Sheng Songcheng on Boosting Chinese Consumption
Sheng Songcheng on Boosting Chinese Consumption
Ex-Director of PBOC's Survey Department Proposes Fiscal and Monetary Measures to Stimulate Domestic Consumption
The unexpected Politburo meeting has boosted the market mood in the short term. Using a popular word to describe, the stock market has been saved from ICU and directly sent to a Karaoke. This upbeat sentiment was also reflected in the Tsinghua PBCSF Chinef Economists Forum meeting over the weekend.
For more information on this forum, I picked up a speech by Professor Sheng Songcheng, who is an adjunct professor of economics and finance at China Europe International Business School (CEIBS). Before that, he was Director General of the Financial Survey and Statistics Department at the People’s Bank of China (PBoC).
Professor Sheng Songcheng
In short, The Chinese economy is currently grappling with weak consumer demand, as evidenced by sluggish retail sales growth, a declining service industry production index, and low capacity utilization rates.
To address these challenges, Professor Sheng advocates a cocktail of fiscal and monetary policies. He notes the slow pace of local government bond issuance and suggests ramping up special treasury bond issuance to bolster consumption. The recent 0.5 percentage point cut in the reserve requirement ratio (RRR) is a step in the right direction, with room for further reductions.
In terms of coordinated fiscal and monetary policies to stimulate consumption. He proposes increasing treasury bond supply to shift monetary policy towards price-based regulation and implementing policies that directly benefit citizens. These include raising the individual income tax threshold and reducing tax rates for lower-income groups.
Additionally, Sheng recommends establishing a national fund to convert existing housing stock into affordable units and utilizing structural monetary policy tools, such as lowering interest rates on loans for affordable housing projects. These coordinated efforts, Sheng argues, could provide the necessary boost to revitalize consumption and support overall economic growth.
Below is the transcript of his speech:
PS:(Professor Yu in the transcript refers to Yu Yongding, an influential Chinese Economist, Known for being influential in Chinese and international monetary, fiscal, and macroeconomic policy debates.)
I've gained a lot from listening to the previous experts' speeches. The topic I'd like to share with everyone is “Boosting Consumption Requires Coordination of Fiscal and Monetary Policies”. I'll discuss three main aspects. First, the current main economic contradiction is weak consumer demand. Second, fiscal policy should be more proactive and supported by monetary policy. Third, some thoughts on how fiscal and monetary policies can work together to support consumption.
Regarding the current weak consumer demand, many are concerned about the total retail sales of consumer goods. In August, it only grew by 2.1% year-on-year, with the growth rate falling by 0.1 percentage points compared to January-July. Another important indicator, perhaps even more crucial, is the service industry production index. This is because service consumption now accounts for 52% of resident consumption in China, compared to 65% in the US, where consumption is mainly driven by the service sector. From January to August, the service industry production index grew by 4.9% year-on-year, but in August alone, it only grew by 4.6%, compared to 8.1% in the same period last year. This means that over the past year or so, the service industry production index has shown an overall downward trend, despite some monthly increases. I think this is an indicator worth sharing with everyone.
The second indicator is insufficient capacity utilization. We often talk about capacity utilization rates, but why are they insufficient? Ultimately, it's due to insufficient consumption. Because of low consumption, enterprises can't produce on a large scale, and consequently, their capacity utilization declines. In the second quarter of this year, our country's capacity utilization rate was only 74.9%, less than 75%, which is below the normal level. I've calculated the normal level: in the decade or so before the pandemic, from 2000 to 2019, our average capacity utilization rate was around 77%. Now it's more than two percentage points lower. Insufficient capacity utilization also affects enterprise investment, leading to suppressed investment.
A couple of days ago, Governor Pan Gongsheng announced at a State Council Information Office press conference that commercial banks would be guided to lower existing mortgage rates to near new mortgage rates, with an average reduction of about 50 basis points. Our current incremental mortgage rates, or new mortgage rates, are around 3.5% to 3.6%, while existing mortgage rates are about 4.1% to 4.2%. If we can achieve this, we'll be able to reduce rates by 50 basis points. This is concrete good news that will benefit 50 million households, or 150 million people, which I'm sure everyone here is very concerned about. It will reduce household expenditure by about 150 billion yuan annually, which can alleviate the pressure of early loan repayments to a considerable extent, if not completely.
The central bank has a calculation: last year, when they lowered the interest rates on existing mortgages, early repayments decreased by about 10% in 2023. This has a tangible promoting effect on our consumption because it's a real increase in income. Everyone is discussing how to increase income. How can fiscal policy be more proactive and supportive of monetary policy? Professor Yu mentioned fiscal policy, and I agree. Fiscal policy needs to be more proactive. Currently, the progress of local bond issuance is slow. As of August this year, national local bond issuance accounted for 65.8% of the annual quota, compared to 77% in the same period last year. We should analyze why this year's growth rate and bond issuance speed are slower than last year. This might involve project issues and a series of other problems. Professor Yu also mentioned these issues, and I think they need to be discussed in depth. (Project issues refer to this year’s low government investment in infrastructure projects)
Another point is that from January to August this year, about 40% of local bonds were used to repay old debts, borrowing new to repay old, with limited actual funds in place. I suggest increasing the issuance of special treasury bonds, especially to support the consumption sector, while monetary policy should actively cooperate. Let's look at some data: currently, about 70% of our country's treasury bonds are held by commercial banks, and about 88% of local bonds are held by commercial banks. On September 27, the required reserve ratio was lowered by 0.5 percentage points, effectively providing 1 trillion yuan of long-term liquidity to the financial market. According to the central bank, depending on market liquidity conditions this year, it's likely to be lowered by another 0.2 to 0.5 points, further releasing liquidity and helping commercial banks purchase more government bonds. Our current required reserve ratio for large commercial banks is 8.5%, which became 8% after this reduction. For medium-sized commercial banks, it was 6.5% before the reduction and became 6% after. Rural commercial banks and rural financial institutions, because they originally only had 5%, didn't see a reduction this time. Before the reduction, the average required reserve ratio was 7%, and after the reduction, it became 6.6%. We still have great potential in this area. Why do I say this? We have a 6.6% required reserve ratio. If we lower it by another percentage point or even two percentage points, it shouldn't be a big problem, of course, depending on market liquidity conditions.
Let's look at the situation in the United States. The U.S. legal reserve requirement is now 0; not a penny needs to be paid. Before the pandemic, it was set based on demand deposits and time deposits. Demand deposits required a 3% legal reserve ratio, but after March 2020, it was reduced to zero, and there's no issue of whether to reduce the reserve requirement or not. In our country, this is a very useful monetary policy tool.
I think increasing the supply of treasury bonds, as Professor Yu especially mentioned, will help make treasury bond trading a common tool of monetary policy, accelerating the transition of our country's monetary policy from quantity-based regulation to price-based regulation. Let's look at the People's Bank of China's balance sheet. I specifically pulled out the latest balance sheet of the central bank for today's discussion. In our total assets, both positive and negative claims in our country are claims of the central government. The central bank still doesn't purchase local government claims. For more than a decade, from June 2014 to July 2024, there hasn't been much change, just around 1.5 trillion. But in August, we suddenly purchased over 500 billion in treasury bonds. The proportion in July this year was about 3.5% of the entire central bank's balance sheet, and now it's about 4.6%. This progress can continue.
Let me give you some data about the Federal Reserve. The Fed mainly uses treasury bond trading as a means of monetary policy operation. Treasury bonds basically account for 60% to 70% of its balance sheet. We currently only account for 4.6%, so there's great potential in this area. This is what I want to say today: while promoting consumption, we need to coordinate fiscal and monetary policies, and this is one method of coordination.
The last page. Growth stabilization policies should lean more towards people's livelihoods. The Politburo meeting on September 26 proposed combining consumption promotion with benefiting people's livelihoods, promoting income increases for low and middle-income groups. To upgrade the consumption structure, we need to cultivate new types of consumption patterns, support and regulate social forces in developing elderly care and childcare industries, and urgently improve the remaining support systems. Childcare refers to industries like nurseries and kindergartens that everyone knows. I have two suggestions: how should fiscal policy exert force? How to make everyone have income growth? There's a lot of controversy now. Some say give money directly, some say issue consumption vouchers, of course, there's a lot of debate. I offer two suggestions that I think are relatively feasible.
One is to raise the individual income tax threshold. Currently, our individual income tax starts at 5,000 yuan per month, with no tax below 5,000 yuan. But if we raise the threshold to 8,000 yuan, with no tax below 8,000 yuan and tax only above 8,000 yuan, the annual tax reduction would be about 30 billion yuan, only 0.17% of last year's total tax revenue. This wouldn't have much impact on fiscal revenue, but this money would be real income for low-income groups, which would be particularly beneficial in promoting their consumption.
Second, I think we can reduce the tax rates for low and middle-income groups by 5 percentage points each for incomes from 100,000 to 300,000 yuan. We're not talking about high incomes here. Our tax system is progressive. Currently, income from 100,000 to 200,000 is taxed at 10%, and 200,000 to 350,000 at 20%. If we reduce each by 5 percentage points, it would mean 5% tax for 100,000 to 200,000 and 15% for 200,000 to 350,000. By my calculations, this would reduce annual tax revenue by less than 100 billion yuan. We issue 1 trillion yuan in special treasury bonds at a time, and this 100 billion yuan would genuinely benefit people's livelihoods and increase the income of low-income groups, who are the main force of consumption. At the same time, it's very important to increase support for the development of the service industry, especially in areas like elderly care, healthcare, and childcare.
Lastly, one more suggestion: establish a national fund for purchasing existing housing stock. The real estate industry is indeed the biggest problem we're facing now, and it's dragging down our entire economy. If such a fund is established, it could eliminate already-built commercial housing and convert it into affordable housing. How can monetary policy cooperate? We can coordinate structural monetary policy with fiscal policy. Our structural monetary policy tools are the most widely used in the world, with about 7 trillion yuan, accounting for about 16% of the central bank's balance sheet. These include support for technological innovation, small and medium-sized enterprises, and weak links in the economy, including ensuring housing delivery, rental housing, and so on. All of these need to operate through market mechanisms. For example, we now have 300 billion yuan in re-loans for affordable housing, but only 121 billion has been used. This is based on the first half-year data from June, published by the central bank. The new third-quarter data hasn't been released yet. The current rate is 1.75%, and I suggest it could be lowered to 1%. This would increase commercial banks' enthusiasm for using re-loans, which is also a means of coordinating fiscal and monetary policies.
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