Li Xunlei, Chief Economist of Zhongtai International, suggests that as China's economy transitions to a stage dominated by its existing scale, the focus of macroeconomic policy must strategically shift towards revitalizing existing assets. The Chinese economy has entered a new era substantively led by its massive stock base, where the marginal impact of new increments on the overall economic foundation is progressively diminishing. Following decades of rapid expansion, a moderate slowdown in potential growth is an objective economic law for an economy of such size.
The current economic landscape faces intertwined cyclical, structural, and institutional challenges. Cyclically, the ongoing downturn in the real estate sector significantly impacts the broader macroeconomy. Structurally, imbalances exist between investment and consumption, as well as between domestic and external demand. Coordination between fiscal and monetary policies and central-local fiscal relations require optimization, while the core risk of excessively rapid debt expansion looms large. China's macro leverage ratio has surpassed 300% and is rising at an accelerating pace, exceeding the average levels of many developed economies, making the proper resolution of debt risks an urgent priority. Furthermore, overcapacity issues stemming from "strong supply and weak demand" are becoming increasingly pronounced across traditional manufacturing, previously large-scale infrastructure investments, and the commercial housing market. Population aging not only directly weakens demand for real estate and overall consumption but also increasingly burdens government debt and finances.
Addressing these issues necessitates correcting biases in performance evaluation and establishing a clear consensus on the current dilemmas. There is a crucial need to re-examine the logic governing investment and consumption. While it is emphasized that consumption should play a fundamental role and investment a key role in economic development, local governments, driven by the need for "stabilizing growth," often heavily rely on investment. This is because consumption is a "slow variable" influenced by expectations and income, whereas investment can be rapidly boosted through administrative means. This long-standing practice has led to an abnormally high dependence on investment for China's growth. Currently, investment's contribution to GDP exceeds 40%, significantly higher than the global average capital formation share of around 20%. However, blindly pursuing a rebound in investment is risky. The investment structure must be refined: should the rebound be in advanced manufacturing or in traditional sectors and real estate? From an economic logic perspective, investment represents aggregate demand in the short term, transforms into supply in the medium term, and can easily evolve into overcapacity in the long run. Sacrificing long-term efficiency for short-term GDP stabilization runs counter to the original intent of high-quality development. Data indicates that China's incremental capital-output ratio has risen sharply, meaning significantly more investment is now required to generate each additional unit of GDP compared to the past.
To tackle these macroeconomic pain points, substantial potential exists in revitalizing existing assets. Proposals can be advanced across four dimensions: First, issuing central government special bonds to refinance local government high-interest debt. Given the massive scale of local government debt and heavy interest burdens, reducing interest expenses is paramount, especially amid slowing growth and an aging population. Some local governments face overseas borrowing costs as high as 10%. It is recommended to increase efforts where the central government issues low-cost special bonds to refinance local debt, thereby genuinely mitigating local debt risks. Second, revitalizing state-owned assets through market-oriented mechanisms. The price-to-book ratios of many state-owned enterprises and listed companies have fallen below 1. For such assets, it is essential to further liberalize thinking and employ market-based methods for revitalization. This could include considering the transfer of certain state-owned equity stakes to nationally managed social security funds that operate with a higher degree of market orientation. Simultaneously, rigid constraints, such as prohibiting state-owned equity transfers below net asset value, should be appropriately relaxed. Poorly performing SOEs could be allowed to introduce market-based trusteeship mechanisms, appointing professional managers through competitive processes to enhance operational efficiency. Third, broadening investment channels and unleashing high-end consumption potential. A paradox exists between "low consumption growth" and "high household deposits," with household savings deposits reaching 170 trillion yuan. On one hand, there is a need to provide more diversified and high-quality investment channels for substantial household savings. On the other hand, ideological constraints should be broken to actively encourage and develop service-oriented and high-end consumption, thereby meeting the demand from higher-income groups. Fourth, deepening reforms to the fiscal and taxation systems and national income distribution. Efforts should accelerate the establishment of a unified national market and promote the cross-regional market-based flow of production factors. Regarding the fiscal system, the scale of annual central-to-local government transfers, exceeding 10 trillion yuan, is relatively large. Given trends in total population decline and regional population mobility, it is advised to structurally optimize and appropriately reduce these transfers. Funds could be more precisely allocated to fill gaps in the social security system or directly targeted as transfers to specific low-income and impoverished populations, addressing structural pain points at their root.
Comments