Easing fiscal policy, stable monetary policy and supply reform to highlight

The annual central economic work conference is coming, and various large institutions announce the expectations on China’s economic growth rate in 2016, which represent part of views in the market. 2016, as a start of the “13th Five-Year Plan” period, sees increasing pressure on economic downtrend. The economic growth rate of next year will be a key point attracting wide attention. Although current expectations are varied, there is a consensus that the economic growth rate in next year will be lower than 2015.

Supply side reform has become a high-frequency word in recent period, but it cannot replace the previous adjustment of total demands, keynote of financial and monetary policies is still the focus. Based on analysis, “easing fiscal policy + stable monetary policy” may become a keynote.

Economic growth rate in 2016 likely to constantly touch bottom

The data released by the National Bureau of Statistics (NBS) on Oct. 20 shows that GDP growth rate of the third quarter was 6.9 percent; it is worthy to notice that this is the first time for macro economy to decline below 7 percent since the second quarter of 2009. Due to this, the market pays more attention to the future trends of macro economy and related policies.

In terms of economic growth rate of the whole year, a research report on people’s livelihood and macro economy points out that it is almost impossible to guarantee a growth rate of 7 percent for each month of 2015. The expectations released by various institutions are also below 7 percent, such as 6.9 percent issued by Renmin University of China and 6.8 percent released by Moody.

The said research report also states that, based on previous targets lowered for four times, the growth targets will certainly be cut, if the targets are not fulfilled in that year, like the situations in 1998 and 2014. It is very likely to cut the economic growth rate target of 2016 according to historic experience.

It is worthy to notice that 2016 is a start of the “13th Five-Year Plan” period. Based on the goals determined by the Fifth Plenary Session of the 18th Communist Party of China Central Committee meeting, the GDP will double up to 2020 when compared with 2010, which means that annual economic growth rate from 2016 to 2020 should be 6.5 percent at the least.

Xu Lin, director of the Planning Department under the National Development and Reform Commission (NDRC), further expects that annual economic growth rate of the future five years must reach 6.543 percent to make the GDP double in 2020, if the growth rate of this year is 6.9 percent; and the annual growth rate will be 6.523 percent, if 7 percent can be realized this year.

Actually, the environment for growth in 2016 is not optimistic. The three main forces driving the economic growth, including export & import trade and investment, are especially weak: import & export growth in October of this year was -8.1 percent, with 14 percentage points lower than the target; that of fixed-asset investment was 10.2 percent, down by 5.7 percentage points compared with the same period of last year, which has been the lowest since 2001. And two of the driving forces are not possibly to rebound in a short term.

Li Daokui, director of the Center for China in the World Economy under Tsinghua University, indicated in the Wealth Management Summit hosted and reported by the 21st Century Business Herald on Nov. 30 that the real economy still needs to adjust in the period of “13th Five-year Plan”, especially in the beginning years, but it will present an uptrend after a downtrend on the whole. He also mentioned that situation may be tough in 2016 and 2017, which are the first two years of “13th Five-year Plan” period, as there are deep issues to be solved.

In terms of economic data, Renmin University of China predicted that the actual GDP growth rate in 2016 will be 6.6 percent, down 0.3 percentage points from its estimation for 2015; while China International Capital Corporation Limited anticipated a 6.8 percent growth rate for 2016, down 0.1 percentage points for its estimation for 2015. And Moody expected the growth rate will dropped to 6.3 percent in 2016.

Policy orientation: easing fiscal policy plus stable monetary policy

“China still faces pressure on stabilizing economic growth for 2016, and it will continue the previous monetary and fiscal policy direction,” Xie Yaxuan, head of macroeconomic research at China Merchants Securities, told the reporter from 21st Century Business Herald. Over the past three years, the Central Economic Work Conference determined stable monetary policy and positive fiscal policy as the keynote for macro economy due to economic slowdown. In 2016, the policy package will still include easing fiscal policy and stable monetary policy.

In respect of stable monetary policy, the frequency of interest rate cut will decrease significantly, as market oriented reform for deposit interest rate is completed and CPI and PPI stay at a low level though risk-free interest rate declined. It is expected that there will be one or two interest rate cuts in 2016.

However, there is much room for reserve requirement ratio (RRR) cut. Currently RRR for large financial institutions remains at the high level of 17.5 percent, and pressure on RMB depreciation still exist in 2016, thus PBOC must fully cut RRR to hedge drop in funds outstanding for foreign exchange.

A research report derived from macro economy research institute of Minsheng Securities shows that monetary policy has played the leading role in 2015. However, as financing cost will be reduced and at the same time inflation will restrict the implementation of loose monetary policy, the adjustment effect of monetary policy will decline in 2016 and the policy focus will transfer to fiscal policy. “Stable monetary policy to a large extent is a complement to positive fiscal policy,” Xie Yaxuan told reporter from 21st Century Business Herald.

As growth rate of fiscal income declined and even record negative growth, the gap between fiscal revenue and expenditure widened. Therefore fiscal deficit will be increased to deal with pressure from revenue and expenditure and stabling growth. According to Report on the Work of the Government 2014, fiscal deficit for 2015 is 2.3 percent, just 0.7 percent from the 3 percent redline of deficit.

Vice-Finance Minister Zhu Guangyao indicated at the beginning of November that “3 percent deficit redline is not absolutely scientific and need to be discussed”. And it was perceived as fiscal deficit will exceed 3 percent in the future.

“It is urgent for us to increase deficit to at least 2.5 percent, and radical fiscal policy would even lift it to 2.7 percent,” Zhu Zhenxing told reporter form 21st Century Business Herald “Meanwhile, the amount of policy financial bond and replacement bond should be expanded”.

As for bond swap, the Ministry of Finance has offered 3.2 trillion yuan bond swap this year; while 1.86 trillion yuan (audit data in 2013) government bonds will come due this year. Based on the audit data in 2013, government bonds due in 2016 will total 1.26 trillion yuan. Yet the amount will significantly increase after considering new debts in 2013 and the adjusted data when screening debts. Therefore the market expects that bond swap will reach at least above 3.2 trillion yuan.

Supply-side reform likely to be a key task

“In fact, to stimulate the economy from a traditional way, or the demand side, did not show satisfactory effects. So China should focus more on the supply side during the ‘13th Five-Year Plan’ period,” Xie told the reporter.

Traditional demand management, a basic framework for China’s macro-economic policy, aims to shore up the economy by stimulating consumption, exports and investment; while supply management tends to increase effective supply and boost economy by removing restrictions on population, mechanism, land and capital.

The 21st Century Business Herald previously reported that Xu Lin, director-general of the Development and Construction Office, the National Development and Reform Commission, Jia Kang, researcher at the Research Institute of Fiscal Science, Ministry of Finance and others established the new supply-side economics school, committed to promoting sustainable development with supply-side economics theories.

Liu Shijin, former deputy director of Development Research Center of the State Council, recently points out in an article that stimulus from the demand side aree mainly designed to prevent economic growth from plunging in a short period, but not to create more productivity.

“If focusing on stimulus from the demand side, China might miss opportunities to reduce production capacity and achieve balance after transformation,” Liu writes, “Under such circumstances, there is apparently an urgent need for the reform of the supply side.”

At the meeting of the central finance and economy leading group on Nov 10, Chinese President Xi Jinping stressed that China should strengthen structural reform of the supply side while expanding overall demands. Later top government officials have reiterated strengthening supply-side reform at several meetings. All these, as the market believes, are signals that the supply-side reform is very likely to be discussed in this year’s Central Economic Work Conference.

Gao Shanwen, chief economist at Essences Securities, believes that the essence of supply-side reform is to increase the input of production factors (labor, capital and technology) or improve the efficiency of production factors.

Liu says in his article that supply-side reform can be viewed from both the macro and micro-economic perspectives. The macro-economic policy for supply-side reform includes reducing taxes. Yet Liu believes that the focus should be given on the micro-economic aspect; that is to open up channels for factor flow and fully improve factor productivity through substantial reform.

Liu also provides some specific measures in the article, such as taking practical methods to reduce excessive productivity to make substantial progress in a given time, further widening investment access and accelerating the reform of the administrative monopoly sector.