Morgan Stanley's Xing Ziqiang: The new "three major projects" break the deflation expectations

On October 25th, Gu Chengqi, President of Wall Street News, Zhu Chen, Founder of Zhibao, and Xing Ziqiang, Chief Economist and Managing Director of Morgan Stanley China, engaged in a dialogue about the Chinese economy and market.

Xing Ziqiang:

Now we propose to implement three major new projects to break the deflationary expectations, helping the economy get back on track through a combination of stimulus and reform. These involve: enhancing social security, reducing real estate inventory, and assisting local governments in repaying debts to ensure smooth circulation of local finances.

First, regarding the enhancement of social security, our calculations indicate that within two to three years, trillions of yuan (injections from the central government issuing special treasury bonds) are needed to help low- and middle-income groups be included in the security system, allowing them to reduce their worries and be willing to spend. This could even extend to the middle class, as they are also a group feeling significant economic pressure. We could provide some benefits in the social security system for them, such as reductions in the five insurances and one fund.

The five insurances and one fund are actually the most significant taxes for ordinary middle-class individuals, even more than personal income tax. The total revenue from the five insurances and one fund for the central government is 11 trillion yuan per year, with a 70-30 split between enterprises and individuals, and individual contributions amounting to about 3.8 trillion yuan. If the central government now says, "I will issue special treasury bonds to cover this 3.8 trillion yuan for you, and you can reduce it by half, so you don't have to pay the five insurances and one fund," that would effectively mean a tax reduction of 4 trillion yuan in a year. I believe this would be a substantial message to the public, saying, "I am using my money to help you consume and reduce your burdens, and I will continue to inject funds into your social security system, so you don't have to worry about future social security funds running out." The injection of special treasury bonds is a significant move and will certainly be seen as an extremely favorable and positive signal by all sectors of society, from enterprises to residents.

Of course, in this project, we can also consider that migrant workers and low-income individuals cannot afford their medical insurance and social security contributions. Shouldn't the central government also step in to cover the arrears from the past three to four years in a one-time manner, using special treasury bonds, so that they can also enjoy certain benefits? If we are to adjust the fertility policy, it is also inseparable from social security reform, whether for families with one child or two children, there can be substantial tax rebates in terms of subsidies, social welfare, and the home-buying process, among other aspects.

The second aspect is reducing real estate inventory. This is a topic everyone is discussing: is it possible to stabilize the real estate market? Some countries have taken many years, like Japan and Spain, where the real estate bubble burst and took seven to eight years to stabilize, while others, like the United States, may have taken just over three years.

One of the biggest differences here is the role of policy variables, specifically whether there is a willingness to use the central government's balance sheet to intervene and shorten the duration of this balance sheet recession.

We are still certainly constrained by some moral hazard concerns, such as if I use central funds to buy these houses or enterprises, am I not saving those who previously expanded disorderly and had excessive leverage? However, looking at global experience, the more we get bogged down in debates about moral hazard, the larger the problems become, leading to greater impacts on the lives of ordinary people and the overall financial risks to society. Historically, the European Central Bank's rescue of the banking sector and the U.S. rescue of core assets at the end of 2008 were ultimately based on reasonably priced disposals of these assets, rather than significant discounts If prices are significantly discounted, the advancement of rescue policies will inevitably be slow, and dragging it out will have too great an impact on the overall society and economy. Therefore, in terms of reducing inventory in the real estate sector, the central government clearly has a lot of funds and finances that can be intervened.

The last aspect is to help local governments repay their debts. This debt relief is not a temporary, accounting, or superficial change. For example, the money owed by local governments to banks becomes national debt of the central government. Currently, among the more than 80 trillion yuan of local hidden debt, there are 11 trillion to 12 trillion yuan of interest-free receivables, which actually means that local urban investment companies and local governments owe a lot of money to state-owned and private enterprises and cannot repay it, all in the form of receivables, and these enterprises cannot even pay salaries. At this time, if the central government launches a debt relief program of six to ten trillion yuan, and clearly states that its purpose is to address these interest-free receivables, it can help circulate this blood. Local state-owned and private enterprises can receive funds to pay salaries, ultimately boosting consumption and investment willingness.

The new three major industries need to break away from some past thinking patterns, whether it is the constraints of the deficit ratio or the constraints on whether funds are used for welfare or investment, which will take some time to implement.

Xing Ziqiang will give a keynote speech at the 7th "Alpha Summit" jointly organized by Wall Street News and China Europe International Business School from December 20 to December 21. Stay tuned.