A leading Chinese investment bank has amplified calls for Beijing to bolster fiscal support to consumers and businesses, citing a relative gulf in effect for pandemic-era stimulative actions taken by China and the United States.
China International Capital Corporation (CICC) issued a report on Saturday discussing the economic divergences that have emerged between the two superpowers, presenting a case for demand-side measures as Beijing attempts to leverage domestic consumption to drive up growth and make its financial system more efficient in serving the real economy.
“The US had bigger fiscal expansion during the Covid years. China needs to crank up fiscal support in the near term to break the vicious spiral as weak economic fundamentals and weak confidence are feeding off each other,” said Kevin Liu, a managing director of CICC Research.
“More fiscal support can encourage consumers and the private sector to invest and expand,” he wrote.
Lawmakers will convene in the Chinese capital next week to review the year’s policy agenda and national economic targets.
Many economists have argued for more fiscal spending since Beijing issued 1 trillion yuan (US$138.9 billion) of special treasury bonds in October, which lifted the country’s fiscal deficit ratio to 3.8 per cent of gross domestic product (GDP) from the previously budgeted 3 per cent.
In the US, money reached people’s hands, while in China, the money [came] from banks and ultimately flows back to banks
The CICC report is one of several which have addressed the topic of fiscal expansion by making direct comparisons between China and the US. Surpassing the US in GDP has been cited as a long-term pursuit of Chinese leadership, although it has not been made an explicit target in government documents.
Both China and the US engaged in monetary loosening during the Covid years, although they are presently in different cycles.
China’s M2 money supply – an aggregate value of a country’s liquid assets, including currency in circulation and private banking deposits – had double-digit growth for most of the last two years, CICC said, but it failed to disperse deflationary threats and jump-start private investment, as much of the money was in credit and loans.
More fiscal support the catalyst to revive China consumption, housing market
More fiscal support the catalyst to revive China consumption, housing market
In contrast, the US’ M2 supply was trimmed by about US$500 billion last year to tame inflation. However, the bank said, its economy still fared better, maintaining strong demand and consolidating its lead over China in terms of economic size.
“In the US, money reached people’s hands, while in China, the money [came] from banks and ultimately flows back to banks,” said the CICC report.
CICC added that much of the 42.6 trillion yuan in new loans disbursed for businesses between 2020 and 2023 did not help spur the country’s economic recovery, as they became deposits or were otherwise used to service old debts.
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Credit support, compared to direct fiscal disbursement – which, per CICC, carries “almost zero cost” to revive consumption and investment – was designated as an option which generated additional costs and inefficiencies, as businesses tended toward lukewarm responses.
“In China, credit support becoming bank deposits suggested low investment return and tepid credit demand, and fiscal support remained inadequate,” the bank said.
When the private sector is unwilling or unable to expand, the CICC report estimated, the central government needs an additional leveraging of 5 to 6 trillion yuan in the first half of 2024. The bank said such an approach is necessary to bring up the “fiscal pulse”, a measure of the changing impact of the budget on the economy, to 4 per cent from its current three-year low.
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Several economists and policy advisers have already issued recommendations for direct fiscal backing.
Yao Yang, director of Peking University’s National Development School, has for years suggested direct cash allowances for low-income residents.
Teng Tai, director of the Beijing-based private think tank Wanb Institute, made another appeal last week, saying China should learn from the likes of the United States, Japan, South Korea, Australia and Singapore.
“The most effective way to encourage consumption is to issue cash [coupons],” he told Chinese media outlet Yicai.
“A one-dollar cash coupon will multiply to three to five dollars of spending.”