Why China needs to overcome its aversion to aggressive monetary and fiscal stimulus measures
Chinese central bank adds new tool to boost liquidity. GDP of the provinces outpaces national growth.
Our briefing on critical economic and financial developments in China as of Tuesday, 29 October, 2024:
Leading economist Yu Yongding explains the reasons for long-standing aversion to robust stimulus monetary and fiscal measures amongst China’s top policymakers.
The Chinese central bank has added a new tool for boosting liquidity to its arsenal of open market operations instruments.
Confusion continues over China’s GDP growth, with province-level figures outpacing national data for increases in output.
Why China needs to overcome its aversion to aggressive monetary and fiscal stimulus measures
One of China's top economists has provided his interpretation of why the country's leaders could soon overcome their long-standing aversion to aggressive monetary and fiscal stimulus measures.
Yu Yongding (余永定), a researcher at the Chinese Academy of Social Sciences (CASS) and head of the China World Economy Association (中国世界经济学会), points out that Beijing has long been reluctant to pile up debt via the pursuit of reckless stimulus measures.
"For a long time, China's macro-economic policy has stressed the removal of overcapacity, avoiding the adoption of short-term stimulus measures, avoiding deficit expansion, and avoiding excess money supply growth," Yu wrote in a recent online opinion piece.
"Instead, the focus has been on growing effective supply and unleashing domestic demand."
Yu points in particular two main reasons for why China "hasn't immediately adopted expansive fiscal and monetary policy despite deflationary pressure."
The first is Beijing's preoccupation with addressing the long-standing problem of overcapacity in the Chinese economy.
If anything, a splurge in fiscal stimulus could exacerbate the issue and cause further problems down the road for the Chinese economy.
"Overcapacity at the macro-level is equal to insufficient aggregate demand," Yu writes.
"Inadequate macro-demand can co-exist with overcapacity in industry, and there is often a time lag...overcapacity is often the result of excess investment from two or three years previously."
Yu further points out that the government lacks macro-economic policy tools for dealing with industrial overcapacity, and that this is dilemma which is best addressed by means of market adjustments.
A second major reason for China's reluctance to pursue aggressive stimulus measures is what Yu refers to as "excessive concern over China's high levels of leverage" - in particular government and corporate leverage.
"[Policymakers] believe that they do not have room to implement expansive fiscal and monetary policy - in particular expansive fiscal policy."
Yu believes this reluctance to implement stimulus policy could now be on the wane, however, given recent signals from Beijing as well as the country's weakening economic performance.
China's economy could struggle to hit its annual GDP growth target of 5% for 2024, with the latest Q3 data revealing a slew of lacklustre metrics. Fixed investment grew by just 3.4% YoY for the first three quarters of 2024, while retail sales growth came in at 3.3%.
Manufacturing investment may have risen 9.2% for the first three quarters, but real estate development investment dropped 10.1%, indicating that the pillar of the Chinese economy is still in an enervated state.
China's policymakers have responded by unveiling a slew of monetary and fiscal stimulus measures since the end of September, including a cut to the required reserve ratio that is expected to unleash 1 trillion yuan in long-term liquidity, as well as reductions to policy rates and plans to step up government bond issuance.
Yu also points out that recent statements from Beijing have placed greater emphasis on shoring up aggregate demand.
"The December 2022 Central Economic Work Conference and the 2023 Government Work report both made reference to inadequate aggregate demand being the outstanding contradiction currently faced by the economy," Yu writes.
"This signals a major adjustment to China's macro-economic policy settings."
Chinese central bank launches new monetary policy tool to refine short-term liquidity adjustments
On 28 October, the People's Bank of China (PBOC), being the Chinese central bank, announced it would immediately commence the use of outright reverse repo operations as part of its open market operations (OMO), in a bid to maintain "rational liquidity in the banking system."
PBOC has long made use of both 7-day reverse repos and one-year medium-term lending facilities (MLF) as its two primary OMO instruments for making adjustments to levels of liquidity in the Chinese financial system.
An official from PBOC said the introduction of the outright reverse repos will be to diversify the lending maturities offered by the Chinese central bank.
"The central bank's launch of the outright repo on top of its existing tools is expected to cover terms of three months and six months," the official said.
"This will strengthen the ability to make cross-cyclical liquidity adjustments of under a year, and further raise the precision of liquidity management."
The outright reverse repos will reportedly involve interest rate bidding for fixed quantities, with accepted collateral to include Chinese treasuries, local government bonds, financial bonds, and corporate grade bonds.
Over half of China's provinces outpace national GDP growth
China has just seen the release of the latest round of GDP increase figures by the country's provincial authorities, with over half of them outpacing the national growth print
As of 27 October, 26 of China's province level entities had released their Q1 - Q3 GDP data.
According to state-owned media, 16 of these provinces had outpaced the national growth rate of 4.8% for the period.
These included the far western provinces of Tibet, Gansu and Qinghai, which recorded YoY GDP growth of over 6.0%.
Inner Mongolia, Jiangsu, Hubei, Shandong and Fujian also saw GDP growth exceed 5.5%.
While it may not be unusual for a disproportionate number of smaller provinces to post GDP growth in excess of the nationwide figure, official data indicates that China's mainstay economic areas have also trumped national growth.
Zeng Gang (曾刚), a professor from East China Normal University in Shanghai, said to state-owned media that the six major economic provinces of Guangdong, Jiangsu, Shandong, Zhejiang, henan and Sichuan accounted for around 45% of the Chinese economy.
Five of these provinces posted GDP growth ahead of 5%, including Jiangsu (5.7%), Shandong (5.6%), Zhejiang (5.4%), Henan (5.0%) and Sichuan (5.3%).
The southern Chinese manufacturing powerhouse of Guangdong province was the one noteworthy laggard in terms of official GDP growth, posting an increase of just 3.4%.