Why you can have confidence in incremental policies

From September 24 to October 12, China’s macroeconomic management took a monumental step forward. This initiative is structured around a framework dubbed “2+3+1,” which includes two key meetings (the Politburo meeting on September 26 and the State Council executive meeting on September 29), three press conferences (from the financial sector on September 24, the National Development and Reform Commission on October 8, and the Ministry of Finance on October 12), and a new law aimed at promoting the private economy. It’s now crucial to summarize this phase to provide a comprehensive view of the central government’s deployments and considerations. More importantly, through an analysis of policy structure and mechanisms, we need to elucidate the underlying logic of this “package of incremental policies” to genuinely boost investor and market confidence.

First and foremost, there is no doubt about the government’s determination to stimulate economic recovery. A plethora of policies has already been introduced, and while further actions are expected, the official stance is unequivocal.

All these measures weren’t just conceived in September. Following a robust recovery in the first quarter of 2023 post-pandemic, issues arose in the second quarter, prompting relevant departments to implement a series of stabilizing measures in the third quarter. The first quarter of this year began positively, but during the Politburo’s economic assessment on April 30, it was emphasized that “the economic recovery still faces numerous challenges,” indicating foresight regarding potential fluctuations. By the half-year meeting on July 30, the call for “sustained and more effective macro policies” was made, alongside directives for early preparation and timely launch of a batch of incremental policy measures. This is the context from which these policies emerged. Economic departments have been closely monitoring the dynamics of economic operations; the so-called “information cocoon” exists only within the misconceptions of non-specialists. All policies have been developed based on thorough observation and rigorous discussion, with timing being the key factor. When the right moment arrived in late September, the central government convened a meeting to make decisive plans without a moment’s hesitation, sending a clear signal.

The comprehensive measures reflect the commitment and actions of the economic departments. Several departments have indeed pushed their responsibilities to the limit. The financial sector’s statements and newly introduced initiatives have ignited market enthusiasm because investors perceive these policies as substantial and effective. The National Development and Reform Commission’s inclusive approach highlights the cohesive transmission of five deployment plans, addressing even those details that might not attract market attention, such as a consistent assessment of macro policy orientation and new urbanization, which lay the groundwork for long-term benefits. Notably, the recent firm stance taken by the commission against “illegal cross-jurisdiction enforcement” and “profit-driven enforcement,” typically outside their purview, deserves commendation. The finance department did not specify numbers this time, consistent with our assessment on October 10 that “there will certainly be a ‘X trillion,’ though some may need to follow legal procedures.” This lack of immediate figures does not imply uncertainty; rather, it reflects a clear stance and direction, as the finance department’s firm position provides tangible substance to the market’s expectations. The synergy among various policies is evident, with the commission advocating for “supporting major state-owned commercial banks’ replenishment of core tier-one capital,” while the finance department elaborates on “actively raising funds through special treasury bonds to support state-owned banks in increasing tier-one capital,” showcasing a unified policy signal.

The timing of the press conferences reflects a systematic approach to pushing forward these policies. The three conferences do not encompass the entirety of the policies introduced. The five initiatives put forth by the National Development and Reform Commission on October 8 establish the fundamental framework for the package of incremental policies, practically serving as an implementation plan. Emphasizing macro controls and expanding effective demand, the commission delineates its role, while the finance department underscores the importance of fiscal policy in these areas, with the financial sector focusing on financial policy and capital market stimulation. The upcoming press conference from the State Administration for Market Regulation on October 14, dedicated to supporting businesses, serves as a concrete execution of the third of the five initiatives. There’s a likelihood that the housing authorities will soon unveil specific policies aimed at stabilizing the real estate market. Altogether, these elements reflect a systematic, incremental approach where each conference is strategically planned and considered. Therefore, while some policy directions may currently seem ambiguous, concrete implementation measures are forthcoming.

The crux of this package of incremental policies is to address the pressing challenges faced by the Chinese economy. Confidence does not come from thin air; it is built through solutions to existing problems. Analyzing the incremental policies reveals a clear problem-oriented approach. A professional methodology would involve systematically sorting through the recent central meetings’ discussions on economic issues and understanding how economic departments have derived responses from these problems. This perspective goes beyond the stock market’s narrow focus and dives into a broader understanding of the fundamental threads of this round of adjustments.

First, addressing the insufficient effective demand is paramount. This concern consistently ranks first in discussions of domestic economic issues across various meetings. A significant focus on “two new” and “two heavy” initiatives in the incremental policies directly stems from this objective. The fourth meeting of the Central Financial and Economic Committee’s direct deployment of specific economic policies, such as equipment upgrades and replacing old consumer goods, indicates its importance. Numerous policies have been introduced this year, specifically targeting consumption and investment outputs. Regarding “two heavy” aspects, reports indicate that ultra-long special treasury bonds were covered in the December 2023 Central Economic Work Conference. The National Development and Reform Commission has clarified project lists, while the finance ministry hastens the disbursement of funds, ensuring a commitment to advance timely interventions. Our assessment suggests that this is the primary focus of economic efforts, acting as a key driver for expanding domestic demand and creating a foundational support system for stabilizing employment and increasing income.

Second, addressing expectations around private enterprises is crucial. During the October 10 consultation on the Private Economy Promotion Law, some voices expressed skepticism regarding its inclusion of seemingly “common-sense” terms. However, this inclusion serves as an acknowledgment of the past shortcomings in execution, requiring legal clarity. A look back at the Third Plenary Session’s decisions reveals that many concerns most troubling to private entrepreneurs are explicitly resolved. Changes in property rights protection, from “equal protection under the law” to “equal and long-term protection under the law,” aim to secure entrepreneurs’ peace of mind. The central bank’s financial support initiatives for small and micro enterprises also reflect strong positive intentions, and we can expect more concrete plans following the October 14 press conference. Our assessment shows that tackling the concerns most prominent for private enterprises and accelerating foundational legal measures represents undeniable sincerity.

Third, resolving local government debt issues is essential for enabling effective economic circulation. The general reaction to the finance ministry’s signals has been positive, anticipated to create favorable conditions for debt resolution. Extensive analyses have been conducted regarding this matter, with the finance department clarifying the transparency of financial operations at all budget units and grassroots levels. It’s noteworthy that the implementation plan for the new round of fiscal reform has been under consideration for some time and may soon be expedited. Thus, examining fiscal and tax realms reveals a combined, short- and long-term strategy, addressing present challenges while establishing lasting new frameworks to eradicate root problems. Additionally, the market’s focus on “expanding the fiscal balance sheet” relates not only to debt resolution but also serves as a primary avenue for enhancing economic work. Finance Minister Lan Fo’an noted that central finances still have substantial borrowing and deficit-enhancing capacity, emphasizing the real significance of “substantial” in this context. The establishment of a deficit rate must follow due processes, which requires patience. Since we introduced “X trillion” as a concept, it has indeed become a catchphrase, but the underlying message remains clear: there is flexibility in the macro management’s strength and pace, depending on economic performance, and we maintain confidence in future policy actions from relevant departments. Anyone claiming that our arsenal is running low truly misunderstands macroeconomic control.

Fourth, addressing issues in the real estate market is critical. The theme of “halt declines and stabilize” has been explicitly addressed across all three press conferences, with several key measures unveiled. Insights from real estate enterprises suggest a positive reception to these initiatives. We anticipate further specific regulatory measures for the real estate market in the future. Moreover, the underlying population issue cannot be overlooked; while it poses a medium- to long-term challenge, it intertwines with many short-term strategic considerations. The recent mention of issues related to the elderly and children, including support for and regularization of social forces in developing retirement and childcare industries, underlines the high priority accorded to these areas. Additionally, urbanization must be highlighted, as the recent five-year action plan will provide significant support to the real estate market.

Fifth, addressing capital market issues remains vital. While extensive analyses have been conducted regarding the revitalization of the capital market, we refrain from sharing too many opinions on the stock market itself. However, it is essential that macroeconomic regulation is not merely reactive to stock market fluctuations; rather, the aim is to alleviate anxieties surrounding market performance, moving away from win-lose mentalities. The fundamental economic issues addressed by various departments aim to dismantle bottlenecks hindering economic advancement. These are complex challenges, and some may require time to resolve entirely, yet we are confident in our commitment to systematically confront and address these issues, with a shared resolve from top to bottom providing the ultimate source of our confidence. By genuinely tackling these foundational concerns within the economy, sustainable development will reflect positively on the long-term health of the stock market.

Looking ahead, here are a few recommendations for the next steps:

First, it’s crucial to listen to market feedback closely. This policy collaboration, alongside media engagement, has presented a rare and invaluable experience in recent history. Going forward, it is advisable to prioritize expectation management within the broader context of macroeconomic governance, ensuring that policies across finance, industry, employment, investment, and consumption align with market expectations. Consequently, ongoing feedback collection during policy implementation will facilitate timely adjustments and improvements. Relevant departments should enhance communication with the market, addressing issues as they arise and dispelling concerns to continuously build trust in policies.

Second, it is essential to actively create economic opportunities. Similar to the “low-altitude economy,” there is currently a scarcity of such emerging avenues. Relevant departments should consider the advancement of new productive forces, purposefully launching previously unexplored industries and concepts to create new “stimulating points” for economic work. This approach is vital for accelerating industrial transformation and modernization while guiding capital towards essential market shifts. Industrial policies should gradually shift focus from merely targeting industries to actively supporting enterprises, encouraging the growth of unicorns and gazelles, which can serve as strong exemplars for broader enterprise development.

Third, we must prioritize actions that stabilize public sentiment. A significant benchmark in observing this round of incremental policies is the emphasis on implementation, necessitating compelling case studies. Enforcing laws against inappropriate practices is imperative; any disregard for central directives, such as profit-driven “ocean harvesting,” must face stringent penalties to set a stark warning. Localities should step up to resolve practical challenges faced by businesses. Likewise, we should extend a welcoming hand to entrepreneurs who sought opportunities abroad in previous years, demonstrating that ample and inclusive opportunities for growth remain within China, encouraging them to re-engage with the country’s development trajectory.

Author: Dong Yu, Executive Vice Dean of the China Development Planning Institute at Tsinghua University
(“Sanlihe” Studio)