Yuan HaixiaHe is a key member of the China Macroeconomic Forum (CMF) and the executive director of the China Chengxin International Research Institute
Zhang Kun is a senior researcher at the China Chengxin International Research Institute
This article ** since November 27 Peking University Financial Review.
Number of words: 5252 words.
Reading time: 15 minutes.
1. The controversy caused by the "balance sheet recession".
The concept of balance-sheet recession was first coined by Koo Chaoming, chief economist at Japan's Nomura Research Institute, who attributed the economic depression that occurred in Japan in the 90s of the 20th century to a balance-sheet recession. After the bursting of the bubble in Japan's real estate and market markets, the assets of enterprises and households that were overextended during the bubble period shrank sharply, and the balance sheet was unbalanced and insolvent. The goal of the business has shifted from maximizing profits to minimizing debt, putting all cash flow into debt repayment while stopping borrowing, and households spending most of their income on debt repayment rather than consumption. This "debt minimization" model ultimately leads to a synthetic fallacy, with no private sector borrowing demand even when interest rates fall to extremely low levels, monetary policy fails, and aggregate demand shrinks, eventually leading to a prolonged recession.
Since the beginning of this year, China's economy has weakened after a brief period of recovery, and the phenomenon of excess household savings and sluggish corporate investment has persisted, and the debate about whether China will fall into a balance-sheet recession has been rampant. As early as the second half of 2022, Mao Zhenhua and other scholars proposed to be vigilant against the risk of China's balance sheet shrinkage under the impact of the epidemic, and many scholars focused on the causes and experience of Japan's balance sheet recession (Yao Yimin and Yang Yang, 2022;Jin Yi, 2022;Ruan Da & Zhu Yuanrong, 2022;etc.). Zhang et al. (2022) conducted a simulation based on the actual situation in China, pointing out that when the asset ** continues to decline, China's economy will face a certain risk of balance sheet recession, and Gu Chaoming also pointed out that "if China's real estate bubble bursts, China may face the risk of balance sheet recession". More studies argue that there are huge differences between China and Japan in terms of market size, stage of economic development, and industrial structure, and that it is meaningless to compare China's current predicament to Japan's recession in the 90s of the 20th century (Guan Qingyou, 2023;).Zhang Ming, 2023;etc.). At the same time, there has also been a fierce debate around the macro policy of "stimulus or reform", and on the whole, the consensus on reform is widespread (Yuan et al., 2023;Liu Shangxi, 2023;Cheng Shi, 2023;How to solve the structural and cyclical problems facing China's economy is crucial.
2. Performance of structural contraction of the balance sheets of the household and corporate sectors
Affected by factors such as the scarring effect of the epidemic, the downturn in the real estate industry, lack of confidence and weak expectations, the assets of China's residential sector have shrunk, risk appetite has declined, and the willingness to save and reduce debt has increasedThe balance sheets of enterprises in different industries and different natures of the corporate sector are structurally differentiated, and the total leverage ratio passively increases.
(1) The leverage ratio of the residential sector continued to fluctuate and fall
Housing prices** have led to a contraction in the assets of the residential sector, hitting the balance sheet. Housing accounts for more than 65 percent of China's total assets, more than 70 percent of residents' physical assets, and nearly 76 percent of residents' liabilities. Affected by the weakening of real estate**, the growth rate of residential housing assets in 2022 will only be 04%, down 11% from 2017, the decline in the growth rate of housing assets led to a decline in the growth rate of residents' assets, from 12% in 2017 to 03%。At the same time,Affected by the scarring effect of the epidemic, high employment pressure, and sluggish income growth, residents' confidence has weakened, and excess savings and prepayment of loans have continued。From January to July 2023, the scale of new RMB deposits of residents was 111 trillion, an increase of 1 compared with the same period last year1 trillion, down 08 trillion yuan, the scale of new loans only increased by 03 trillion yuan, and in July, medium and long-term loans turned negative again, becoming one of the important signs of the residential sector taking the initiative to reduce debt. In addition, residents' risk aversion has risen, investment willingness has declined, service consumption** but overall consumption is weak, and the year-on-year growth rate of service consumption from January to July is as high as 203%, but the total retail sales of consumer goods increased by 25%, down 06 percentage points, further dragging down the balance sheet repair. Overall, the leverage ratio of the residential sector has continued to fluctuate and decline since 2020, which is the first time this phenomenon has occurred since the financial crisis。The leverage ratio of the residential sector in 2022 was 6762%, down 0. from the high at the end of 20207 percentage points, according to China Chengxin International**, the leverage ratio of the residential sector will drop to 67 in 20234%。
(2) Differentiation of the balance sheet repair of the enterprise sector
Enterprises in different industries and different natures have repaired differentiation and exacerbated the differentiation of balance sheets. On the one hand,Industries such as accommodation, catering, entertainment, and transportation related to "food, housing and transportation" have been rapidly turning losses into profits to promote balance sheet repair. From January to July, the service industry production index increased by 8 percent year-on-year3%, especially the year-on-year growth of the accommodation and catering production index remained above 20%. Affected by the recovery of downstream demand and weak exports, the performance of upstream industries such as raw materials and high-tech industries in industry was relatively sluggish, and the added value of high-tech industries from January to July was 1 year-on-year6%, the lowest level since 2019, and the balance sheet deteriorated further. In addition, the downturn in the real estate industry has also dragged down the repair of upstream and downstream industries such as construction, furniture, and home appliance manufacturing. On the other hand, the profits of state-owned enterprises and private enterprises are divergent, the pressure on private enterprises to passively increase leverage. As of the second quarter of 2023, the overall profit of state-owned enterprises exceeded 2 trillion yuan, a year-on-year increase of 5%, and the profit of private industrial enterprises was less than 09 trillion, down 13 percent year-on-year5%, while small and medium-sized enterprises, especially downstream small and medium-sized enterprises and service small and medium-sized enterprises, have not significantly recovered their operating profits. Since the beginning of this year, the year-on-year growth rate of fixed asset investment has been negative, falling to more than double digits in July, and the year-on-year growth rate of private investment from January to July has fallen to -05%。The passive leverage pressure caused by the simultaneous shrinkage of the assets and liabilities of private enterprises is greater, and the asset-liability ratio of private enterprises will reach 60 in June 20233%, in comparison, the asset-liability ratio of state-owned enterprises is relatively stable, at 576%。On the whole, since 2021, the policy has continued to increase support for the financing of real enterprises, and actively guided the comprehensive financing cost of enterprises to decline, and the overall moderate growth of debt in China's enterprise sector has driven the leverage ratio to riseIt reached 176 in June 202358%, which is completely different from a Japanese balance-sheet recession.
3. Look at the core causes of balance sheet damage through appearances
A balance sheet recession is an economic performance, and the balance sheet, as a transmission mechanism or channel, can amplify the negative impact of a damaged balance sheet. At present, the reasons for the rise in the risk of shrinkage of China's balance sheet are not only long-term factors such as cyclical, structural, and trend problems, but also short-term factors such as insufficient market confidence and weak expectations.
(1) The superimposed impact of cyclical, structural and trend factors
At present, China's economic downturn is intertwined with both cyclical factors and structural and trend factors, and the short-term impact of the epidemic will not change the long-term trend of shifting economic growth. Especially during the period of continuous competition between external powers, the shift of internal economic growth, and the pain of structural adjustment, the factors such as globalization dividends and human resource dividends that used to support rapid economic growth have changed, and the downward pressure on China's economic growth has persisted. The slowdown in economic activity leads to a decline in production and employment, as well as a decrease in consumption and investment, which negatively affects macro leverage. In addition, economic structure problems may also lead to the decline of the balance sheet, for a long time in the past, China has relied on real estate to drive the economy, which has a far-reaching impact on residents, the financial system, land finance, and economic growth, and the accelerated adjustment of the real estate industry will have an impact on China's economy and its assets and liabilitiesIn recent years, the adjustment of China's industrial structure has accelerated, but the impact pressure of industrial chain decoupling and chain breaking caused by the intensification of international friction under the great power game has increased, and the transformation of China's high-end manufacturing industry has been blocked, and the relocation of low-end industries has weakened the momentum of economic growth. These cyclical, structural, and trending issues are impediments to economic growth that are difficult to remove in the short term, and balance sheet discussions must incorporate these factors into the research framework.
(2) Lack of confidence and weak expectations of micro subjects
It is true that housing prices** will shrink residents' assets, but the root cause of the increase in residents' precautionary savings and the decline in loan growth is the lack of confidence and weak expectations for future income growth. In June 2023, residents' confidence in future income and future employment expectations decreased by 14 and 36 percentage points to 485% and 487%, in the context of insufficient aggregate demand, residents expect future income growth to slow down, consumption and investment capacity decline, and tend to increase savings to reduce debt, which ultimately leads to a decline in the asset-liability ratio of the household sector. At the same time, affected by high real interest rates, credit constraints and sluggish expectations, the corporate sector has insufficient credit demand and low investment willingness. Since the beginning of this year, deflationary pressure has been increasing, CPI and PPI have negative year-on-year growth in July, and the real interest rate has risen from -0 in the fourth quarter of 2021 while the nominal interest rate remains unchanged5% to 34%。Financing costs remain high, dampening companies' willingness to borrow. In addition, some lending constraints and financing restrictions have also made the financing needs of the enterprise sector not fully met, such as commercial banks are more inclined to state-owned enterprises when lending, and private enterprises and small and micro enterprises require sufficient collateral for loans.
Fourth, how to avoid the economy sliding into a "balance sheet recession".
In the process of normalized economic development, residents and enterprises may retreat to a certain extent, and the private economy is not powered enough.
(1) Strengthen the overall planning of macroeconomic regulation and control
On the one hand, macroeconomic policies need to strengthen overall planning, maintain stability, strengthen the guidance of expectations, and avoid fragmentation and movement of regulation and control. On the other hand, the current economic downturn short-term pressure and the medium- and long-term potential growth rate downward superposition, the short-term policy still needs to strengthen the efforts to stabilize growth, stabilize expectations, and boost market confidence, at the same time, it is necessary to further strengthen the guidance of expectations, not only to release the short-term steady growth signal, as soon as possible to reverse the lack of confidence and weak expectations, but also to adhere to the GDP assessment in the medium term, to encourage all localities to explore the growth potential.
(2) Give full play to the main role of fiscal policy in stabilizing growth
Fiscal policy should continue to play a role in stabilizing growth and continue the overall tone of strengthening efficiency. First, we will continue to promote tax cuts and fee reductions, highlighting precision and pertinenceConsider further reducing corporate income tax, especially exempting small and micro enterprises from corporate income tax, to help enterprises bail outThe second is to increase the implementation of incremental fiscal funds and appropriately raise the fiscal deficit rate。In the second half of the year, the pace of special bond issuance should be accelerated, and the implementation of incremental fiscal funds should be increased, including policy-based development financial instruments and the revitalization of special bond limits. This year, the budget deficit ratio rose to 3%, and the broad deficit ratio after taking into account special bonds was 5.%.9%, which is still marginally lower than the previous three years, and there is still some room for improvement;Third, compared with developed countries such as the United States and JapanChina has a large space for leverage, depending on the economic recovery situation, as appropriate, consider increasing leverage;Four areStrengthen the coordination of fiscal policy with other policies to promote consumption and investmentFor example, through the issuance of special treasury bonds, cash or digital currency subsidies will be issued to the residential sector, and consumption subsidies will be provided for durable consumer goods such as home appliances and automobiles.
(3) Give full play to the expected guiding role of monetary policy and the policy multiplier effect
Compared with developed economies such as Europe and the United States, China's monetary policy during the entire epidemic period has been relatively restrained, and overall has not adopted a flood of basic currency delivery, and the current monetary policy still has some room for adjustment in guiding the financing cost of the real economy down and protecting the liquidity of the money market. According to the economic recovery situation, we will wait for opportunities to increase RRR and interest rate cuts to promote the financing and investment needs of the real economy. In addition,Optimize and improve structural monetary policy tools, guide the flow of funds to new infrastructure, high-tech, small and medium-sized enterprises and other key areas, effectively reduce the financing cost of enterprises, and truly support the development of the real economy. For example, through tools such as quasi-PSL, we will guide the precise and targeted delivery of policy funds in key areas, such as water conservancy and new infrastructure with large capital demand, low income or high volatility, etc., to establish a differentiated credit delivery mechanism, and to study the varieties of special loans according to the characteristics of credit objects, and improve the level of refined pricing, including extending the term, reducing interest rates, and special subsidized loans.
(4) Release the vitality of the factor market through deepening reform
The first is to further promote the reform of the factor market, promote the improvement of total factor productivity, and hedge against the downward trend of potential growth. Deepen the reform of the market-oriented allocation of factors such as land, labor, capital, and data, and break the problems of poor flow of factors and inefficient resource allocation in China, such as optimizing the land supply structure, deepening the reform of the household registration system, and cultivating the market for data elements, so as to guide the flow of resources and production factors to high-efficiency departments. The second is to organically combine the supply-side reform with the strategy of expanding domestic demand, and promote industrial upgrading through supply-side structural reformGive full play to the advantages of the super-large-scale market and the radiation and driving role of high-tech manufacturing. For key digital economy industries such as cloud computing, big data, Internet of Things, industrial Internet, blockchain, artificial intelligence, virtual reality and augmented reality, we will increase the tilt of resources through supply-side structural reforms, promote industrial upgrading and manufacturing upgrading, and expand investment demand through high-level and high-quality reindustrialization. The third is to further promote the reform of mixed ownership, optimize the business environment, and unleash the vitality of the private economy。Promote the reform of mixed ownership, and support private enterprises to enter more market areas through capital integration and other means;Further optimize the business environment for private enterprises, attach importance to the efficiency assessment of state-owned enterprises, and orderly remove inefficient zombie state-owned enterprises, etc. Fourth, it is necessary to further promote the reform of the income distribution system and effectively expand domestic demand。Intensify efforts to adjust the distribution structure of national income and the income structure within the resident sector, increase the proportion of the resident sector in the primary income distribution, and steadily alleviate the current problem of excessive income disparity, so as to increase the average social consumption rate and give play to the role of the consumption multiplier in stimulating economic growth.
(5) Properly handle risks in key areas such as real estate and local debts
Guide the transformation of real estate to avoid a balance sheet recession caused by a decline in house prices。From a long-term perspective, the real estate industry has entered the stage of structural adjustment and transformation and development of supply and demand, and the short-term recommendations are still based on "stabilizing expectations, stabilizing housing prices, and stabilizing real estate". In the long run, efforts can be made from the supply system, business model, business model, land mechanism and other aspects to promote the smooth transition of the real estate industry to a new development model. In order to prevent and resolve the local debt problem, it is necessary to combine short-term and medium- and long-term measures to resolve the local debt problem in the process of growth. In the medium and long term, it is necessary to promote the reform of the fiscal and taxation system, accelerate the reform of the central and local powers and expenditure responsibilities, and strengthen the coordinating role of finance. At the same time, we will promote the reform of the deep-level mechanism and build a long-term mechanism for local debt management. In the short term, it is necessary to adhere to the management idea of "opening the front door and blocking the back door", and increase the "time for space" efforts to help the soft landing of debt risks. The first is to reasonably control the increment and further optimize the debt structure. Second, for the stock of hidden debts, the main responsibility should be compacted and classified and screened. Third, according to the type of debt, we will promote debt restructuring and replacement in an orderly and transparent manner, including the issuance of special refinancing bonds and loan swaps, so as to exchange time for space and low interest for high interest to mitigate risks. Fourth, we should give full play to the advantages of resources in accordance with local conditions, especially make good use of the resources of local state-owned enterprises. Fifth, appropriately increase the tolerance for hidden debts, and so on.
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