Abstract

Real estate has indeed spurred rapid economic growth in China, but past experiences cannot be dogmatically applied to the future. The later the regulation, the greater the difficulty, and this round of real estate regulation may take five to six years.

The Third Plenary Session of the 20th Central Committee of the Communist Party of China reviewed and passed the "Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernization" (hereinafter referred to as the "Decision"), which makes overall arrangements for China's further reform and opening up in the next five years and points out the direction for the transformation and development of the financial industry.

The subsequent meeting of the Political Bureau of the CPC Central Committee pointed out that the adverse effects brought about by changes in the external environment are increasing, domestic effective demand is insufficient, the operation of the economy shows divergence, there are still many risks and hidden dangers in key areas, and there are growing pains in the conversion of old and new momentum. At the same time, the meeting emphasized that the tasks of reform, development, and stability in the second half of the year are very heavy.

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What are the key tasks of China's financial industry in high-level reform and opening up in the next five years? How to deal with the adverse factors of current economic development? How to balance short-term challenges and long-term transformation?

Around the above issues, a recent interview was conducted with Professor Sheng Songcheng, a professor of economics and finance at China Europe International Business School.

Sheng Songcheng is an authoritative expert in the field of monetary finance theory and macroeconomic regulation, with both policy execution experience and a deep academic foundation. He has presided over the research, formulation, and promotion of China's unique social financing scale indicator, which has appeared in the Central Economic Work Conference and the government work report of the National Two Sessions for 14 consecutive years and is a key indicator reflecting the operation of China's macroeconomic and financial situation. In recent years, Sheng Songcheng has mainly engaged in teaching and research work in colleges and universities, and his research results have had a significant impact on both policy and the market.

Sheng Songcheng believes that there are five key aspects of financial sector reform, namely "high-quality development, central bank system, capital market, financial opening, and the formulation of financial laws". This reflects the central government's two main ideas for financial industry reform: one is to enhance the ability of the financial industry to serve the real economy, especially to support high-quality development. The second is to pay more attention to financial supervision and financial security. For example, in terms of financial opening, the construction of the capital market interconnection and cross-border payment system are all more cautious in wording, the former is "prudently promoted", and the latter is "independently controllable".

The three major risks faced by the current macroeconomic operation are real estate risk, local debt risk, and the risk of small and medium financial institutions. In Sheng Songcheng's view, the most important of these is the real estate risk.

At present, real estate investment and housing prices have not yet stabilized, and the market has discussed whether China's real estate will go the "Japanese way" or the "American way". In response, Sheng Songcheng said bluntly, "China will not go the American way, nor will it go the Japanese way." In his view, China's development is different from that of Japan and the United States at that time. China is investing resources squeezed out from the real estate market into new quality productive forces, developing modern manufacturing and advanced services."Currently, we are in the painful period of transitioning from old to new drivers of growth," Sheng Songcheng suggests, "On the one hand, in terms of capital allocation, resources should flow more towards advanced manufacturing and modern services. On the other hand, real estate should gradually achieve a soft landing."

Current macroeconomic policy should be primarily fiscal, with monetary policy as a supplement.

1: Since the beginning of this year, market institutions have concentrated on buying government bonds, driving the rapid decline of medium and long-term government bond interest rates. Against this backdrop, the central bank has begun to operate in the secondary market for government bonds. What is your view on this? What else can the central bank's monetary policy do?

Sheng Songcheng: The market's demand for government bonds is relatively large for two main reasons: First, there is a scarcity of assets, and investment channels are limited, while government bonds are risk-free assets and easily become a "safe haven" for funds; second, the market expects that interest rates will gradually decline over the next one to two years, and buying government bonds is a choice made by financial institutions after weighing the options.

In August of this year, the central bank carried out open market government bond operations, buying short-term government bonds from some primary dealers of open market operations and selling long-term government bonds, with a net purchase of bond face value of 100 billion yuan for the entire month. The "buy short, sell long" operation not only helps to curb the trend of one-sided downward movement in the long end of the yield curve but also aligns with the regulatory goal of guiding short-term interest rates downward.

Monetary policy has a "pushing rope effect," with better contraction effects and limited easing effects. Under current conditions, fiscal policy should be the main focus, with monetary policy as a complement. For example, the Ministry of Finance issues government bonds, the central bank lowers reserve requirements to release liquidity, and commercial banks buy government bonds to support fiscal efforts.

2: The Third Plenary Session of the 20th Central Committee proposed to accelerate the improvement of the central bank system and unblock the transmission mechanism of monetary policy. Recently, the central bank has made many adjustments in its monetary policy operations. What kind of reform thinking does this series of adjustments reflect behind the scenes?

Sheng Songcheng: In line with the spirit of the Third Plenary Session of the 20th Central Committee, the central bank's monetary policy reform thinking focuses on two major aspects: First, adhere to a supportive monetary policy stance, while the intensity and direction of policy reflect the requirements of high-quality development. Second, unblock the transmission mechanism of monetary policy and enhance the effectiveness of policy interest rates.

Among them, the reform to unblock the transmission mechanism of monetary policy mainly includes three aspects:

First, optimize the intermediate variables of monetary policy control, gradually shifting from a focus on the growth of monetary credit volume to price-based control.Secondly, further improve the market-oriented interest rate control mechanism. From the speech by Governor Pan Gongsheng at the Lujiazui Forum and recent interest rate cuts, the 7-day reverse repurchase operation rate will become the main policy rate, and the importance of the MLF (Medium-term Lending Facility) rate will decrease.

Thirdly, gradually include secondary market government bond transactions in the monetary policy toolkit to increase the channels for base money issuance. Currently, in the central bank's balance sheet, the proportion of government bonds is less than 4%, and the issuance scale of short-term government bonds in China is relatively small, which is not conducive to the central bank's direct adjustment of short-term market interest rates.

In addition, establishing a modern central bank system also implies reforms in the internal management mechanisms of the central bank. As a macroeconomic regulatory institution, the central bank requires very strong decision-making and research capabilities at the headquarters level. In this regard, the Federal Reserve is a typical example. Therefore, improving the central bank system also means strengthening the capabilities of the headquarters during institutional reforms. In the new round of national institutional reforms that began in 2023, the central bank abolished county branches, and the inherent logic lies in this.

3: Since April 2024, the growth rate of M1 (narrow money) has been negative for four consecutive months. How should we view this data change?

Sheng Songcheng: Negative growth of M1 is indeed rare in history. M1 is mainly composed of two parts: cash and demand deposits of enterprises and institutions. The main reasons for the current negative growth are twofold:

First, the economic activity is not high, and the willingness of enterprises to invest is low. The demand deposits of enterprises often reflect the activity of enterprise operations and investment. If enterprises place funds in demand deposits after receiving them, it indicates a strong willingness to invest because these funds need to be used in the short term. This also reflects the main problem faced by the current macroeconomy - insufficient effective demand.

Second, the statistical口径 of M1 needs to be optimized. The theoretical basis for the M1 indicator is that money is a medium of exchange and means of payment for goods, that is, money that can be used for payment at any time should be classified into the M1 category. Currently, a large number of Chinese residents use electronic payment methods such as WeChat and Alipay for payments, and the funds are essentially personal demand deposits or reserve funds of third-party payment institutions, and this part of the money has not yet been included in M1, there is a certain omission. Recently, Governor Pan proposed to revise the money supply indicators. It is expected that after the revision, the indicators will be more perfect and in line with the actual liquidity situation, and can more accurately reflect the relationship between the money supply and economic operations.

4: The central bank proposed to downplay the past control mainly based on the growth of monetary credit, and gradually shift to price-type control, does this mean that the indicative significance of indicators such as social financing and credit volume for monetary policy has decreased?

Sheng Songcheng: Downplaying does not mean unimportant, nor does it mean exiting.

Taking the social financing scale as an example, this is a unique indicator in China. It is calculated from the asset side of financial institutions and the issuance side of the financial market, and can comprehensively reflect the financing situation of various market entities and regions from the financial system. This indicator is very suitable for China's national conditions. The government work report still has expressions such as "the social financing scale and money supply are matched with the expected targets of economic growth and price levels" in the description of monetary policy, indicating that these indicators still have significant importance. Of course, with the development of economic and financial situations, financial indicators also need to be revised and improved. From the 1970s to the 1980s, with the rapid development of financial activities, the Federal Reserve revised the statistical口径 of money supply 16 times.It needs to be emphasized that financial data are interrelated, reflecting the overall financial operation, and one should not view any single indicator in isolation.

It is recommended to vigorously develop the productive service industry.

5: The 3rd Plenary Session of the 20th Central Committee pointed out that it is necessary to coordinate development and security, and to implement various measures to prevent and resolve risks in key areas such as real estate, local government debt, and small and medium financial institutions. In view of the current situation, what do you think still needs to be done to prevent and resolve risks in key areas?

Sheng Songcheng: The prevention and resolution of risks mainly focus on the following three aspects:

Firstly, the risk of real estate. It is not only necessary to promote the stabilization of the real estate market but also to build a long-term mechanism to resolve risks, and to take multiple measures to promote a smooth transition of the real estate industry to a new development model.

Secondly, the risk of local debt. I believe that adjusting the debt structure between the central and local governments, appropriately increasing the central government debt, deepening the reform of the fiscal and tax system, improving the transfer payment system, and adjusting the division of responsibilities between the central and local governments are all feasible strategies to resolve local debt risks and optimize the relationship between the central and local governments.

Thirdly, the inherent risks of the financial industry, especially the risks of small and medium financial institutions. They have a small asset scale and weak risk resistance. Therefore, it is necessary to hold the relevant parties responsible, to carry out routine risk prevention and resolution work, and to continuously enhance the ability to resist risks and serve the real economy.

6: Some people believe that the real estate market has a huge impact on China's macro economy, and discuss the path of saving the real estate market in China by analyzing the experience of the real estate markets in the United States and Japan. What do you think about this?

Sheng Songcheng: China is neither the United States nor Japan, and we will not follow the path of the United States or Japan. Our current development path is different from that of Japan and the United States at that time. We are transferring more resources to new quality productive forces, vigorously developing advanced manufacturing and modern services, and catching up with the trend of global scientific and technological innovation.

In the past period, many people had different opinions on the previous real estate regulation policies. In fact, before the epidemic, real estate had already absorbed too many social resources. At the end of 2019, the proportion of real estate loans in the total loan balance was as high as 29.0%.In 2023, the per capita GDP (Gross Domestic Product) of the United States was $81,000, while China's was approximately $13,000, less than one-sixth of that of the United States. However, the average living space per person in China has reached two-thirds of that in the United States.

Real estate has indeed spurred rapid economic growth in China, but past experiences cannot be dogmatically applied to the future. If regulation had been delayed by another two years, the problems would be more severe, and the difficulty of regulation would be greater. The main task at present is to prevent a significant downturn in real estate and achieve a soft landing. This round of real estate regulation may take five to six years.

7: Currently, as the growth rate of real estate, an old driving force, slows down, you have suggested that China vigorously develop the productive service industry to cultivate new quality productive forces. What is the concept of the productive service industry, and what is its relationship with new quality productive forces?

Sheng Songcheng: The productive service industry can be understood as an intermediate service sector, mainly providing services for the production activities of various market entities. At present, the productive service industry involves 16 categories of the national economic industry, including the information transmission, software and information technology service industry, as well as the financial industry, etc.

In 2023, the added value of China's service industry accounted for 54.6% of GDP, while the United States accounted for 81.6%. In the nearly 30 percentage point gap between China and the United States in the proportion of the service industry, about 60% comes from the productive service industry.

While the proportion of the service industry in the United States has increased, it has also maintained a high level of labor productivity. The main reason is the rise in the proportion of the productive service industry. Data shows that from 1977 to 2023, the proportion of the productive service industry in the GDP of the United States increased from 39.5% to 47.7%, and its per capita GDP increased from $30,337 to $66,755 during the same period.

In recent years, the global production layout has shown a trend of "nearshore reshoring." Chinese enterprises have taken a new round of "going global" steps, and they need the productive service industry to "escort and protect" them. Enterprises not only need to move towards the high end of the global value chain through technological innovation, product innovation, and brand building but also need the support of professional services such as business services, finance, and law.

In summary, the service industry plays an indispensable role in the cultivation and development of new quality productive forces, especially the productive service industry with high added value, which is an important cornerstone for China's service industry to support high-quality economic development in the future.

Opening up to the outside world requires enhancing exchange rate risk avoidance capabilities.

8: The Third Plenary Session of the 20th Central Committee proposed to improve the high-level opening up system and mechanism, what are the key requirements for the opening up of the financial industry?Sheng Songcheng: The Third Plenary Session of the 20th Central Committee has set higher requirements for financial opening up to the outside world, with a focus on promoting the internationalization of the renminbi, accelerating the construction of Shanghai as an international financial center, consolidating and enhancing the status of Hong Kong as an international financial center, expanding the introduction of foreign financial institutions, and promoting the interconnection of financial markets.

9: What are the current obstacles to further improving the level of financial opening up, and how can they be overcome?

Sheng Songcheng: At present, there are still some obstacles to financial opening up, mainly reflected in the following aspects:

Firstly, the promotion of renminbi internationalization is not strong enough. There is a certain pressure on capital outflows, especially since 2023, foreign investors have been withdrawing funds from the Chinese stock market, and there is also a certain depreciation pressure on the exchange rate. This objectively reduces the attractiveness of the renminbi and affects confidence in its internationalization.

The use of renminbi outside China is mainly concentrated in Hong Kong and Singapore, and the use of renminbi by countries along the "Belt and Road" is mainly in the field of trade, while its use in direct investment, securities investment, trade credit, and other fields is not yet widespread. Therefore, the promotion of renminbi internationalization in "Belt and Road" countries needs to be strengthened. Due to the high sensitivity to exchange rate fluctuations, in the impossible trinity, China has chosen an independent monetary policy, a relatively stable exchange rate, and appropriate control over the capital account. China's capital account openness is even lower than that of BRICS countries such as Brazil and Russia, and is comparable to that of South Africa and India. Although China has lifted restrictions on quota limits for channels such as QFII (Qualified Foreign Institutional Investors) and RQFII (Renminbi Qualified Foreign Institutional Investors), the acquisition of qualifications requires approval, which increases transaction costs and reduces the use of renminbi in the capital field.

Secondly, there is still room for improvement in the legal and institutional aspects of the financial sector, especially in terms of supporting systems such as information disclosure and accounting standards, which are not yet compatible with the common rules of international financial markets, and the predictability and stability of policies still need to be improved. In addition, some financial laws and regulations are relatively outdated, and the construction of supporting systems does not match the diverse development of the economy.

Thirdly, there are deficiencies in the interconnection of domestic and foreign financial markets. The main issue is the insufficient degree of investment freedom, with many restrictions on investor qualifications, tradable securities, and transaction amounts, and the approval process is also cumbersome, increasing transaction costs and reducing the attractiveness of capital inflows. In particular, the shortcoming of the futures market opening is quite prominent, lacking varieties such as renminbi foreign exchange futures, with low participation from foreign investors and weak international influence on domestic exchange prices.

10: What is the primary task in promoting high-level financial opening up at present?

Sheng Songcheng: First, we should strengthen the institutional construction for domestic financial institutions and enterprises to cope with exchange rate risks, enhance the regulatory authorities' ability to monitor exchange rate risks, guide domestic institutions to adhere to the principle of exchange rate neutrality, and increase their ability to resist the risks of exchange rate fluctuations. On this basis, the fluctuation range of the exchange rate can be appropriately expanded. With domestic institutions having a strong ability to resist exchange rate risks, the opening up of the capital account can be gradually expanded, and the restrictions on foreign investment entering China can be steadily relaxed to increase the capital attractiveness of the renminbi, allowing the financial market to better play its role in pricing and resource allocation.