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Review and Outlook for China's Economy

Jan 10-2025   



How to Get out of Deflation

Xing Ziqiang, Chief Economist of Morgan Stanley China, discussed the impact of the US New Deal on China and the logic of China's policy transition as well as strategies to break deflationary expectations since the end of September 2024.

In the past, the official budget deficit was controlled at around 3%. However, there was a hidden deficit. Now that consideration is being given to controlling hidden debt, an increase in the explicit deficit rate to 4% or higher would be a positive signal to break with conventional thinking. As for the direction of fiscal power, whether to continue to invest in infrastructure or shift to consumption and social benefits is still under debate. The introduction of special treasury bonds to stimulate consumption in 2024 is a new attempt, which again signals a change in thinking.

 

The Formation Mechanism of Inflation

Miao Yanliang, chief strategist and executive head of research at CICC, argues that fiscal policy, monetary policy, and expectations together determine whether inflation will appear. The key for China to get out of its current low-inflation predicament is to coordinate both fiscal and monetary policies.

In understanding inflation and deflation, we have mistakenly thought that the money supply directly affects inflation and deflation. However, that is not the case. If no one is willing to borrow, no amount of financial liquidity can be transformed into market liquidity. An effective increase in market liquidity requires a combination of central bank and fiscal policies. Among them, the fiscal policy plays the role of the ultimate borrower and payer, while the central bank plays the role of the ultimate market regulator and lender.

 

The Development & Challenges of Micro, Small and Medium-sized Enterprises

Zhang Xiaobo, Chair Professor of Economics at Guanghua School of Management and Director of Center for Enterprise Research, presented the development status and challenges of micro, small, and medium-sized enterprises (MSMEs) based on long-term tracking and research data. He pointed out that MSMEs drive the employment of at least 400 million people and affect the families of 800 million people, which has a huge impact on economic development and social stability.

To gain a deeper understanding of these enterprises, Prof. Zhang and his team did researches and found that the phenomenon of indiscriminate business fees triggered by local debt problems has been prominent in recent years. Moreover, the main challenges faced by MSMEs also include revenue difficulties, which need to be solved by stimulating consumption.

 

Financial Relief & Local Debt Resolution

Hu Jiayin, Assistant Professor of Finance at PKU NSD, said that the debt growth of the United States and China is the main driver of global debt growth. Meanwhile, developed countries have lower interest burdens, while developing countries such as those in Asia and Latin America with high interest rates are under debt service pressure. In addition to government debt and other visible debt, current debt also includes liabilities such as those for disaster relief and epidemic prevention, as well as government arrears to suppliers, purchasers, and other delinquent accounts, which is a common problem faced by all countries around the world as they develop. Given the seriousness of the debt problem, the ideal solution is debt exchange to reduce financing costs and long-term structural reforms to balance the financial and fiscal relationship between the central and local governments.

 

New Changes & Reforms in China-US Relations

Lu Feng, Emeritus Professor of Economics at PKU NSD, shared three main aspects: first, analyzing the possible new policy of Trump 2.0. Second, judging the direction of China-US economic and trade relations. Third, how to deal with it. He said that the two major challenges facing China at present are high tariffs and the possibility of the US adjusting China's most-favored nation treatment (PNTR). Besides, the US policy towards China may be tougher after Trump takes office again, which also increases the risk.

In this regard, China should adhere to the great power principle, safeguard its core interests, and consider adopting strategic policies to deal with the situation. It is also in China's interest to maintain a relatively stable economic and trade environment.

Review and Outlook for China's Economy

Jan 10-2025   



How to Get out of Deflation

Xing Ziqiang, Chief Economist of Morgan Stanley China, discussed the impact of the US New Deal on China and the logic of China's policy transition as well as strategies to break deflationary expectations since the end of September 2024.

In the past, the official budget deficit was controlled at around 3%. However, there was a hidden deficit. Now that consideration is being given to controlling hidden debt, an increase in the explicit deficit rate to 4% or higher would be a positive signal to break with conventional thinking. As for the direction of fiscal power, whether to continue to invest in infrastructure or shift to consumption and social benefits is still under debate. The introduction of special treasury bonds to stimulate consumption in 2024 is a new attempt, which again signals a change in thinking.

 

The Formation Mechanism of Inflation

Miao Yanliang, chief strategist and executive head of research at CICC, argues that fiscal policy, monetary policy, and expectations together determine whether inflation will appear. The key for China to get out of its current low-inflation predicament is to coordinate both fiscal and monetary policies.

In understanding inflation and deflation, we have mistakenly thought that the money supply directly affects inflation and deflation. However, that is not the case. If no one is willing to borrow, no amount of financial liquidity can be transformed into market liquidity. An effective increase in market liquidity requires a combination of central bank and fiscal policies. Among them, the fiscal policy plays the role of the ultimate borrower and payer, while the central bank plays the role of the ultimate market regulator and lender.

 

The Development & Challenges of Micro, Small and Medium-sized Enterprises

Zhang Xiaobo, Chair Professor of Economics at Guanghua School of Management and Director of Center for Enterprise Research, presented the development status and challenges of micro, small, and medium-sized enterprises (MSMEs) based on long-term tracking and research data. He pointed out that MSMEs drive the employment of at least 400 million people and affect the families of 800 million people, which has a huge impact on economic development and social stability.

To gain a deeper understanding of these enterprises, Prof. Zhang and his team did researches and found that the phenomenon of indiscriminate business fees triggered by local debt problems has been prominent in recent years. Moreover, the main challenges faced by MSMEs also include revenue difficulties, which need to be solved by stimulating consumption.

 

Financial Relief & Local Debt Resolution

Hu Jiayin, Assistant Professor of Finance at PKU NSD, said that the debt growth of the United States and China is the main driver of global debt growth. Meanwhile, developed countries have lower interest burdens, while developing countries such as those in Asia and Latin America with high interest rates are under debt service pressure. In addition to government debt and other visible debt, current debt also includes liabilities such as those for disaster relief and epidemic prevention, as well as government arrears to suppliers, purchasers, and other delinquent accounts, which is a common problem faced by all countries around the world as they develop. Given the seriousness of the debt problem, the ideal solution is debt exchange to reduce financing costs and long-term structural reforms to balance the financial and fiscal relationship between the central and local governments.

 

New Changes & Reforms in China-US Relations

Lu Feng, Emeritus Professor of Economics at PKU NSD, shared three main aspects: first, analyzing the possible new policy of Trump 2.0. Second, judging the direction of China-US economic and trade relations. Third, how to deal with it. He said that the two major challenges facing China at present are high tariffs and the possibility of the US adjusting China's most-favored nation treatment (PNTR). Besides, the US policy towards China may be tougher after Trump takes office again, which also increases the risk.

In this regard, China should adhere to the great power principle, safeguard its core interests, and consider adopting strategic policies to deal with the situation. It is also in China's interest to maintain a relatively stable economic and trade environment.