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China still has tools to revitalize economy

China’s real estate sector and equity markets have struggled this year, along with negative growth in exports from January to July and a number of economic indexes falling short of expectations. Therefore, investors have expected stronger policy steps to encourage economic expansion and rejuvenate property and the bourses.

A raft of measures has already been rolled out since the beginning of this year, which has helped stabilize economic growth, though the long-term effects are yet to be verified. Are there any other options available in the policy tool kit to revitalize the economy? Will more forceful policies be introduced in the final four months of the year?

China has frequently adopted countercyclical policies over the course of the past 10 years of slower economic growth. As a result, not only did it meet its goal of doubling household incomes by 2020, but it also successfully transformed its economy, putting new energy, electric vehicles and other emerging industries in a position of global leadership.
But how many more tools are there in the policy tool kit given rising local government debt and a decreasing appetite for home purchases?

Prior to anything else, it’s critical to comprehend the distinctions between China’s economic system and that of Western countries. The scope of the assets that the Chinese government may control is far greater than that of Western counterparts because the former is a socialist market economy with public ownership as foundational, whereas the West consists of mainly market economies with private ownership as the mainstay.

In addition to being the owner of the largest State-owned enterprises in the world, the State controls assets such as property, minerals, forests, water resources and others, which can be used as policy tools. That is to say, in addition to policy instruments that Western governments often employ — which China also has — Beijing can resort to other instruments that Western countries do not have at their avail.

Also, China is at a different stage of economic development compared with the West as it is still in a developing stage. Unlike other developing nations, the country — as the world’s largest manufacturer — accounts for 30 percent of global output and has an abundant supply of basic goods.

China’s producer price index, which measures costs for goods at the factory gate, is still posting negative growth at a time when the West is generally experiencing considerable inflationary pressure. It enables China to maintain monetary policy independence and provides room for it to cut interest rates despite interest rates spiking in the West.

Many people are concerned that the interest rate drops in China will lead to a depreciation of the renminbi. No single endeavor, in my opinion, can result in a complete upside without losing something. It just requires choosing the best option, or the lesser of two evils, because all policies have both upsides and downsides. In addition, it should be noted that the RMB has outperformed nearly every other developing nation’s currency in the January-August period.

The average depreciation rate of currencies in developing nations — relative to the United States dollar over the past three decades — has approached 90 percent, whereas the RMB has appreciated. Therefore, since a mild depreciation of the RMB is also beneficial to exports and job creation, there is no need to worry too much about it at present.

China’s macro leveraging ratio, despite being close to most developed countries’, is manageable. However, China has a very low macro leveraging ratio — only about 21 percent — compared to Japan and the United States, which have levels of over 110 percent and about 250 percent, respectively. This means there is still plenty of room for the Chinese government to increase its macro leveraging level going forward.

The upward and downward movements of the economy are shaped by a combination of variables.

These elements could be roughly categorized into two main groups: structural factors and cyclical factors.

For instance, this year marks the 45th anniversary of China’s reform and opening-up drive. Over the past 45 years, China’s economy has experienced remarkable growth, rising to become the second-largest economy and the top manufacturer. This remarkable growth is largely attributable to reform and opening-up. But cyclical factors such as demographic factors should not be ignored.

In fact, China’s economic slowdown began in 2011, which is almost at the same time when demographic concerns were first raised. The pinnacle of China’s population dependency ratio was reached in 1966, and then it started to fall rapidly in the late 1970s. Reform and opening-up came just in time.

The shift in cyclical factors from a positive contribution in the past to a negative contribution after 2011 has increased the economy’s downward pressure. China typically adopted an investment-led approach to stabilize growth. However, at the same time, the amount of debt held by households, government and enterprises has surged.

In general, more aggregate policies should be used to address cyclical issues, while additional structural policies should be adopted to resolve fundamental problems. It was emphasized during the 20th National Congress of the Communist Party of China that it is imperative to harness the fundamental role of consumption and government investment in driving economic growth.

Scaling up infrastructure and real estate investment are commonly used aggregate policy tools as they help stabilize growth and often produce immediate benefits. Pro-consumption reform initiatives, such as improving the structure of income distribution, are relatively less utilized as they are slower acting.

Therefore, whether policies can reverse current trends is the question that has to be considered. The 20th CPC National Congress report reaffirmed the need for high-quality economic development, which in return asks for more efficient and effective economic policies.

For instance, the development of related industries and growth stabilization can be facilitated by the construction of high-speed railways, expressways and urban rail transit systems. However, at the same time, these projects face pressure from falling returns on investment and rising debt loads of governmental participants.
Traditional infrastructure investments, which in the past may have been utilized to stimulate the economy, must therefore be used more cautiously today. Additionally, there is not enough “new infrastructure “being built to support steady growth.

It was highlighted in the annual Central Economic Work Conference last December that efforts to restore and expand consumption should be high on government work agendas, and it was also pointed out that the current economic downturn is related to structural issues with China’s long-standing investment and export-driven economic growth model, as well as cyclical issues of insufficient demand.

However, encouraging consumption is basically about boosting household incomes or lessening burdens on the residential sector in terms of debt payments, eldercare costs or educational investment. Recently, the central bank implemented a plan to lower interest rates on mortgage loans, which will ease some household debt burdens.

Therefore, assuming that the residential property sector will continue to raise its leveraging levels in the future is unrealistic.

Potential initiatives for the future include, first, increasing incomes among the middle- and lower-income groups through continued reform of the income distribution system and, second, channeling income subsidies to unemployed and lower-income groups through targeted approaches.

In short, policy measures to address cyclical issues primarily rely on aggregate instruments and can only have a moderating impact. That is, they only flatten the curve rather than reverse the trend. Reforms — particularly those balancing the interests of government, business and households — however are the primary means of resolving structural issues.

In addition, the capital market has lately been stabilized, and investor confidence has increased as a number of national ministries and commissions have introduced various initiatives over the past month, including lowering interest rates, reducing stamp duties, trimming transaction and fund management fees, and encouraging medium- to long-term capital to enter the market.

Although these measures have the potential to somewhat encourage investors to buy stocks, this effect is relatively indirect. Therefore, it may be worthwhile to think about creating a capital market stabilization fund, which can act as a market anchor during periods of extreme panic or irrational market collapses, and would be also helpful in directing the market toward value investments.
Source: China Daily

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