There is no doubt that “Innovative Macro Regulation” is the highlight of the new Chinese government work report. At present, with the increasing downward pressure of China’s economic growth, a big challenge for China is how to strike a balance between “short-term economic growth and long-term restructuring” and between “transformational upgrading and rational growth rate”. It becomes hard to use traditional macro regulation method to effectively resolve new economic issues and contradictions. It is imperative to break the old rules, change mind and create new policies.
China has entered into a platform transition phase and a deep-water area in reform, still staying under the big downward economic pressure. In this special period, the basic tone of macro policy is to hold the bottom line and keep stable, so as to avoid a fast economic slowdown driven by various kinds of overlapped risks.
The domestic and foreign situation that China is now facing remains complicated and goes beyond imagination. At meantime, several big risks like debt paying gap of the local financing platform, the overcapacity, real estate bubble, shadow banks, etc. are interrelated and act on each other; if any of the risks shows a “sign of disturbance or trouble”, it could trigger a systematic risk, and even could bring forth the pressure of “economic issues being politicalized”.
Reform is a key strategy vitally important to China’s future and destiny, so neither delay nor impatience should be allowed, and there is a fundamental need of dealing well with the relationship between “Be bold and courageous” and “Take steady steps”. Taking restructuring as a long way to go, China should both persist in its reform and take precautions through macro-prudential measures; China should positively learn the experiences and lessons that the developed countries have acquired in dealing with their crisis, however it is more important for China to creatively find out a macro regulation model in conformity with China’s economic reality, closely following the objective law of economic progress and development.
In terms of “stabilizing expectation, minimizing risks and carrying out restructuring”, it is more difficult to find an optimal synchronizing balance in macro-economic policy. On one hand it is necessary to strengthen the elasticity of macro regulation policy and enhance the accuracy, effectiveness, and coordination of regulation policy according to the new changes of international and domestic economic and financial situation; on the other hand transparency of macro-policy should be promoted. To a certain extent, a vague macro-policy expectation also fosters an opinion atmosphere of “bad-mouthing of China”, causing a great policy pressure against China. In the future, for the purpose of avoiding different interpretations or even misinterpretation of macro policy by the market, the important aspect of creative macro regulation should be on comprehensively enhancing macro policy transparency, on taking initiative to strengthen policy communication and providing guidance in stabilizing market expectation.
Judging from the policy signals revealed by the new government report, China’s future macro policy will be likely more flexible. In the aspect of controlling financial risk of debts, the new Chinese government headed by Xi Jinping and Li Keqiang faces a greater challenge in the ability and policy wisdom needed in governing the nation. For a China with a higher leverage rate it is important to manage “leveraging” well, but it is even more important to manage “de-leveraging” well. It has been proven that “de-leveraging” is a painful process, thus few countries are able to perfectly realize “de-leveraging”.
China might not take “simple and hard” measures against local debts and shadow banks. Instead, China might classify the issues before solving them and implement differential regulations in order to prevent “a rigidly common” policy, making a balanced policy in squeezing the bubble, de-leveraging and maintaining financial stability. For example, on the issue of city investment bond risk mostly concerned by the market, decision makers are searching for a new debt-solving mechanism. A possible way is to figure out the local governments’ financing platform at first, and afterwards “perform a unified special management, make classified solutions, distinguish between old and new issues, make experiments in some areas, provide guidance in financial increment and converse the exiting stock”, thus solving the problem of the mismatch between return and investment in infrastructure investment projects caused by city investment bonds.
As to the issue of resolving restructuring, the new Chinese government’s focus is on balance, a policy to “carry forward the advantages and overcome the disadvantages” while implementing restructuring at the same time. For instance, in investment, China pays more attention to “soft investment” which is more important than the “hard investment” of infrastructure. The new government work report clearly points out that the central government’s investment budget in 2014 will increase to RMBY457.6 billion, with major investments on such projects as government subsidized housing, agriculture, major water conservancy, railways, energy savings, environmental protection, social undertakings, etc. The purpose of the investment policy is to make up for the deficiency in social construction, which, to some extent, not only helps ease the difficult problems of over investment and over capacity, but also brings real benefits to the people.
It is even more noteworthy that China is possibly turning from “being passive” to “taking initiative” in its macro policy development, gaining the initiative in economic development and restructuring. Financial policy will, by means of innovation tools, give priority to major areas such as strategic emerging industries, advanced manufacturing, producer services, small and micro businesses, and will meet the real economy’s demand for fund-raising.
It is evident that the new government will be continuously confronted with new risks and difficulties at present and for a period in the future. It can be predicted, however, that the governing concept and methods of Xi-Li leadership are becoming increasingly mature, and China’s economy is enhancing its ability to gain growth momentum through reform.
Zhang Monan is a researcher at the Strategic Studies Department of the China International Economic Exchange Center.