How to determine the economic development goals under the background of “six stability” and “six guarantees”, how to seek development under the normalization of epidemic prevention and control, how to release the potential of domestic demand through a combination of short-term and long-term macro policies, what innovations and reforms the epidemic has forced out, and how to start the “14th Five-Year Plan” will all be the key issues of this year’s Two Sessions.
The 2020 Two Sessions is about to be held. According to Xinhua News Agency on April 29, the third session of the 13th National People’s Congress (NPC) will be held in Beijing on May 22, 2020, and the third session of the 13th Chinese People’s Political Consultative Conference (CPPCC) will be held in Beijing on May 21. Different from previous years, 2020 is the year when China has built a moderately prosperous society in all respects and the 13th Five-Year Plan has come to an end. A sudden outbreak of COVID-19 has brought an unprecedented impact on economic and social development. Therefore, the impact of the national macro-control policy will be unprecedented.
“In view of the upcoming national Two Sessions, the market is very concerned about the strength of fiscal policy throughout the year. This is reflected not only in the level of financial deficit ratio but also in the specific scale of local government special bonds and anti-epidemic special bonds. The specific investment direction of financial funds is also the focus of observation, for example, whether it will further stimulate consumption, whether it will increase the inclination of traditional infrastructure and new infrastructure,” Gao Ruidong, Guotai Junan Securities Chief Macro Analyst, told the China Business News (CBN).
Shi Zhengwen, director of the Center for Research in Fiscal and Tax Law of CUPL, told CBN that the measure of a fiscal stimulus depends on the scale of government borrowing. From the domestic and international situation and the current prevailing market views, this year’s fiscal stimulus will be far greater than before, and the government’s (newly increased) borrowing is probably close to 10 trillion yuan. Last year, the government (newly increased) borrowed about 5 trillion yuan.
According to the convention, the annual main economic and social development goals, including GDP growth rate, will be announced to the public in the government work report during the national Two Sessions.
China’s GDP contracted by 6.8% year-on-year during the first quarter of 2020. The Political Bureau Meeting on April 17 judged the current situation as “the challenges facing the current economic development are unprecedented, so we must fully estimate the difficulties, risks and uncertainties, earnestly enhance the sense of urgency, and focus on the work of economic and social development.”
Under the above judgment, the central government first proposed “six guarantees”, namely, to guarantee the employment of residents, the basic livelihood of the people, the main body of the market, the food and energy security, the stability of the supply chain of the industrial chain, and the operation of the grass-roots level. Wang Jun, a member of the Academic Committee of China Center for International Economic Exchanges (CCIEE), said in an interview with the CBN reporter that this year’s expected goal of economic growth should be adjusted appropriately. In the face of the once-in-a-century epidemic disaster, we should draw a new starting line, formulate more realistic goals, and accept the lower economic growth. While preventing and controlling the epidemic, the problems of short-term stable demand and smooth supply should be solved, and more attention should be paid to accelerating structural reform on the supply side, and more efforts should be made to solve medium-and long-term deep-level structural problems.
CICC Securities pointed out that the Political Bureau Meeting in mid-April for the first time put forward “six guarantees” such as guaranteeing residents’ employment and basic livelihood. This year’s phased growth target may be diluted accordingly. After a very unusual first quarter under the influence of COVID-19, considering the objective background that the global economy is still worsening and the general economic growth in major countries is negative, it is expected that this year’s policy will focus on implementing poverty alleviation goals, protecting people’s livelihood and ensuring employment stability.
At present, there are many voices in the market that China’s economic growth rate will slow down in 2020 and its growth prospects are highly uncertain. Therefore, the Chinese government should focus on stabilizing employment and people’s livelihood, rather than setting an annual growth target for 2020.
Under the background of great uncertainty in the international environment, there are many factors affecting the annual economic growth, which are not entirely determined by China itself. Whether the overseas epidemic can be effectively controlled, how long it will last, and the depth and breadth of the impact on international economic activities, all of this will impact China’s economy to varying degrees. China should be well prepared, but it doesn’t mean to blindly stick to the “pre indicators” or expected indicators.
There are also experts with different views. Zhang Ming, director and researcher of the Institute of World Economics and Politics Chinese Academy of Social Sciences, believes that it is still necessary for the Chinese government to set an annual growth target for 2020. The specific growth target can be set at a level recognized by all parties through discussion. The target can be flexible and not to be mandatory. But in any case, the annual goal remains essential.
Zhang Ming said that China’s economy needs an annual growth target to coordinate resources in all aspects. So far, the annual economic growth rate is still the most important baton of China’s economic growth. No matter the central ministries or local governments, a lot of economic work is carried out on the basis of achieving economic growth targets.
More importantly, economic growth is closely related to employment. According to a study by Liu Yuanchun, a professor at Renmin University of China, for every 1% increase in China’s GDP growth rate, 2 million new jobs will be created. However, if China’s GDP growth rate drops by 1%, 4 million jobs will be lost. In other words, without a certain speed of economic growth, there is no way to stabilize employment and guarantee residents’ employment.
Liu Shijin, former deputy director of the Development Research Center of the State Council (DRC), said in the media recently that China’s economy needs to shift from the conventional growth model to the “epidemic growth model” for a quite long period of time. “It is a great victory to achieve annual growth of about 3%.” At the same time, he said that the assessment of growth targets should also be adjusted in the light of changes in the growth background. It is suggested to adopt the evaluation method of “relative growth rate”, that is, to use the ratio or difference between China’s growth rate and the world average growth rate.
As the “pillar” for economic operation, the financial policy to deal with the epidemic will be announced during the Two Sessions. At the Meeting of the Political Bureau of the Central Committee of the CPC held on April 17, it was demanded that active fiscal policy should be more active and effective, and that fiscal policy should really play a key role in stabilizing the economy. The specific requirements are to raise the fiscal deficit ratio, issue special anti-epidemic government bonds and increase special bonds for local governments. This is also called the “three arrows” of this year’s fiscal policy by the market.
Fiscal deficit ratio refers to the ratio of fiscal deficit to GDP, which was 2.8% last year. The market is generally expected to reach about 3.5% this year. This will be the first time that China’s fiscal deficit rate has broken through the psychological line of 3%. The deficit gap will eventually need to be covered by the issuance of government bonds, which amounted to about 2.8 trillion yuan last year.
As an important source of funds for local infrastructure construction, special bonds have been issued 2.29 trillion yuan in advance this year, and the market is generally expected to reach about 3.5 trillion yuan this year.
Special government bonds, which were rarely used in previous years, have become one of the important tools for this year’s fiscal policy to deal with the epidemic. The market generally expects the scale to reach up to trillion yuan.
Liu Shangxi, President of the Chinese Academy of Fiscal Sciences, believes that in the face of unprecedented impacts and challenges, unprecedented policies are needed to match. For example, in order to boost market confidence, the budget size of special government bonds can be considered to reach 5 trillion yuan, but the actual implementation can be smaller than this figure.
Compared with the scale of government borrowing of nearly 5 trillion yuan in 2019, former Minister of the Ministry of Finance Lou Jiwei, when analyzing the scale of fiscal policy needed this year, though that it might increase by nearly 5 trillion yuan from last year, that is, the total scale of government borrowing this year might be close to 10 trillion yuan.
Although the market generally expects that this year’s fiscal stimulus will be stronger than before, the specific scale of government borrowing, i.e. the fiscal deficit, special debt and special anti-epidemic national debt, remains to be announced at the national Two Sessions.
Yu Yongding, Member of the Chinese Academy of Social Sciences, wrote that in view of China’s current situation, in order to ensure the economic growth rate of more than 3%, China must boldly implement an expansionary fiscal policy, supplemented by an expansionary monetary policy. According to the preliminary estimation of the Institute of World Economics and Politics Chinese Academy of Social Sciences, the increase in infrastructure investment required for this expansionary fiscal policy should be significantly higher than the 4 trillion yuan in 2008.
Shi Zhengwen believes that compared with the scale of government borrowing, the key is to grasp the direction of the capital investment.
The specific investment direction of financial funds is still to be announced at the national Two Sessions, but the core is focused on the “six guarantees” first proposed at the Meeting of the Political Bureau of the CPC Central Committee held on April 17. Among them, the main body of the guarantee market is to guarantee employment and people’s livelihood. Therefore, the State Council has issued a tax reduction policy of 1.6 trillion yuan. Shi Zhengwen believes that there may be new tax and fee reduction policies at this year’s Two Sessions.
Facing the complicated economic situation at home and abroad, how should macroeconomic policies be oriented? In the short term, the financial policy should focus on work/production resumption and relief, with the focus on small and medium-sized micro-enterprises and low-income groups. In the medium and long term, economic growth momentum should be stimulated through reform. The focus should be shifted to the substantive deepening of structural reforms.
Liu Shijin said that to achieve stable economic growth at this stage, the key is to stabilize consumption, especially household consumption. He suggested direct subsidies for low-income groups.
Consumption is the first engine of China’s economic growth. At a time when the COVID-19 in China is under effective control, the key to promoting an overall economic recovery is to increase residents’ income, ensure employment and boost consumption accurately and effectively through a package of economic assistance policies.
In the medium and long term, reform is the key to stimulate new momentum of economic growth. Wang Jun told the CBN reporter that China’s new and old kinetic energy transformation is still in progress and the transformation and upgrading are still at a critical moment, and the reform must be deepened. In particular, the reform of the income distribution system, the reform of state-owned and state-owned enterprises and mixed ownership, the reform of the division of financial powers and expenditure responsibilities between the central and local governments, the structural reform of the financial supply side, the market-oriented reform of interest rates, and the reform of the basic system of the capital market.
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