China should take unconventional action to prevent a worst-case scenario in which the economy could “fall off a cliff”, as there are signs of a fundamental shift in Beijing’s understanding of debt and deficits as well as in policymakers’ mindset on macroeconomic risks and stimulus packages, according to a prominent economist with close ties to the finance ministry.
The comments by Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, affiliated with the Ministry of Finance, came after the central leadership’s decision to implement a slew of incremental policy support measures, and amid fervent debate and speculation about the state of the economy and Beijing’s resolve in the absence of a headline-grabbing stimulus figure like what was seen in 2008.
High-profile press conferences were held successively last week by China’s top economic planner and finance ministry, but both refrained from putting an estimated value on the scale of stimulus being employed.
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Asked what his estimate was for the combined value of the sweeping suite of stimulus measures – including debt relief for local-level governments, special treasury bonds and targeted actions to address the national property crisis – Liu said it “should absolutely surpass” 10 trillion yuan (US$1.4 trillion), but that it could be years before the total is fully realised.
“If you don’t take extraordinary measures [to boost domestic demand], the economy may fall off a cliff,” Liu warned in an exclusive interview with the Post on Wednesday. “It is not always a simple linear trajectory.”
Any final decision on the stimulus total, since it involves changes to budgetary plans, would require approval by China’s top legislature. And if the stimulus figure does come to light, it would only be released by the central government.
While Beijing has traditionally been cautious when it comes to debt, there have been strong signals recently to increase the central government’s debt while shifting attention to the expansion of domestic demand, said Liu, who is also a member of the Chinese People’s Political Consultative Conference, the country’s top political advisory body.
‘A turning point’
Compared with its prudent work style in the past, Beijing is undergoing a shift in policy mindset as it struggles to revive the world’s second-largest economy and meet leadership’s full-year growth target of “around 5 per cent”, Liu noted.
Speaking at a presser on Saturday, finance minister Lan Foan emphasised that there was ample room for the central government to leverage debt and raise the fiscal deficit. He also pledged a one-off, large-scale increase to the debt ceiling, so that local governments could swap their so-called hidden debts.
“They were extremely cautious on debt before, but now a turning point has come in their attitude on deficit and debt,” Liu said.
The structure of China’s government debt is shifting toward a much heavier weight in the central government’s debt, while local governments should reduce leverage, he added.
While a 3 per cent fiscal-deficit ratio was previously regarded as a warning limit in China – with an exception being last year’s 3.8 per cent ratio in the wake of the pandemic – Beijing should become more flexible based on the changing situations, he urged, likening it to the treatment of an illness.
“If you are sick, you have to take medicine, and even at high doses” when it is particularly severe, he said. “And when you get well, you stop the medicine.”
Policymakers are also showing a change in how they view macro risks, the government adviser said.
“Only when the economy is revitalised can the risk be truly reduced,” he said.
Going big
China has compelling reasons to go big in its moves to bolster the economy, including great room to increase its debt level when compared with some advanced economies, Liu said.
Even when factoring in the hidden liabilities among local governments, he estimated that China’s current ratio of debt to GDP is around 100 per cent. In comparison, the debt-to-GDP ratio is about 130 per cent in the United States and 260 per cent in Japan.
China is also facing an extended and rare stretch of a negative difference in nominal minus real GDP – a trend that signifies deflation and points to more breathing room for policy efforts, Liu added.
“This inverted growth rate is abnormal,” he explained. “This gap represents the space for your policy to take effect. The bigger the gap, the more room there is for it to take effect.”
Liu also warned about the risk of a fourth-quarter plunge in China’s economic growth, pointing to on-the-ground parameters, including the struggles of small and medium-sized enterprises, the financial losses of listed firms, and a situation in which exporters are seeing higher revenues but lower profits.
While China spent years reforming the supply side to tackle industrial overcapacity that was induced by the 4 trillion yuan stimulus package in 2008, the focus should now be on expanding domestic demand, Liu said.
He also expressed doubt that a nationwide consumption-voucher programme might be utilised, suggesting that such handouts would do little to boost spending considering Chinese people’s traditional preference for saving money, especially at a time when income expectations are weak.
Instead, he suggested, the government should allocate considerable funds to support China’s ongoing urbanisation process, as hundreds of millions of migrant workers are demanding equal access to public services and urban homes.
And Liu insisted that it is unlikely China will mirror Japan’s experience following the burst of its property bubble 30 years ago, as “China has a large number of people turning into urban residents”.
Official figures show that, as of the end of last year, slightly more than 66 per cent of China’s 1.4 billion people lived in urban areas, but only 48.3 per cent had an urban hukou – a household registration document all Chinese citizens must have that controls access to public services based on the birthplace of the holder. Migrant workers hold hukou from their hometowns, meaning they have limited rights to public services in any other city that they move to for work.
Treasury bond purchases
The prominent government economist also called on the central bank to embrace more treasury-bond purchases, a rarely used monetary tool in China that has triggered hot debate since coming to the public’s attention in March.
The door “must be opened wider” in this regard, as what happens in many market economies, he said.
Deeming such purchases a means of helping manage the bond market and stabilise the economy, Liu said people should change their old way of thinking and stop worrying about the possibility of inflation.
“Issuing more currency may lead to inflation, but it does not necessarily lead to inflation,” he said, warning about the deflationary pressure faced by the world’s second-largest economy.
The People’s Bank of China started buying 100 billion yuan of government bonds from the secondary market in August – the first such monetary operation in nearly two decades. Then it bought an additional 200 billion yuan last month.
Earlier this month, the bank and finance ministry held their first joint working-group meeting on the treasury bond trade, vowing to provide an “appropriate environment” for government bond trade.
More from South China Morning Post:
- China’s GDP set to underperform in third quarter, adds to urgency for more stimulus
- China stimulus debate simmers on social – now you can’t follow an economist, fund manager
- How big is Beijing’s war chest, and why does a headline stimulus figure remain elusive?
- Chinese economist calls for massive stimulus, saying 2008’s 4 trillion yuan not enough
- Who makes China’s stimulus decisions, and what’s the procedure?
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