Context:

On December 6, the Political Bureau of the Communist Party of China’s (CPC) Central Committee published policies that will better coordinate pandemic prevention and control and economic and social development, comprehensively deepen reform and opening up, and vigorously boost market confidence, prioritizing the national economy’s recovery. These policies will bring new changes to the employment market, the fight against inflation, the growth of domestic consumption, and the development of the service sectors as China transitions to a new stage of pandemic control.

Key points:

2023 Potential GDP growth is expected to be higher than 5%

• The implementation of these CPC policies support a goal of more than 5% GDP potential growth to effectively promote the economic recovery in 2023. China still needs to prudently consider the uncertainties of this transition stage to new pandemic control policies and use the advantages of its institutions and governance system to deal with external challenges.
• The rebound of the 2023 GDP will be demonstrated through the return of migrant workers to the urban and industrial areas, the surveyed urban unemployment rate decrease, and the net increase in urban employment, thus highlighting the improvement of the economic operation and people's livelihood.

The consumer market is expected to improve in 2023

• The 5% GDP potential growth rate in 2023 will drive many economic activities, especially consumer demand. Though economic fluctuations may occur in the first quarter of 2023, the effectiveness of the new policies will be gradually realized, and once fully implemented, will result in the rebooting of the consumer market.
• With the changes in the pandemic control policies, investment and export will grow faster than consumption in China. It’s hard to maintain surplus-driven growth when the response to inflation by the U.S. and the West is austere monetary policies, thus causing a global economic slowdown. The decision to boost consumption and stabilize the macroeconomy through a basket of policies, including new pandemic prevention and control measures, was inevitable.
• The new energy and electric vehicle industries have become the highlights of China's economic vitality and resilience in the post-pandemic era. The previous prevention and control measures however, must be changed in a timely and orderly way. For industries such as steel, which have undergone rounds of cyclical fluctuations and structural adjustments, special industrial policies, beyond market rules, should be implemented more prudently.

New measures will be taken to respond to inflation

• To address the pressure of short-term adjustments and weak expectations for future economic growth in the private sector, it is necessary to balance the development of this sector and the implementation of policy measures, strengthen industry regulation, emphasize the rule of law and procedural transparency, deepen reforms to address the real problems, and improve institutional mechanisms.
• In the face of global downward economic pressure, China will continue its positive macro policies to gradually revitalize consumer demand and keep inflation at a low rate. Improved counter-cyclical regulation and necessary supervision will also stabilize market expectations and help different social sectors go through this new transition stage.

Context:

On December 6, 2022, the Political Bureau of the CPC Central Committee met and proposed the following 2023 goals: stabilize economic growth, employment, and prices, and achieve effective improvement of economic quality and reasonable economic growth. Since the beginning of 2022, China's economic situation has been greatly impacted by the pandemic. In contrast to a sharp decline in fiscal revenue distribution from the central to local governments, fiscal expenditures have increased dramatically in the context of the nationwide resistance to Covid-19. How will China solve the fiscal challenges to guarantee stable economic growth? Zhang Ming expressed his point of view in a recent interview with Guancha.

Key points:

The main reason for China’s fiscal revenue decline in 2022 is an overall economic downturn, especially in the real estate sector.

• Revenues from the general public budget and the governmental fund budget are the two major revenue sources for the Chinese government. These two are regarded as the government's comprehensive financial resources.
• In 2022, the government's overall financial resources declined significantly, with a cumulative year-over-year (YoY) decrease of 13.4% from January to October. The revenue for the local governmental fund budget fell 24.3% YoY to 4,853.7 billion yuan. The reason for this was the dramatic revenue decrease that was generated from the transfer – by local governments to privately owned companies – of the right (through paying long-term rent) to use state-owned land, which had accounted for nearly 90% of the total local fund budget revenue, now down 25.9% compared to the same period in 2021.
• At the same time, downward economic growth and continued years of tax cuts have driven down tax revenue growth.

With the reduction in fiscal revenue, it is a reasonable choice for the government to further expand the scale of the national debt in order to achieve the goal of stable economic growth in the future

• The widespread perception at home and abroad that China's macro leverage ratio is too high is untrue. The leverage ratio of the Chinese central government, that is the ratio of central government debt to the Gross Domestic Product (GDP), is only 20%, and the ratio of national government debt to GDP was 47% (in 2021); both are far below the level of most developed countries.
• Increasing the national deficit through issuing more national debt will inevitably lead to an increase in the Chinese government's leverage ratio. However, as long as the government can keep interest rates relatively low and inflation under control, the most important thing is to reinvigorate economic growth.

Optimizing the financing structure is a major issue in the implementation of expansionary macroeconomic policies

• The core of expansionary macroeconomic policies is that local governments facilitate the development and organization of companies, mainly state-owned enterprises (SOE), to invest in infrastructure to drive economic growth. However, the central government doesn’t want to increase its debt ratio. This has led to unhealthy financing mechanisms for infrastructure development: nearly 80% of infrastructure funding is self-financed by local governments and the enterprises engaged in the construction work. The central government's direct support for infrastructure is minimal. Only 2% of the central government’s total budget was invested in infrastructure in 2020.
• Lacking financial support from the central government forced local governments to rely on market-based, high-cost financing methods, such as special bonds, enterprise bonds, and bank loans. The consequence is these more expensive funding methods are more frequently used in infrastructure investment.
• Although this kind of financing structure reduces the fiscal risk of the central government, demonstrated by the ratio of national debt to GDP, it increases the local governments’ fiscal risk. This financing structure needs to be optimized.
• Increasing the expenditures of the general public budget will lead to an increase in China's fiscal deficit as a share of GDP, thus making the deterioration of China's fiscal condition visible. However, given the continued decline in economic growth and the increasing unemployment rate, especially among the youth, it is a choice of the lesser of the two evils, exchanging a more visible decline in the fiscal condition for the stability of economic growth.