Locals holding umbrellas emerge from a subway station in the rain during the morning rush hour on September 20, 2024 in Beijing, China.
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BEIJING – More economists are calling on China to stimulate growth, including those based in the country.
China should issue at least 10 trillion yuan ($1.42 trillion) of long-term government bonds in the next year or two to invest in human capital, said Liu Shijin, former vice president of the Development Research Center of the State Council, China's top executive body.
This is according to a CNBC translation of Liu's Mandarin-language remarks available on financial data platform Wind Information.
The title of his presentation Saturday at the China Macroeconomic Forum at Renmin University was: “A basket of stimulus and reform, an economic recovery plan to significantly expand domestic demand.”
Liu said China should do more to address the challenges faced by urban migrant workers. He stressed that Beijing should not pursue the same kind of stimulus as advanced economies, such as simply cutting interest rates, because China has not yet reached that level of slowdown.
After a disappointing recovery from the Covid-19 pandemic last year, the world’s second-largest economy has been weighed down by a sluggish property market and weak consumer confidence. Official data in the past two months also point to slowing growth in the manufacturing sector. Exports have been a rare bright spot.
Goldman Sachs earlier this month joined other institutions in cutting its annual growth forecast for China, to 4.7% from 4.9% previously estimated. Analysts said in a Sept. 15 note that the cut reflected recent data and a lagging impact of fiscal policy compared with the firm’s previous forecast.
“We believe the risk of China missing its 5% annual GDP growth target is rising, and so the urgency for further demand-side easing is also growing,” Goldman Sachs analysts said.
China's upcoming third leaders' meeting in July largely reaffirmed existing policies, while saying the country would work to meet annual targets it announced in March.
In late July, Beijing announced more targeted plans to boost consumption by offering trade subsidies, including the upgrade of large equipment such as elevators.
But many companies said the moves had yet to have a tangible impact. Retail sales rose 2.1% in August from a year earlier, among the slowest growth rates since the post-pandemic recovery.
Real estate withdrawal
China has also taken several gradual steps over the past two years to support the real estate sector, which once accounted for more than a quarter of the Chinese economy. But the property slump continues, with property-related investment falling by more than 10% in the first eight months of the year.
“The real problem is the property market,” said Xu Gao, chief economist at the Beijing-based Bank of China International, speaking at an event last week organized by the Center for China and Globalization, a Beijing-based think tank.
Xu said that demand from consumers in China is there, but they do not want to buy properties because of the risk that the homes will not be delivered.
In China, apartments are typically sold out before they’re completed. Nomura estimated in late 2023 that about 20 million of those pre-sold units were still unfinished. Homebuyers in one such project told CNBC earlier this year they had been waiting eight years to get their homes.
To restore confidence and stabilize the real estate market, Xu said policymakers must bail out property owners.
“It is clear that the current policy to stabilize the property market is not enough,” he said, noting that the sector likely needs support on the scale of 3 trillion yuan, compared with about 300 billion yuan announced so far.
Different priorities
Top Chinese leaders have placed greater emphasis on boosting the country's manufacturing and advanced technology capabilities, especially in the face of increasing U.S. restrictions on high technology.
“While the Politburo meeting at the end of July signaled an intention to escalate policy stimulus, the degree of escalation has been gradual,” Gabriel Wildau, managing director of US-based consultancy Teneo, said in a note earlier this month.
“Senior leaders seem content to be making slow progress toward this year’s GDP growth target of around 5%, even if that target is achieved with nominal growth of around 4% coupled with a contraction of around 1%,” he said.
In a rare high-level public comment on deflation, former People's Bank of China Governor Yi Gang said in early September that leaders “should focus on combating deflationary pressures” through “proactive fiscal policy and easy monetary policy.”
However, Wildow said, “Yi was never part of the inner circle of Chinese economic policymakers, and his influence has diminished further since his retirement last year.”
Restrictions imposed by local government
China's latest report on retail sales, industrial production and fixed-asset investment showed slower-than-expected growth.
“Despite the increase in government bond financing, infrastructure investment growth has slowed markedly, with local governments struggling with tight fiscal conditions,” Ting Lu, chief China economist at Nomura, said in a note dated Sept. 14.
“We believe that the Chinese economy is facing a second wave of shocks. Under these new shocks, conventional monetary policies are reaching their limits, so fiscal policies and reforms must take center stage,” he said.
The People’s Bank of China on Friday left one of its key interest rates unchanged, despite expectations that a rate cut by the U.S. Federal Reserve earlier this week could support further monetary easing in China. Fiscal policy has been more conservative so far.
“In our view, Beijing needs to provide direct financing to stabilize the property market, as the housing crisis is the root cause of these shocks. Beijing also needs to step up transfers (from the central government) to ease the fiscal burden on local governments before it can find longer-term solutions,” Nomura’s Lu said.
China's economy officially grew 5% in the first half of the year. Exports rose 8.7% in August from a year earlier, beating expectations.
“In the short term, we really need to focus on making sure that we successfully achieve the growth target for this year, 2024, of around 5%,” former vice finance minister Zhu Guangyao said at a Center for China and Globalization event last week. “We still have confidence in achieving this target.”
Asked about China's fiscal reforms, he said they focus on the budget, regional fiscal reform and the relationship between the central and local governments. Zhou noted that some government revenues were lower than expected.
But he stressed that the third meeting of China's ministerial conference focused on long-term goals, which he said could be achieved with GDP growth of 4% to 5% annually over the next decade.
