Opinion leaders - China finance 40 Forum

Author: Zhu He

On March 5, the fifth session of the 13th National People’s Congress was held in Beijing. Premier Li Keqiang delivered a government work report. The report puts forward the main expected targets for development this year, of which the growth target of gross domestic product (GDP) is about 5.5%, and the deficit ratio is planned to be about 2.8%.

Zhu He, deputy director of the research department of China Financial forty Forum (CF40) and young researcher of China Financial forty Research Institute, believes that the GDP growth target of 5.5% is the anchor of macro policies this year. In order to achieve this growth target, macro policies must make significant efforts.

The report points out that fiscal expenditure will increase by 2 trillion, or 26.6 trillion, in 2022. The fiscal revenue in 2021 is 20.2 trillion. How can we make up for the 6.4 trillion gap? Zhu he proposed that there are three main channels: first, the deficit ratio should be arranged at 2.8% in 2022. Combined with the actual growth target of 5.5% and the GDP reduction index of 2%, the deficit financing scale should be 3.4-3.5 trillion; Second, the increment of fiscal revenue is about 1 trillion; Third, the transfer in of the budget stabilization fund and the turning over of the profits of state-owned enterprises.

He believes that the expenditure intensity of the general public budget this year is guaranteed, but there is still uncertainty whether the broad fiscal expenditure included in the government fund budget can achieve a relatively high year-on-year growth rate. This requires the central level to further strengthen overall planning and coordination, pay attention to the intensity of fiscal expenditure in a broad sense, and implement the fiscal force.

In terms of monetary policy, Zhu he proposed that according to the requirements of the report, monetary policy should not only increase the volume but also reduce the price. However, considering that the task of risk prevention is still important, it is necessary to leave sufficient cushion for the banking sector. The monetary authorities should reduce the real loan interest rate by reducing the short-term interest rate and driving the overall downward trend of the interest rate curve.

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The GDP growth target of 5.5% is the anchor of this year’s macro policy. In order to achieve this growth target, macro policies must make significant efforts.

The government work report points out that fiscal expenditure will increase by 2 trillion in 2022. The fiscal expenditure in 2021 is 24.6 trillion yuan, plus 2 trillion yuan, which will be 26.6 trillion yuan this year, with a corresponding expenditure growth rate of more than 8%. Objectively speaking, the fiscal expenditure growth rate of 8% is at least close to or even higher than the nominal GDP growth rate this year, which can better realize the role of stabilizing the economy.

The next question is how the fiscal revenue in 2022 should match the fiscal expenditure of 26.6 trillion. Specifically, the fiscal revenue in 2021 is 20.2 trillion, and how to fill the revenue and expenditure gap of 6.4 trillion.

From the perspective of existing policy ideas, there are three main channels:

First, fiscal deficit financing. The budget deficit ratio in 2022 is 2.8%. Combined with the actual growth target of 5.5% and the GDP reduction index of 2%, it can be calculated that the nominal GDP in 2022 is about 122 trillion, and the corresponding deficit scale should be 3.4-3.5 trillion.

Second, fiscal revenue increment. The fiscal revenue in 2021 is 20.2 trillion. If the growth rate of fiscal revenue in 2022 is 5%, the corresponding incremental part will be 1 trillion.

But there is a problem here: fiscal revenue is highly related to the degree of economic prosperity, especially the prosperity of upstream industries. Not to mention whether the tax reduction will increase this year, if we want to achieve a 5% growth rate of fiscal revenue, the corresponding scenario is that the year-on-year growth rate of PPI this year remains high.

Third, the transfer in of the budget stabilization fund and the turning over of the profits of state-owned enterprises. Even though the “report of the state-owned financial institutions” has not mentioned the important way of turning over the profits of the state-owned financial institutions in accordance with the law in recent years. For a long time in the past, the profits of state-owned enterprises were not paid in full as required. In 2021, the total after tax net profit of state-owned enterprises in China was 2.47 trillion, including 1.57 trillion for central enterprises. It should be said that the current profit situation of state-owned enterprises has the potential to support large-scale fiscal expenditure.

In addition to the general public budget expenditure, the budget expenditure of government funds is also an important aspect of fiscal power. From the experience of previous years, a considerable part of the budget expenditure of government funds is transferred into the general public budget, which is not directly reflected in the expenditure of government funds.

The expenditure intensity of government fund budget mainly depends on the income. The main revenue source of government fund budget is land transfer fee, which comes from the land purchase expenditure of real estate enterprises.

In other words, the key to determining whether the government fund budget can work is whether the real estate enterprises can maintain the same enthusiasm for land purchase as in the past five years.

Recently, relevant departments and some local governments have begun to adjust real estate policies, and market expectations are improving. However, there is still a lack of consensus on the extent and speed of the recovery of real estate sales, investment and new construction data.

From the policy implementation, to the demand recovery, to the cash flow repair of real estate enterprises, and then to the balance sheet repair of real estate enterprises, this is not a one-step process, which needs to be conducted step by step. Given the current debt scale of the real estate industry, this process may take longer than expected.

Before the balance sheet of real estate enterprises is substantially repaired, the probability of land purchase decision-making of enterprises will remain cautious. This will directly affect the revenue and expenditure growth of the government fund budget.

To sum up, the expenditure intensity of the general public budget this year is guaranteed, but there is still uncertainty whether the broad fiscal expenditure included in the government fund budget can achieve a relatively high year-on-year growth rate. This requires the central level to further strengthen overall planning and coordination, pay attention to the intensity of fiscal expenditure in a broad sense, and implement the fiscal force.

Compared with fiscal policy, although the length of the report on monetary policy is less than last year, the macro policy characteristics of monetary policy are more prominent.

According to the requirements of the report, monetary policy should not only increase the amount (“keep the growth rate of money supply and social financing scale basically match the nominal economic growth”), but also reduce the price (“promote financial institutions to reduce the actual loan interest rate” and “comprehensive financing rate”)