Expectation management is an essential component of macroeconomic governance, referring to the government's efforts to enhance communication with the public through policy interpretation, information disclosure, press releases, and other means. This is done to effectively guide, coordinate, and stabilize social expectations, making policies somewhat predictable and understandable to maximize policy outcomes and ensure that policy implementation achieves the desired effects. The theory of expectation management emerged in Western countries in the 1970s, with Lucas being a typical representative figure.
There is an ancient Chinese idiom called "morning three, evening four," which tells the story of a monkey keeper who announced to his monkeys that they would receive three chestnuts for breakfast and four for dinner each day, causing the monkeys to be angry. The keeper then adjusted the plan to four chestnuts for breakfast and three for dinner, which pleased the monkeys. This illustrates that without increasing total expenditure, adjusting the structure can improve expectations. Similar ancient Chinese stories about expectation management include "quenching thirst by thinking of plums."
In fact, China's decision-making departments have also started to pay attention to expectation management issues relatively early. For example, in 2009, "stabilizing expectations" first appeared in the "Government Work Report"; in 2011, the "Government Work Report" mentioned "correctly guiding market expectations." The Third Plenary Session of the 18th Central Committee in 2013 further emphasized the importance of expectation management.
Especially after China entered the long-term downcycle of the real estate market in 2021, the higher-ups paid more attention to expectation issues. For instance, the Central Economic Work Conference in 2021 first proposed that China's economy faces three pressures: demand contraction, supply shock, and "weakening expectations." The Central Economic Work Conference in 2022 again mentioned "weakening expectations"; in 2023, it changed to "weak expectations," indicating that expectation issues have become a medium-term factor contributing to the economic downturn.
Since September 24, the State Council Information Office has held three press conferences, hosted by the financial regulatory authorities represented by the central bank, the National Development and Reform Commission, and the Ministry of Finance, respectively. The good results achieved by these three conferences, especially the strong discussion引发的 by the Ministry of Finance's conference, may be related to the greater impact of fiscal policy itself on expectations of future economic trends.
The Ministry of Finance's press conference can be summarized in three parts. The first part is to eliminate the misunderstanding that "fiscal policy is not proactive enough." This year, more than 4 trillion yuan has been arranged for the general budget deficit, plus 3.9 trillion yuan for special bonds and 1 trillion yuan for ultra-long-term special treasury bonds. If you add the 1 trillion yuan in special treasury bonds issued at the end of last year, the actual broad fiscal deficit reaches 10 trillion yuan, with a broad fiscal deficit ratio exceeding 7%. Therefore, the fiscal policy for 2024 cannot be considered unproactive.
The second part introduces how to optimize the existing budget in the next step, with the core being to expand the scope of use for special bonds. Because special bonds are used for specific purposes, they are used for investment projects that can generate cash flow or profit. Due to the high requirements for the establishment of special bonds, the quota of special bonds cannot be fully used, resulting in historical surpluses. These surpluses can be used as existing funds to be revitalized, such as for local governments to supplement capital for banks and other state-owned enterprises, to purchase buildings as affordable housing, or to reclaim idle land from developers. This is beneficial for small and medium-sized banks and real estate developers and helps promote the stabilization and recovery of the real estate market.
The third part is the incremental policy, including: 1) "Plan to increase the debt limit on a one-time basis to replace the existing implicit debt of local governments on a large scale," that is, allowing local governments to issue a large amount of refinancing bonds; 2) Issue special treasury bonds to supplement the capital of bank primary accounts; 3) Expand the issuance of special bonds for land and housing reserves, etc.; 4) For elderly care, student assistance, and assistance for special difficulties, etc. Finally, Minister Lan also emphasized that "the central finance still has a large space for debt and deficit increase," allowing everyone to believe that there is still a large space for fiscal policy and the strength to deal with various crises that may be encountered in the future.
In addition, the Ministry of Finance's press conference made three clear stipulations on the issue of local debt: First, the principle of "whoever's child, whoever holds" remains unchanged, that is, national debt will not be used to replace or replace local debt or implicit debt, and the total amount of debt undertaken by local governments has not decreased, only the interest cost has been reduced; Second, provincial governments must take the bottom for the debt of the city and county level, that is, they are the ultimate responsible parties for local debt; Third, implicit debt can no longer be added. This is good for regulating the behavior of local governments and resolving implicit debt, but at the same time, it will also involve the clarification of the rights and financial rights between local and central governments.
Therefore, there is a large optimization space for finance, including the adjustment space for the proportion of central and local fiscal expenditures, the space for central finance to add leverage, and the space for tax and financial reforms.The proportion of central and local fiscal expenditures needs to be optimized.
The Third Plenary Session of the 20th Central Committee devoted considerable space to fiscal and tax reforms, which generally responded to the long-standing calls from the academic community to "appropriately expand local tax management authority" and "moderately strengthen central government responsibilities and increase the proportion of central fiscal expenditures." It proposed "establishing a clear division of responsibilities, coordinated financial resources, and balanced regional development in the fiscal relationship between the central and local governments."
Therefore, it is necessary to continue advancing in the direction of fiscal and tax reforms set by the Third Plenary Session. Currently, there is a significant disparity between the central and local governments in terms of fiscal expenditure ratios. Some statistics indicate that in 2023, the central fiscal expenditure accounted for only 14% of the total fiscal expenditure, which makes the central finance's role in resource allocation relatively weak.
In 2023, the central finance transferred more than 10 trillion yuan to local governments, which is more than the central government's own revenue. This is clearly inappropriate because the central finance has to rely on borrowing to maintain expenditures. So, is it necessary to allocate so much financial power to local governments? In fact, it is essentially a redistribution of local financial resources.
From an international comparison, the leverage ratio of local governments in our country is significantly higher than the average level of the world's major economies. According to data from 2022, the leverage ratio of local governments in Japan is 36.6%, the United States is 28.8%, France is 9.4%, and China, due to the lack of exact data on the balance of local government implicit debt, is estimated to have an overall leverage ratio of local governments at more than 80%.
Why is the leverage ratio of local governments still so high against the backdrop of such a large scale of central government transfers to localities? First, this is related to China's economic growth model. In the composition of China's GDP calculated by the expenditure method, the contribution rate of capital formation (fixed asset investment) to GDP is twice the global average level, and this is also the case in recent years when real estate development investment has been continuously negative.
Second, it is related to investment efficiency. Although the central government requires fiscal expenditures to improve quality and efficiency, according to calculations, the median ROIC (Return on Invested Capital) of China's infrastructure investment in 2023 has dropped to 0.46%, indicating that China's infrastructure is generally excessive. However, to achieve GDP targets, the gap caused by insufficient real estate and consumption is mainly compensated by increasing the scale of infrastructure investment and manufacturing investment.
From the perspective of high-quality development and enhancing new quality productivity, it is necessary to adjust the proportion of central and local fiscal expenditures, which essentially involves clarifying the responsibilities and financial powers between the central and local governments. Due to population flow, capital flow, and goods flow, it is difficult for a single province or a large city to achieve reasonable resource allocation through fiscal expenditures. The central finance can optimize the allocation of fiscal resources better than local finance based on the country's strategic deployment.
Looking at the unconventional growth of local debt scale over the past decade, it indeed reflects the irrational structure of local fiscal expenditures and the insufficiency in improving quality and efficiency. Therefore, it is necessary to reduce the scale of fiscal transfers to local finance and correspondingly increase the proportion of central fiscal expenditures in the total national fiscal expenditures.
If the proportion of central fiscal expenditures is to be increased, it is necessary to expand the central government's responsibilities, that is, to redivide the responsibilities between the central and local governments. The general principle should be to increase the central government's responsibilities in providing public services nationwide. For example, in the face of population flow, many regions may become "rust belts" in the future. Should the central government expand fiscal expenditures in serving people's livelihoods? Should it take on more responsibilities in areas such as education, healthcare, elderly care, and increasing residents' income, while correspondingly reducing the amount of fiscal transfers to localities?For instance, there is a strong and enduring call from society for the issuance of consumption vouchers. Local governments lack the capability and willingness to use fiscal expenditures to issue consumption vouchers in the true sense, as the population is mobile and consumption is broadly defined. Only the central finance can issue consumption vouchers that are universally applicable across the country, but this前提是 contingent upon the availability of financial resources. If the scale of transfer payments to localities is reduced by 30%, that is, 3 trillion yuan is allocated to livelihood expenditures, the improvement in people's livelihoods and the stimulation of consumption will be immediately apparent.
The space for central finance to leverage must be opened up.
The pressure China's economy is currently facing is unprecedented. The GDP growth rate for the third quarter was 4.6%, a further decline from the second quarter. If the annual growth target of 5% is to be achieved, the GDP growth rate for the fourth quarter must reach 5.4% year-on-year, and the sequential growth rate needs to reach 10.3%, which is very difficult to achieve.
The approximate data for the three main drivers in the first three quarters are as follows: retail growth rate was 3.2% (the largest weight), investment growth rate was 3.4%, and export growth rate was 6.2% (in RMB terms, the smallest weight), all of which are far from the GDP growth target of 5%. It should be noted that real estate investment in the first three quarters was still a negative growth of 10.2%, which should be the third consecutive year of maintaining a downward trend of -10%. The trend of the long-term downward trend in the real estate cycle has been further confirmed, and the multiplier effect of economic contraction will continue to be reflected in the future.
Since this round of the long-term downward trend in the real estate cycle is the first time it has occurred since the reform and opening up, there is no comparable historical case for the magnitude of its negative effects, so in-depth research is needed, and plans should be made in advance. My work "How to Deal with the Multiplier Effect of Economic Contraction" was published in November 2023, and the series of policy recommendations made at that time to deal with the multiplier effect have now mostly been launched or are ready to be implemented.
Minister of Finance Lan Fu'an said at a press conference held by the State Council Information Office, "We are also studying other policy tools, such as the central finance still has a larger debt space and deficit increase space." This indicates that China's fiscal policy indeed has a large extension space, and it is not limited to being introduced this year.
Objectively speaking, as a socialist public ownership country, China adopts a large government governance model. It is different from the United States, Europe, and Japan, which all belong to small governments with fewer disposable resources. The difference between a large government and a small government is reflected in the scale of assets owned by the government. If the scale of assets owned by a large government is larger, does it mean that its debt capacity is also stronger? In fact, the leverage ratio of the Chinese government (including implicit debt) should be around 100%, which is significantly lower than that of the United States and far lower than that of Japan.
Therefore, can we draw such a conclusion that if the economic contraction exceeds expectations, then fiscal expenditure (including the deficit ratio and the leverage ratio of central finance) should also exceed expectations?
The space for fiscal and tax reform is even greater.
If economic stimulus could solve the problem, then China could become the country with the most policy advantages. The reason why economic problems arise or worsen is due to the imbalance of the economic structure. Therefore, increasing the scale of fiscal expenditure or implementing a loose monetary policy is only for emergency relief and to maintain the bottom line of not occurring systemic risks, but the important thing is to prescribe the right medicine and prevent problems before they occur.For instance, behind the phenomenon of overcapacity lies weak consumption, and the essence of weak consumption is the relatively low share of income in the household sector. Therefore, how to increase the share of household income, especially the share of income for low- and middle-income groups, is crucial for promoting consumption. This is closely related to fiscal and tax reforms.
From an international comparison, personal income tax accounts for about 40% of the total tax revenue in the United States, around 27% in the United Kingdom, and about 19% in both Japan and France. In contrast, the share in our country is only about 8%. The failure to effectively tax high-income groups has led to a significant income disparity in our country's household sector.
For example, according to data from the National Bureau of Statistics, over the past decade, the income share of low-income households in our country has not increased, with 20% of the population's income accounting for only 4%. Although the third distribution (social charity such as poverty alleviation) has been ongoing, its effectiveness is not as good as the second distribution (tax adjustment).
Although our country's personal income tax has a progressive tax rate, with the highest rate reaching 45%, personal income tax revenue for the first eight months of this year was only 968.5 billion yuan, with an average of 680 yuan per person. This indicates that it is difficult to effectively collect personal income tax from the wealthy. Therefore, the tax system should be reformed, shifting from individual withholding and payment to family-based comprehensive taxation, and adopting severe penalties for tax evasion.
A family-based approach is more in line with the principle of fairness. This reform direction has been proposed for at least 20 years, but it has not been implemented due to operational difficulties. However, with the diversification of information acquisition channels and the advancement of technology, pilot programs can be conducted and gradually expanded in the future.
The sharing of consumption tax is also a reform measure proposed at the Third Plenary Session, but as a minor tax category, it contributes little to local tax revenue. The best time window for property tax has passed, so the current tax reform may mainly focus on personal income tax. In terms of fiscal reform, I proposed equity finance two years ago, which involves revitalizing state-owned equity, optimizing the stock, and expanding the contribution of state-owned equity to fiscal revenue.
The reason why land finance could make a significant contribution to local economic development in the past was due to the reform of the land system. Similarly, if equity finance is to become another source of fiscal revenue after land finance, the prerequisite is to advance the reform of state-owned enterprises. According to data provided by the State-owned Assets Supervision and Administration Commission, in 2022, the total assets of state-owned enterprises (excluding financial enterprises) nationwide were 339.5 trillion yuan, the total debt was 218.6 trillion yuan, and the state-owned capital equity was 94.7 trillion yuan, with an average asset-liability ratio of 64.4%. However, the total profit in 2023 was only 4.5 trillion yuan, with a return on net assets of only about 3.7%.
The Third Plenary Session proposed to improve the system and mechanism of state-owned enterprises, promote the revitalization of existing assets and the disposal of inefficient and ineffective assets. If such a large amount of state-owned existing assets can be revitalized, then equity finance has great potential.
The precision of fiscal expenditure can be further improved.
The above mainly discusses the space for fiscal expansion, including increasing revenue and the deficit amount. The difference between fiscal policy and monetary policy is that it can be a total policy or a structural policy; monetary policy is mainly a total policy. Since fiscal policy has the function of precise policy implementation, in the face of prominent issues in the current economic field, fiscal policy can be targeted in terms of direction and intensity.For instance, currently, there is employment pressure, but why does the U.S. GDP growth rate lag significantly behind China's without causing employment pressure? The reason lies in the fact that the U.S. service industry contributes over 80% to the total employment, whereas in China, it is only around 50%. From January to September, China's manufacturing investment growth rate reached 9.2%, which is nearly double the GDP growth rate. However, the larger the scale of manufacturing investment, the fewer people it employs. This is because, since the beginning of this year, manufacturing investments have typically been used for large-scale equipment upgrades and investments in emerging industries, which will further reduce the number of workers in manufacturing.
In fact, since 2013, the total employment population in China's secondary industry could have decreased. This does not mean that manufacturing should not be invested in; China should become a manufacturing powerhouse and should also vigorously develop the service industry that can absorb more employment. That is to say, while fiscal support is provided for manufacturing investment, should there also be an increase in investment scale in the service industry? After all, full employment is a more important goal than GDP growth rate.
The issue of redundant construction in various regions is a long-standing problem and an important cause of overcapacity. Why are local governments so eager to attract investment? Firstly, it can help achieve GDP growth targets, and secondly, it can leverage the multiplier effect of investment to drive up land prices in the area, thereby increasing land fiscal revenue.
Therefore, the National Development and Reform Commission and the Ministry of Finance should study the behavior of local governments and the potential consequences of such behavior more, in order to establish more scientific evaluation indicators to improve the efficiency and quality of fiscal expenditure. For example, by downplaying the assessment of local GDP and increasing the assessment of net employment numbers.
In summary, there is still a lot of room for China's fiscal policy to be unleashed. People not only expect the introduction of an unexpectedly large scale of fiscal expenditure under economic downturn pressure, but also hope for an increase in the precision of policies, directly addressing the current economic difficulties and pain points, and an enhancement in the intensity and speed of fiscal and tax reforms.