Trends in China’s Macroeconomic Policy

As can be seen from the table below, the Chinese economy was relatively stable in the January-February period, but it regressed from March due to price increases in energy and food caused by the prolonged Russian invasion of Ukraine and lockdowns in Shanghai and other cities with the rebound of Covid-19 infections.

The State Council responded to this downward trend of the economy. Since late March, Premier Li Keqiang has announced policies to expand investment, strengthen consumption, and stabilize commodity prices, employment, trade, and foreign investment at the State Council Executive Meetings and other occasions. In May, he announced comprehensive policies to stabilize the “economic fundamentals,” and in August, additional policies (which the State Council calls “follow-up policies”) were announced, followed by economic measures for the October-December quarter released in September. While the economy has been recovering since June, progress has been slow. This article discusses the main points of the various important meetings to explain changes in the macroeconomic policy.

The National People’s Congress opened on March 5 and Premier Li delivered a Report on the Work of the Government.

This report gave a harsh assessment of the triple pressures debilitating the Chinese economy: (i) shrinking demand; (ii) disrupted supply; and (iii) weakening expectations (future market forecast).

Amid this harsh environment, while many economists had predicted that the target GDP growth rate for 2022 would be set around 5%, the report set a target of around 5.5%, stating: “It represents a medium-high rate of growth, given our large economic aggregate, and demonstrates our ability to move proactively. But achieving this goal will require arduous efforts.”

“The proactive fiscal policy should be more effectual, more targeted, and more sustainable.” Thus, fiscal policy is now moving toward prioritizing sustainability. For this reason, the target ratio of fiscal deficits in GDP was lowered from the 2021 target of around 3.2% to around 2.8% in 2022. The Ministry of Finance, in reference to the EU fiscal rules, has set the target of keeping the deficit-to-GDP ratio below 3% as benchmark for fiscal health. The 2.8% figure is probably also aimed at leaving more elbow room for additional government spending. On the other hand, the scale of fiscal spending is being increased by 2 trillion yuan over FY2021 by tapping the People’s Bank of China’s payments, the Central Budget Stabilization Fund, and such other sources.

In terms of public investment, allocations in the central government’s budget have increased by 30 billion yuan from 2021 to 640 billion yuan. The special-purpose bonds for local governments to fund their infrastructure investment will total 3.65 trillion yuan, same as the previous year.

The centerpiece of tax cuts and cost cutting policies for 2022 is some 1.5 trillion yuan in input VAT credit refunds. This is because VAT refunds arise if VAT for procurements exceeds VAT on sales, and advancing the payment of VAT refunds withheld will help secure companies’ cashflow. Adding to this tax cuts for manufacturers, small and micro enterprises, and self-employed individuals, the tax refund and tax cut package comes to around 2.5 trillion yuan.

Furthermore, “deployment of policies will be advanced as appropriate.” This means that local government special-purpose bonds will be issued and used; investments included in the central government budget will be frontloaded to secure the needed volume of infrastructure investment; and refunds for excess input VAT credits will be made ahead of schedule to secure companies’ cashflow. In addition, this will also mean early central government transfer of payments to local governments to ensure basic livelihood and wages at the lowest administrative units and guarantee their operations.

“The prudent monetary policy should be both flexible and appropriate, with reasonably ample liquidity being maintained.”

In concrete terms, increase in money supply and aggregate social financing will be kept generally in step with nominal economic growth, and the macro leverage ratio (ratio of total government, corporate, and household debts in GDP) will be kept generally stable in order to control money supply and debt levels and reduce financial risks. In addition, through inclusive financing for micro and small businesses, collateral-free loans, and the promotion of first-time loans to micro, small, and medium enterprises (MSMEs), financial assistance will be provided to business sectors and companies severely affected by Covid-19.

“We must step up efforts to improve quality,” indicating employment policy is moving toward emphasizing quality.

The temporary reduction of premiums for unemployment insurance and workers’ compensation will be extended to maintain the stability of businesses. Refund of unemployment insurance premiums to enterprises that do not lay off personnel or make only minimal cuts will continue, with a marked increase in the proportion of refunds going to MSMEs.

Since the number of college graduates will exceed 10 million in 2022, uninterrupted services to provide guidance and policy support for their employment and entrepreneurship must be strengthened.

A bleak appraisal was made on the current situation at this meeting: “At present, there is increasing downward pressure on the economy, and many market entities are facing serious difficulties.”

In response to the economic downturn, a decision was made to implement 33 measures in six aspects (later announced on May 31) in order to coordinate Covid response with the development of the economic society with high efficiency, implement the policies set out at the Central Economic Work Conference and in the “Government Work Report” faster and more forcefully, and take a host of targeted, strong, and effective measures for range-based regulation to keep the economic fundamentals stable.

In terms of fiscal policies, VAT credit refunds will be increased by over 140 billion yuan, bringing the total amount of refunds and tax relief this year to 2.64 trillion yuan. In addition, local government special bonds for 2022 will be basically used up by the end of August, with their scope of support extended to new infrastructure, such as 5G and AI, and other projects.

Monetary policies include deferring principal and interest repayments on loans made to MSMEs and self-employed households, truck driver loans, and home loans and consumer loans borne by individuals affected by Covid-19. The scale of the support facility for inclusive loans to micro and small businesses and its share of the increase in the loan balance will both be doubled this year.

Full details of the 33 measures in six aspects and the key policies set at the Executive Meeting will be listed as reference at the end of this article.

This was convened by the State Council alone, with Vice Premier Han Zheng presiding over this meeting of 100,000 participants. Vice Premiers Sun Chunlan, Hu Chunhua, and Liu He and State Councilors Wei Fenghe, Wang Yong, Xiao Jie, and Zhao Kezhi also attended. Leading officials of the National Development and Reform Commission, the Ministry of Finance, and People’s Bank of China spoke at the meeting.

In his important speech to the meeting, Premier Li indicated that, “The difficulties in March, and since April in particular, are in some respects and to a certain extent greater than those experienced in 2020 when the Covid-19 epidemic hit the country, marked by downward indicators for employment, industrial production, power consumption, and cargo transportation, among others.”

He also said: “Development is the key to solving all problems in China. Epidemic prevention and control require financial and material resources, and ensuring employment, people’s livelihood, and risk prevention all require development support. We are currently at a critical juncture in determining the economic trend of the whole year. We must seize the time window and strive to bring the economy back to the normal track,” thus indicating the emphasis on economic development. He added: “We must ensure that the economy achieves reasonable growth in the April-June quarter and the unemployment rate drops as soon as possible and keep the economy operating within a reasonable range.”

Thanks to the economic stimulation measures, the GDP growth rate in the April-June period was 0.4%, barely avoiding negative growth, and growth rate for January to June was only 2.5%. It is now difficult to achieve the target annual growth rate of around 5.5%. Since July, Li has been holding various meetings vigorously. Here, we will discuss the main points of the key meetings leading to adopting additional economic measures.

Nearly 400 business leaders from over 50 countries participated. At this meeting, Premier Li described China’s present economic situation as follows: “In May, the decline in major economic indicators slowed. In June, the economy stabilized and rebounded. Major indicators picked up fairly fast and returned to the positive territory. The surveyed urban unemployment rate fell notably. As a result, the economy registered a positive growth in the second quarter.” However, he added: “That said, we are keenly aware that recovery of the economy is not yet firmly established, and painstaking efforts are required to keep overall economic performance stable."

Li claimed that the current macroeconomic policies were “both targeted and forceful, and well-calibrated as appropriate” and vowed that “We will not introduce supersize stimulus measures, issue excessive money supply, or sacrifice future interests to go after an excessively high growth speed.” He made it clear that even if the growth rate slows down, China will not deploy large scale economic measures similar to those implemented in 2008 after the Lehman Shock. Furthermore, he stated: “We will do the best within our means to strive for fairly good results in economic development for the whole year,” hinting that the target 5.5% growth rate would be virtually abandoned.

The meeting discussed the key elements of the policies to expand effective demand in the second half of the year. It noted that “China’s economy is at a crucial stage of stabilization and recovery, and the third quarter (July to September) is of vital importance.” In macroeconomic policy, “priority should be given to job security and price stability,” indicating that there will not be too much emphasis on the target growth rate. The following measures were adopted to expand investment and consumption.

(i) Expansion of effective investment
Selected projects should deliver both immediate and long-term benefits, help strengthen the fundamental underpinning for economic and social development, fall within the scope of the 14th Five-Year Plan, generate economic returns, and get started as quickly as possible.
Capital shortage for projects will be supplemented by funding from the China Development Bank, the Agricultural Development Bank of China, and Export-Import Bank of China and special-purpose bonds for local governments. Furthermore, capital will be secured through loans from these policy banks and commercial banks to speed up projects to generate more physical gains in the third quarter.

(ii) Expansion of consumption
Robust rigid demand for housing by migrant workers and their family members coming to cities from the countryside (called “new urban residents”) and college graduates will be ensured. Reasonable assistance will also be provided to meet rehousing needs. Specific measures will be introduced for the sound and well-regulated development of the platform economy, which creates jobs and spurs consumption.

“The requirements for effective Covid-19 prevention, economic stability, and safe development” should be fully satisfied. “The momentum of our rebounding economy should be maintained, stable employment and commodity prices ensured, and major economic indicators kept within an appropriate range while striving to achieve the best possible results.” The target annual growth rate was effectively abandoned. Six basic policies were adopted for economic policy in the second half of 2022.

(i) Uphold a dynamic zero-Covid policy. Immediate responses and strict measures should be adopted once an epidemic outbreak occurs to ensure resolute and effective control wherever necessary. No let-up is allowed in relevant efforts.

(ii) Fiscal and monetary policies must effectively offset deficiency in social demand, support optimizing the utilization of special local government bonds, maintain a proper and adequate liquidity supply in the monetary policy, and increase credit support for enterprises.

(iii) More work should be done to safeguard food security, boost the capacity to ensure energy and resource supply, and stabilize the real estate market. Efforts should also be made to ensure overall stability in financial markets.

(iv) Promote rule-based, sound, and sustained development of the platform economy, concerted efforts should be made to give the green light to a number of investment cases.

(v) More efforts will be exerted to ensure the basic living needs of people in financial difficulty and facilitate employment for key groups such as college graduates.

(vi) Major economically developed provinces should play a leading role, and eligible provinces should strive to meet the objectives set for economic and social development this year.

While the State Council meetings had not mentioned a dynamic zero-Covid policy, this meeting of the CPC Central Committee Political Bureau upheld this policy as the top item in its agenda. With regard to the platform economy, although a Political Bureau meeting in December 2020 had come up with the policy of setting up “traffic lights” for strict oversight and control of capital, leading to anti-monopoly crackdowns and strict imposition of fines, another Political Bureau meeting in April 2022 put an end to the crackdown, with a “green light” being given now to active proposal of investment projects. The major economic powerhouse provinces that are relatively unaffected by Covid-19 are also called upon to serve as the driving force for the economy.

Following the Political Bureau meeting on July 28, this meeting asserted that “employment and price stability is of vital importance for maintaining stable economic performance.” An instruction was issued to “adopt multi-pronged measures to boost effective demand.”

(i) Harness the key role of effective investment
Investment will be mainly directed to projects involving transportation, energy, logistics, agriculture, rural areas, and other new infrastructure. Projects chosen should have ripe conditions, be highly efficient, and deliver results as quickly as possible. They must generate more physical gains as quickly as possible in the third quarter.

(ii) Promote consumption
The tax exemption policy for new energy vehicle purchases will be extended. Support will be provided to meet the rigid housing demand for new urban residents, college graduates, and rehousing. Localities will be encouraged to provide subsidies or interest discount as appropriate on environment-friendly smart home appliances and building materials. Support policies for industries in difficulty, such as the restaurant business, retail, tourism, and transportation will be fully implemented, and extra VAT deduction in the services sector will be extended across the board.

With a recent meeting of the CPC Central Committee’s Political Bureau asking the economic powerhouses to drive the economy, Premier Li convened a meeting in Shenzhen. The party secretary and governor of Guangdong and the governors of Jiangsu, Zhejiang, Shandong, Henan, and Sichuan spoke at the meeting.

Li stated at this meeting: “While the economy recovered in July, and the momentum of development is continuing, minor fluctuations have been observed. This momentum must be boosted and must not slow down. The economy is currently in a critical stage of stabilization. We must adopt a sense of urgency that ‘time will not wait’ in our efforts to promote economic recovery and consolidate the foundation of development.” He added: “The six economic powerhouses contribute to 45% of the country’s total economic output, and they are the pillars of the country’s economic development. They must play the key role of supporting the economy’s stability as pillars.” He thus urged them to play a major role in stabilizing the economy, financial resources, employment, foreign trade and foreign investment, securing market entities (companies and self-employed individuals), boosting big-ticket consumption, including auto-consumption, and accelerating the construction of mature projects.

Fiscal and monetary support policies for the real economy and securing the people’s basic livelihood were discussed at this meeting.

(i) Fiscal and monetary support for the real economy
Use the local government special bond issuance quotas in accordance with the law. Establish the mechanism for marketizing and transmitting interest rate and give play to the guiding functions of the loan prime rate. Support the upward swing of effective demand for loans and promote the reduction of overall financing cost of companies and the cost of individual consumer loans.
Based on the above, the People’s Bank of China lowered the one-year loan prime rate by 0.05% to 3.65% on Aug. 22, the first rate cut in seven months since last January. The five-year loan prime rate, which serves as the basis of most housing loans, was lowered by 0.15% to 4.30%, the first cut in three months since May.

(ii) Securing the people’s basic livelihood
Expand the scope of subsistence allowance and strengthen aid to people in financial difficulty. The mechanism of raising social benefits pro rata to price increases will be adjusted from September 2022 to March 2023 to increase the number of recipients. The central government will subsidize a certain portion of the additional cost incurred by the local governments to implement this measure.

(iii) Support for purchase of new energy vehicles
The vehicle purchase tax exemption for NEVs, which is due to expire at the end of this year, will be extended to the end of 2023, waiving an additional 100 billion yuan in taxes.

The assessment given at this meeting was: “The economy at the moment has continued the momentum of recovery and growth registered in June, yet marginal fluctuations still remain, and the foundation of economic recovery is not solid.” It noted that “Swift and decisive steps must be taken, the appropriate policy scale maintained, and the policy instruments at our disposal in the toolkit better harnessed, to further strengthen the foundation of economic recovery and growth,” but added “without resorting to massive stimulus or compromising longer-term interests.”

Specifically, it was decided that “On top of delivering the policy package for stabilizing the economy, an additional 19 follow-up policies will be rolled out to shape greater synergy. The goal of such policy mix is to promote economic stabilization and upturn, keep major economic indicators within the proper range, and work for the best results possible.”

The follow-up policies mainly consist of the following:

(i) Project financing by the China Development Bank, the Agricultural Development Bank of China, and the Export-Import Bank of China will be increased further by over 300 billion yuan on top of the current 300 billion yuan.

(ii) The balance of the local government special-purpose bond quota worth over 500 billion yuan should be fully utilized and issued by the end of October.

(iii) The effect of loan prime rate will be used to lower the costs of corporate financing and consumer loans.

(iv) The start of certain infrastructure projects with mature conditions will be approved.

(v) Measures will be introduced to support the development and investment of private businesses and advance the sound and sustained development of the platform economy.

(vi) Provide reasonable assistance to meet housing demand for new urban residents, college graduates, and rehousing.

(vii) Defer payments of certain government-levied charges for one quarter.

(viii) Encourage localities to set up risk compensation funds for loans extended to MSMEs and self-employed households.

(ix) Support electricity producers under central administration in issuing 200 billion yuan of special bonds for energy supply.

(x) On top of the subsidies for agricultural supplies delivered this year totaling 30 billion yuan, an additional 10 billion yuan will be distributed.

These additional measures aim not only to supplement project capital shortages and general funding shortfall, but also to utilize the remaining special-purpose bond quota for 2022 by redeeming the principal of these bonds in order to issue another 500 billion yuan worth of bonds in an effort to accelerate the construction of local projects.

Since the comprehensive policies to stabilize the economic fundamentals and the follow-up policies had mainly targeted the July-September quarter, further arrangements were made for the fourth quarter.

Premier Li noted that comprehensive and follow-up policies had been formulated so far, stating that “all the policy tools accumulated over the past years were deployed, and these policies are effective and of a reasonable scale.” He claimed that “through arduous efforts, the economic downturn was reversed, and the economy began to recover and regain its overall stability in the third quarter.” He pointed out, however, that “the fourth quarter it is the most important period throughout the whole year, and many policies are expected to play a greater role during the period,” calling for efforts to promote the comprehensive implementation of the policies for them to take effect fully and ensure that the economy operates within a reasonable range.

The main policies decided at the meeting for the October-December quarter are as follows:

(i) Step up the use of funds and construction of infrastructure projects by tapping supplement funding by the China Development Bank, the Agricultural Development Bank of China, and the Export-Import Bank of China to produce even more actual results in the fourth quarter.

(ii) Make effective use of policies on special reloans and interest subsidies to speed up equipment upgrades in the manufacturing, service industries, social service industries, and other sectors to generate real demand as soon as possible.

(iii) Frontload part of the 2023 quota for the local government special-purpose bonds.

(iv) Support measures to meet rigid housing demand from new urban residents, college graduates, and rehousing residents and ensure the strict implementation of the policy on deliveries of pre-sold housing.

(v) Guarantee smooth logistics.

(vi) Guarantee steady supply of coal, electricity, and other energies.

(vii) The economic powerhouses should play their underpinning role in stabilizing economy.

(viii) Gradually expand the coverage of basic living allowance in the fourth quarter. The central government will subsidize 70% of the local governments’ additional expenditure.

(ix) Implement and improve policies on expanding the coverage of unemployment relief.

(x) Improve production safety.

Support for equipment upgrades and renovation by the manufacturing and service industries and other sectors was newly added to the policy package for the fourth quarter.

The above looked at the timeline of China’s macroeconomic policies. Below are a number of distinguishing features observed in the policies for 2022.

First, there has been no change in the basic macroeconomic policy of maintaining fiscal sustainability and the basic stability of macro leverage ratio.

Premier Li asserted repeatedly that “there will be no excessive money supply or sacrifice of future interests.” He stated clearly at the WEF Special Virtual Dialogue with Global Business Leaders on July 19: “We will not introduce supersize stimulus measures, issue excessive money supply, or sacrifice future interests to go after an excessively high growth speed.” He further claimed at the Sept. 28 meeting that with the economic policies introduced so far “all the policy tools accumulated over the past years were deployed, and these policies are effective and of a reasonable scale.”

These policies were introduced in stages, in May, August, and September. They also do not consist of additional issuance of government and local bonds or a major increase in money supply. China is trying to deal with the situation through such measures as VAT refunds, policy-based tax cuts, drastic frontloading of the issuance and use of local government special bonds, frontloading the local government special bonds quota for 2023, supplementary funding by the policy banks, special reloans by the People’s Bank of China, and using government funds to subsidize interest payments.

While this has been criticized by some as “piecemeal attack,” this must have been based on the lessons learned from the outcomes of the large-scale economic measures adopted at the time of the Lehman Shock, which later resulted in such side effects as excess production capacity of the state-owned enterprises, skyrocketing housing prices, increase in local government debts, expansion of shadow banking, and inflation.

Second, efforts to buoy up the economy were focused on the July-September quarter.

At each State Council Executive Meeting, Premier Li came up with a continuous series of specific policies to expand investment, strengthen consumption, alleviate the difficulties of MSMEs and self-employed individuals, give assistance to business sectors affected by Covid-19 and the poor, and stabilize employment and commodity prices, logistics and transportation, trade, and foreign investment. He announced comprehensive and follow-up policies to stabilize the “economic fundamentals” twice in May and August.

According to the National Bureau of Statistics, the GDP growth rate was originally scheduled to be announced on Oct. 18, which was in the middle of the 20th CPC National Congress. However, the announcement was postponed suddenly. Since the announcement of a low growth rate in the middle of this important meeting deliberating on a third term for General Secretary Xi Jinping might develop into a question of the leadership’s responsibility, it was probably absolutely necessary to avoid making the announcement.

Third, the role of the major economically developed provinces as pillars is being emphasized.

Premier Li has held several meetings with leading provincial officials this year. The major ones are as follows:

April 11: Meeting with certain leading local officials held in Jiangxi Province. The provinces of Jiangxi, Liaoning, Zhejiang, Guangdong, and Sichuan participated.

May 18: Meeting with leading provincial officials in Yunnan Province. Yunnan, Liaoning, Jiangsu, Zhejiang, Anhui, Fujian, Shandong, Henan, Hubei, Hunan, Guangdong, and Sichuan participated.

July 7: Meeting with leading officials of the coastal provinces in the southeast held in Fujian. Fujian, Shanghai, Jiangsu, Zhejiang, and Guangdong participated.

Aug. 16: Meeting with leading officials of the economic powerhouses in Guangdong. Guangdong, Jiangsu, Zhejiang, Shandong, Henan, and Sichuan participated.

The State Council sent working teams to these provinces to supervise and support the full implementation of the comprehensive and follow-up policies. Provinces with a large economic scale which were relatively unaffected by Covid-19 are strongly urged to achieve their annual economic targets in order to help buoy up the overall economy.

Fourth, the State Council’s Premier Li is taking the lead in these economic policies.

On Feb. 23, 2020, at the time the Covid-19 epidemic was spreading rapidly, a “meeting on coordinating Covid-19 prevention and control with economic and social development” was held to discuss economic policies with the full membership of the Standing Committee of the Political Bureau of the CPC Central Committee attending. Later, a meeting of the Political Bureau on March 27 decided on comprehensive economic measures. Another meeting of the Political Bureau on April 17 adopted specific measures for the comprehensive economic policies. All the economic policies were led by the CPC.

Even before this, after the Great Sichuan Earthquake occurred in May 2008 amid a slowdown in economic growth, a major meeting of leading central government and local officials was convened on June 13 to discuss reconstruction policies for the Sichuan earthquake and review macroeconomic policies. This meeting was organized jointly by the CPC Central Committee and the State Council. Even today, the annual Central Economic Work Conference determining basic economic policy for the next year is jointly convened by the CPC Central Committee and the State Council.

However, this time, since the lockdown in Shanghai started in late March, the State Council’s Premier Li has consistently taken the lead in economic policies for six months. Li announced successive economic stimulation policies at the State Council Executive Meetings and has actively convened other economic-related meetings. The State Council Executive Meeting on May 23 decided on comprehensive economic policies, and on May 25, the State Council alone held a videoconference involving 100,000 local leaders. Furthermore, follow-up measures and policies for the fourth quarter were decided at State Council Executive Meetings on Aug. 24 and Sept. 28, respectively.

On the other hand, the CPC Central Committee Political Bureau meetings reported in the media discussed only Covid-19 policies. It would seem that a clear line has been drawn for the State Council to lead economic policies and the Party to take leadership in Covid-19 measures. Moreover, at their respective meetings, the CPC Central Committee seems to have focused on the dynamic zero-Covid policy, while the State Council prioritized stable economic recovery and improvement. It is not clear if this is simply a practical demarcation or if the two sides have differences in policy priorities.

Therefore, it is necessary to pay close attention to whether leadership and priorities in economic policies will change after the 20th Party Congress.