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Tuesday, August 18, 2020
The Shifting of Macro Policies in China
ANBOUND

As the international scene continues to cope with new changes from COVID-19, China's economic recovery begins to gain traction too. Previously, ANBOUND proposed to China that it should finetune its macroeconomic policies to keep up with the environmental changes. It needs to shift from responding short-term urgencies to promoting long-term, systematic economic growth and structural adjustment. From the recent series of the central meetings and market trends, it appears that the adjustments are underway. This means fiscal and monetary policies are next in line to shift. Put simply, the expansion of monetary aggregates has come to an end, and fiscal support for the economy is increasing, which will be the focus of policy implementation soon.

At the mid-year meeting, the Politburo of the Communist Party of China has proposed that "fiscal policy should be more proactive and effective"; "Funds for major project construction should be guaranteed"; "The focus should be on the quality and efficiency"; And lastly, "monetary policy should be more flexible, with appropriate and precise orientation. It is necessary to maintain a reasonable growth in the money supply and the scale of social financing, and promote a significant reduction in comprehensive financing costs."

This is a massive difference compared the April statement issued by the Politburo which reads: "There should be greater macroeconomic policy to hedge against the impact of the pandemic. Proactive fiscal policies must become even more proactive, increase the deficit rate, issue special national bonds in regards to the pandemic, increase special local government bonds, improve the efficiency of fund use, so as to truly play a key role in stabilizing the economy. In addition, the prudent monetary policy should be more flexible and appropriate, using measures such as RRR cuts, interest rate cuts, and refinancing to maintain reasonable and sufficient liquidity, and guide loan market interest rates to decline. Funds should be channeled to support the real economy, especially small, medium and micro enterprises." On the one hand, the fiscal policy will be further strengthened. On the other hand, the monetary policy tends to shrink. This means the fiscal and monetary policies are currently undergoing a shift.

The recent central bank work conference also pointed out that "monetary policy should be more flexible, appropriate, and precise, and the policies that have been introduced to stabilize enterprises and ensure employment should be effectively implemented. There should be a comprehensive use of multiple monetary policy tools to guide broad money supply and social financing to have significantly higher growth rate compared to the previous year. Likewise, attention should be paid to grasping the pace, optimizing the structure, and promoting the substantial growth of inclusive small and micro enterprise loans and long-term manufacturing loans." It emphasized structural policies, and the monetary aggregate will remain at "grasping the pace" and "precise guidance." Meanwhile, the central bank's open market operations have also tightened the mass stimulus policies. According to institutional statistics, the central bank's single-month net withdrawal in July reached RMB 687.7 billion, the second consecutive month of net return. China is no longer at a critical COVID-19 period, which allows the monetary policy to shift from a crisis-response model to a normalized one, with some marginal tightening.

With the economy recovering gradually, the slowdown in monetary aggregate expansion actually helps to avoid an inflated demand. Wu Ge, chief economist of Changjiang Securities, believes the period of substantial expansion of domestic currency credit is coming to an end. Considering the short-term concentrated issuance of government bonds alongside other factors, monetary credit expansion is expected to remain relatively high in the third quarter, and the marginal convergence trend in the fourth quarter may be more obvious. However, in order to avoid another economic downturn, monetary policy will not shrink, and liquidity will remain fully ample in the second half of the year. Some analysts believe liquidity is divided into two levels. The first is the real economy, which the central bank will satisfy with various tools; the other is the level of inter-bank market liquidity. In the second half of the year, inter-bank interest rates will remain at a relatively stable level, which is neither too low nor too high. If it is too high, it would increase the cost of corporate bond financing, and if it is too low it would cause the bond market to increase leverage. As a whole, monetary policy will maintain a moderately neutral state.

From a financial point of view, in the first half of the year, fiscal revenues and expenditures fell as a result of the pandemic. According to the 2020 general public budget revenue and expenditure arrangements disclosed by the Ministry of Finance at the parliamentary meeting Two Sessions this year, as of the first half of the year, the general public budget revenue is 53.4% of the annual total, and the expenditure is 47%. With the revenue moving forward and the expenditure moving backward, the pace of fiscal expenditure will further accelerate in the second half of the year. CITIC's research also shows the growth rate of expenditure in the second half of the year will reach 14% year-on-year, based on the analysis of budget deficits, local government special debts, and special national debts. It also mentioned that with the record high of the annual special bond quotas, the pace of new special bond issuance will improve. It is expected that the remaining scale of RMB 1.5 trillion will be issued in August and September. The focus of fiscal policy will also shift from responding to the pandemic and alleviating economic stagnation to increasing real demand for investment and consumption.

It is important to note that the boost of fiscal policy in a currency-neutral environment is not the same as the large-scale expansion in 2008 and is subjected to strong budget constraints. This means that fiscal policy expansion of investment is not a blind expansion of mass stimulus, but direct expansion to the grassroots under the premise of benefiting people's livelihood and matching economic structural transformation and supply-side reforms. Judging by the current strengthening of real estate regulation and the direction of financial investment in various regions, the role of fiscal policy has increased, and the focus now is to create an "inner circulation" of domestic demand, and the implementation of fiscal policy is being steered towards an approach known as "precision drip-irrigation".

Final Analysis Conclusion:

From the recent policy changes, it appears that the degree of easing has slowed down after the monetary policy has experienced the easing in the first half of the year and substantial increase in the money supply. The focus of macro policy will pave way to further efforts in fiscal policy. With the financing of the central and local governments in place, the role of fiscal policy will become more prominent.

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