**10,000 Fans Incentive Plan
There is no consensus on the expectations for China's economy in 2024.
According to the IMF, China's GDP growth this year can reach 4 in an optimistic scenario6%, but if the real estate sector continues to decline, it may be as low as 4%; Nomura's earlier forecast was about 4%, and some domestic brokerages and other institutions also made similar **. At the same time, however, most domestic institutions believe that China's economic growth will reach 5%, and the weighted target growth rate of each province announced by the local government and the two sessions in 2024 will exceed 53%。
The divergence between the different expectations is clearly concentrated in three areas:
First, when and where will real estate bottom? This affects whether the decline in real estate investment can be narrowed, and also involves the degree to which the shrinkage of assets will crowd out household consumption.
Second, how big is the impact of debt constraints on infrastructure? The recently released "No. 47 document" clearly states that 12 provinces and municipalities are not allowed to add new investment projects in principle. Debt stress has constrained local infrastructure, and most provinces with high debt stress in 2023 have not achieved their expected GDP growth targets for that year.
Third, how uncertain is there in the export field? The staggered growth of exports between 2020 and 2022 has subsided in 2023, and the scale of exports in 2024 may be difficult to maintain.
This means that in order to achieve 5% growth, it is necessary to either support real estate or infrastructure. But how much real significance does this bring to growth?
For the former, real estate as an asset can certainly bring wealth effects, and can also drive construction, home appliances and other industries. China's economic growth model is unique, and the overall contribution of real estate to the economy is greater than that of other economies. But from another point of view, real estate is also a cost, in the process of buying and selling, the cycle of assets and costs alternates, it is difficult to say whether the benefits brought by assets are greater, or the costs caused by costs are greater. The rapid rise in housing prices will also bring about the crowding out of consumption.
In the latter case, as infrastructure projects become saturated, their positive spillover effect on employment and the economy becomes weaker, while behind them is a rolling debt. Just as spending a lot of money on a property can certainly increase the value of the property, there is no need to put two layers of floor tiles or spend a lot of money on a sink. More importantly, infrastructure projects rely on public sector spending and input, but the financing process is market-oriented, which will exacerbate the crowding out of the public sector from the private sector, weaken the positive spillover of infrastructure to the economy and employment, and further exacerbate the structural imbalances in the economy.
The key to China's economic weakness is that the residential sector has been discouraged by the superposition of various factors. ** With the decline in property values, there is a loss of stock wealth. According to conservative estimates, between 2021 and 2023, the wealth management account of the resident sector will shrink by 2 trillion yuan, and the market value will decrease by 54 trillion yuan, housing assets shrank by 68 trillion yuan. While stock wealth is shrinking broadly, the opportunity for incremental income is decreasing. The adjustment of industrial policies has increased the pressure and competition for employment, and the average weekly working hours of urban employees have increased from less than 46 hours in June 2018 to 49 hours in December 2023, while the growth rate of per capita disposable income in urban areas has fallen by nearly 3 percentage points in the same period.
Almost all of the current macroeconomic contradictions can be attributed to the lack of expectations and confidence in the household sector. Whether it is overcapacity, low price levels and deflationary risks in the field of industrial consumer goods, or the lack of financing demand leading to the blockage of easy credit and the M1 growth rate hitting a historical low, it is related to the fact that the residential sector bears the non-market adjustment costs but has to face a shrinking market.
The theory of balance sheet recession holds that micro entities are the beginning of a balance sheet recession by cutting back on food and clothing and actively deleveraging. From 2021 to 2023, the leverage ratio of Chinese residents has declined for three consecutive years, which is a phenomenon that has never been seen before.
In such a situation, it is no longer meaningful to simply talk about economic growth. Again, we would like to reiterate the view that a 3 per cent growth that improves the current situation in the household sector would be better than a 5 per cent growth that has nothing to do with the household sector.
From this point of view, it is still useful to stabilize real estate, but it is necessary to rely on market forces to find the bottom, and can no longer rely on purchase restrictions and sales restrictions to control, let alone rely on non-market-oriented large-scale affordable housing construction to boost real estate investment. The bubble in the real estate market is not entirely blown up by market factors, and land finance, infrastructure investment and credit have undoubtedly amplified the bubble.
If spending on infrastructure can be reduced, there is a lot of room for lower personal income tax to directly help the household sector repair its balance sheet. Judging from the funds for infrastructure investment in recent years, about 17% of public financial expenditure is used for infrastructure, about 60% of special bonds are invested in infrastructure, and about 10% of land transfer expenditure is used for infrastructure. Assuming that the above-mentioned infrastructure expenditure can be reduced, based on the 2022 data, the savings can be about 35 trillion yuan of infrastructure funds. In comparison, the total size of individual income tax in 2022 is about 15 trillion yuan. This means that if there is less infrastructure spending, it can even be completely exempted from individual income tax.
In addition, it is also important to help the private economy return to the market. When the downward pressure on the economy is greater, there will always be an instinctive retreat in the residential sector and the private sector, and according to Keynesian theory, it is necessary to spend at this time to make up for the gap in market retreat. Keynesianism, however, argues that an important premise for this logic is that spending can help achieve full employment, and that only full employment can provide the conditions for the exit of temporary policy interventions. On the other hand, if the private economy cannot return to the market to assume the function of absorbing employment, ** expenditure may face a black hole that cannot be exited, and employment is the biggest livelihood of the people, but also the confidence of the residential sector**.