AI MENG/CHINA DAILY
There have been lots of discussions lately about some major adjustments in China's macroeconomy.
Speaking of root causes, in general, there are five groups who hold views as outlined below.
The first group believes that due to the ongoing Sino-US tensions, a deterioration in the external environment has led to China's macroeconomic difficulties.
The second group deems weak consumption as the reason, as changes in the overall income, confidence and other factors have led to a contraction in consumption.
The third group thinks that domestic supply is piling up, and corporate profits are compromised, which has further led to a decline in income and insufficient consumption.
The fourth group blames deep adjustments in the real estate market for the decline in demand, high debt and oversupply.
There is also a group holding the view that China is undergoing a balance sheet recession, believing that there is a significant change in the asset-liability structure that has led to comprehensive liability management nationwide and contraction in the number of market players.
Finding the root cause
In light of this, figuring out whether these reasons are the root causes or not for the current macroeconomic downturn is significant.
External demand, which has always been an important cornerstone of China's macroeconomic stability, performed beyond expectations last year despite headwinds from an unstable external environment. Therefore, a variation in the external environment can be preliminarily ruled out.
Second, there is also the issue of insufficient consumption, which is reflected in a decline in the growth rate of total retail sales of consumer goods. However, by analyzing the changes in domestic demand, and supply and demand structure, it can be revealed that the most dramatic changes did not occur in consumer goods, but investment goods, because the decline in consumer goods prices has been significantly lower than that in investment goods rates. Therefore, in finding the root cause, the decline in consumption is only a superficial reason.
As for oversupply in some sectors due to overcapacity, it is only cyclical — a natural market phenomenon that normally appears every seven to eight years.
In the current cycle, such an issue presents some new phenomena, the causes of which include but are not limited to cyclical changes, market behavior and market order. These factors are not the root cause for the imbalance in domestic supply and demand.
When it comes to the balance sheet, changes in the assets and liabilities of any market entity are inevitably the result of changes in a variety of basic parameters, and will also form an important influencing factor in the next-step economic cycle and the decision-making of market entities. That is, changes in the balance sheet, which for China is a so-called recession in this case, are both a result and a derived cause, negating its role as the ultimate cause. The management of the balance sheet, too, is only a temporary solution.
In summary, we can see that changes in supply, demand and the balance sheet are all related to changes in China's development paradigm, which point to drastic adjustments in its real estate sector, a major issue that the nation should pay heed to at present. Such an adjustment leaves a profound and drastic impact not only on the demand side of the real economy, but also on the asset side of the balance sheet and the liability side from a financial perspective.
Policy tools are key
Specifically, changes in the real estate sector have affected some key parameters, such as real estate consumption, investment spending, credit, as well as the collateral of enterprises and individuals, and government revenue. Meanwhile, they also show a series of deep-seated issues in the development mode and involved systems. Therefore, there is a need for precise policymaking and implementation in the real estate sector.
First, proactive fiscal policy, which attracts most of the market's attention, is an important pillar of in-depth governance in the real estate sector. A more proactive fiscal policy should not focus too much on the deficit ratio, but rather on the growth rate of broad fiscal spending, which is central to a more proactive fiscal policy in 2025 and 2026, and the growth rate of broad fiscal spending should match the target growth rate of nominal GDP of 5 percent.
To this end, the implementation of a proactive fiscal policy must be complemented by a more active monetary policy, and the easing of the monetary policy is of equal importance to prevent economic "hypothermia" and avoid deflation.
It is necessary for proactive macroeconomic policies to be made with a cross-year perspective — preferably with a two-year time span — to systematically arrange indicators, as these can help dispel market concerns over policy stability. In addition, the policy foothold should not be overly generalized, and must focus on basic and root issues.
Way out
Stabilizing the real estate market is the key to stabilizing China's confidence, expectations and avoiding vicious circles.
China should seize the opportunity of the sharp decline in real estate prices, carry out large-scale real estate acquisition and storage, and make every effort to promote new urbanization.
This will not only help resolve the dilemma of deep adjustment in the real estate market, but also effectively solve the housing problem of migrant workers and comprehensively promote the development of new urbanization.
In addition, the nation can further issue treasury bonds on a large scale to provide sustained financial support for deepening reform and expanding domestic demand.
The government should promote the adjustment of the asset side in a timely manner, and accelerate the construction of the social system with the optimization and adjustment of the asset side.
Regulators should rectify the current chaos resulted by giving low prices with no limits in the market and take this reform as an opportunity to upgrade the mechanism of price formation, secure market order, and promote the construction of a unified market.
Last but not least, on the question of local government debt, China should deepen reforms among local governments and refresh the goals and functional positioning of local governments. To the outside world, China should promote opening-up to a new stage, and further enhance the resilience and competitiveness of its economy.
The writer is president of Shanghai University of Finance and Economics.
The views do not necessarily reflect those of China Daily.
