Macroeconomic policies likely to return to normal

Editor's note: China Daily is publishing a series of stories focusing on major issues expected to be discussed at the annual sessions of the National People's Congress and the National Committee of the Chinese People's Political Consultative Conference, known as the two sessions, the biggest annual political event in China, which generally starts in early March. Some stories will also look at how the participants in the two sessions, deputies and political advisers, perform their duties.

Policy advisers and economists defined this year as a time for "policy normalization", but they unanimously expected the withdrawal of special fiscal and monetary stimulus to be step by step and moderate. Those policies were rolled out last year because of the COVID-19 pandemic.

Discussions on major macroeconomic policies are heating up before the opening of the two sessions－the annual meetings of the national legislature and the national political advisory body. The important political event will start next week.

Lawmakers and political advisers will gather in Beijing to review a series of policies covering the country's overall development and people's livelihoods.

Major macroeconomic policies, including fiscal and monetary measures, have contributed to a rapid, V-shaped economic recovery in 2020 despite the pandemic. Some of the measures are expected to continue to play a significant role in sustaining growth while preventing risks, policy advisers and economists said.

They recommended Beijing maintain a moderately expansionary fiscal stance this year, before turning to consolidation once the recovery is complete, in order to smooth the transition from the strong support rolled out last year.

"We expect (the government's) fiscal conditions to improve this year, with growth of fiscal revenues and expenditures both jumping significantly. This expectation is based on the ongoing recovery of growth and a low base in 2020," said Lu Ting, chief economist for China at Nomura Securities.

Based on that outlook, Beijing will likely lower its official target for the fiscal deficit from "above 3.6 percent of GDP" in 2020 to around 3 percent in 2021 and reduce the quota of net local government special bond financing to 3 trillion yuan ($462.5 billion) from 3.75 trillion yuan, Lu said. The government also is likely to plan zero net central government special bonds, a debt instrument of 1 trillion yuan created last year for anti-pandemic financing, Lu added.

The government's planned fiscal budgets and the annual bond quotas－for both local government general budgetary bonds and off-budget special bonds－will be disclosed at the opening of the fourth session of the 13th National People's Congress, which is scheduled for March 5.

China issued a package of fiscal stimulus measures at the third annual session of the 13th NPC in May 2020, including special transfers of fiscal funds from the central government to local governments to help vulnerable businesses and households. They also included cuts in taxes and fees as well as an increase in public investment partly financed by the issuance of additional local government bonds. Among them was the first issuance of central government special bonds since the 2009 global financial crisis.

Thanks to the domestic economic recovery, the government's fiscal revenue growth rebounded significantly to 17.4 percent year-on-year in December from a decline of 2.7 percent in November. But for the whole year of 2020, fiscal revenue growth on a yearly basis still recorded a drop of 3.9 percent because of the severe effects of the pandemic. That came after growth of 3.8 percent in 2019, according to the Ministry of Finance.

In an earlier interview, Finance Minister Liu Kun discussed the idea of setting the fiscal deficit ratio and the scale of local government special bonds "at reasonable levels", which would guarantee a certain level of spending but at the same time keep the macro leverage level basically stable.

Ding Shuang, chief economist for China and North Asia at Standard Chartered financial services company in Hong Kong, said he calculated that China's fiscal stimulus package in 2020 helped lift GDP growth by 2.5 percentage points, and local governments still had unused fiscal budgetary funds of up to 2.5 trillion yuan at the beginning of this year. That, Ding said, made the central government reluctant to designate a new bond quota before the two sessions.

The quotas of government bonds, both at central and local levels, are likely to be lowered to around 5 trillion yuan this year, compared with a surge to 8.5 trillion yuan in 2020, in order to control the overall government debt level, Ding predicted.

The government debt ratio rose to 45.6 percent of GDP at the end of 2020, up from 38.5 percent by 2019, the fastest expansion since the first report of the leverage ratio, according to research from the National Institution for Finance and Development, a national financial think tank under the Chinese Academy of Social Sciences.

In addition, experts from the International Monetary Fund suggested that China pay more attention to the already large and growing funding gaps between local governments' revenues and expenditures, which can be bridged through transfers from the central government and other financing sources.

"Continued policy support is needed to secure the recovery, with the policy mix calibrated to strengthen private demand and address financial vulnerabilities," IMF experts wrote in a report in January.

They expected China's fiscal policy to remain "broadly neutral" while monetary policy remains "supportive" in 2021, though less so than in 2020. They also expected the growth of total social financing－all financing sources for the real economy－to slow down to 12.2 percent year-on-year by the end of 2021 from 13 percent in January.

The People's Bank of China, the central bank, said in its latest quarterly monetary policy report that there should be more focus on monitoring policy rates, which indicate real conditions in the financial market. The major interest rates have remained basically unchanged this year, a signal that the PBOC is maintaining a neutral stance for monetary policy, neither loose nor tight, said analysts.

On Saturday, the PBOC reported the benchmark lending rate, the one-year loan prime rate, at 3.85 percent, which was unchanged since May 2020.

Although monetary policy is becoming normalized, the LPR is likely to stay at the current level, and the PBOC will prefer to use policy tools such as open market operations, medium-term lending facility, relending and rediscount to maintain market liquidity at a balanced level, said Ming Ming, a senior analyst at CITIC Securities.

Nomura's Lu predicted neither hikes nor cuts to policy rates and the reserve requirement ratio, the amount of cash that financial institutions must hold in reserve in the central bank, in the near term. He also said he expected a relatively stable renminbi exchange rate against a basket of major currencies.