such as the U.S. presidential election often correspond to the appreciation of the U.S. dollar, the RMB exchange rate may face potential fluctuations.

Figure 4. When will the "strong interest rate cut" appear?

Note: The interest rate refers to the 7-day reverse repurchase rate.

Resolving existing issues requires a focus on new developments. Looking at the successful experience of over forty years of reform and opening up, the ultimate effectiveness of incremental macroeconomic policies depends not only on addressing historical debt and other existing issues but also on the extent to which resources can be increased to promote incremental economic growth. These aspects are all worth learning from.

Authors of this article: Wu Ge, Yu Tao, Gao Tong, Cao Haiwei, Source: Wu Ge Economic Notes, Original Title: "Economics, What Are We Waiting For?"