In the first three quarters of this year, China's GDP grew by 5.2% year-on-year, and as the fourth quarter is about to conclude, it is expected that the annual growth rate will exceed 5%. Given that real estate data is still awaiting stabilization and external demand remains uncertain, efforts are still needed for stable economic growth next year.

During the 2023 China-Europe Finance and Investment Forum and the CLF50 Annual Conference held on December 3, Sheng Songcheng, a professor of economics and finance at China-Europe and former director of the Central Bank's Survey and Statistics Department, stated that with the continuous implementation of growth-stabilizing policies, and under the condition of a low base last year, China's main economic indicators in the fourth quarter will be better than expected. "However, if the economic growth rate next year is to reach around 5%, efforts are still needed." He believes that a proactive fiscal policy will continue to be implemented next year. If the economic growth rate reaches about 5% next year and the deficit scale (4.88 trillion yuan) remains the same as this year, then the target deficit ratio for 2024 will reach about 3.6% (this year it is about 3.8%). Structural monetary policy supports weak links in the economy and promotes high-quality development, which is also in line with the spirit of the Central Financial Work Conference. Currently, China has relatively more room for policy space in terms of reserve requirement ratio cuts.

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Sheng Songcheng also believes that the China-US interest rate differential will enter a stable period, and the renminbi may maintain a moderate appreciation trend, but the appreciation will be limited.

Under slow recovery, fiscal policy still needs to exert effort

The support policies in the fourth quarter have boosted market confidence, but the economy is still in the process of bottoming out. Recent high-frequency data shows that the stabilization of real estate sales data still needs time; the official manufacturing PMI for China in November, announced on Thursday, decreased from 49.5% in October to 49.4%, lower than the expected 49.7%; the official non-manufacturing PMI in November fell to 50.2%, a decrease of 0.4 percentage points from the previous month, falling for two consecutive months and reaching a new low for the year, but still remaining in the expansion area.

Sheng Songcheng said that this round of recovery will be relatively slow. One of the reasons is that investment has not yet stabilized. From January to October, fixed asset investment grew by 2.9% year-on-year, a decrease of 0.2 percentage points from January to September. Consumption recovery is slowing down. In October, the total retail sales of consumer goods in China grew by 7.6% year-on-year, 2.1 percentage points faster than the previous month, but only increased by 0.07% month-on-month. Consumption recovery can also be seen from the price level. The CPI growth rate in October was -0.2% year-on-year and -0.1% month-on-month. In addition, external demand still has uncertainty. In US dollar terms, China's total export volume in October this year decreased by 6.4% year-on-year, an increase of 0.2 percentage points from September.

"If the economic growth rate next year is to reach around 5%, efforts are still needed." He believes that a proactive fiscal policy will continue to be implemented next year. If the economic growth rate reaches around 5% next year and the deficit scale (4.88 trillion yuan) remains the same as this year, then the target deficit ratio for 2024 will reach about 3.6%.

The issue of fiscal sustainability is often raised, but Sheng Songcheng mentioned earlier that there is no fixed uniform warning line for the fiscal deficit ratio. The 3% warning line in the 1991 Maastricht Treaty was mainly to ensure that the fiscal deficit ratios of EU countries were basically the same, but this does not conform to the actual situation in China. In the longer term, China's fiscal deficit ratio can be appropriately increased to create conditions for a proactive fiscal policy.

The probability of a reserve requirement ratio cut is greater than that of an interest rate cut

In terms of monetary policy, the market's liquidity often tightens in the fourth quarter, and the increase in bond supply (trillion yuan of government bonds and special refinancing bonds) has also increased liquidity pressure. Against this backdrop, the call for reserve requirement ratio cuts and interest rate cuts in the market has gradually strengthened.However, Sheng Songcheng believes that the probability of a reserve requirement ratio (RRR) cut is greater than that of an interest rate cut. Currently, the excess reserve rate of financial institutions in China is at a low level, and a RRR cut is more effective in regulating market liquidity. Data shows that the current weighted reserve requirement ratio for financial institutions in China is 7.4%, while interest rates are already at a historical low. The current Loan Prime Rate (LPR) has reached a new low since the reform in 2019, indicating that there is more room for a RRR cut than for an interest rate cut.

"Most of China's national and local government bonds are purchased by commercial banks. Currently, about 64% of China's national bonds are held by commercial banks, and about 86% of local government bonds are held by commercial banks. A RRR cut will increase the funds that commercial banks can freely use, thereby better supporting the issuance of national and local government bonds, which is also a major means of China's monetary policy to coordinate with fiscal policy."

In addition, as of the end of September, the net interest margin of China's commercial banks was 1.73% (1.74% at the end of the first half of the year), the lowest value since statistical data began in 2010; in the first three quarters of this year, commercial banks achieved a cumulative net profit of 1.9 trillion yuan, a year-on-year increase of 1.6%, with the growth rate falling by 1.0 percentage points compared to the end of the first half of the year. In September, the weighted average interest rate for corporate loans was 3.8%, at a historical low level. Considering that the China-US interest rate differential is still at a relatively high historical level, this also limits the room for China to cut interest rates.

In the future, he believes that structural monetary policy will play a key role in supporting weak links in the economy and promoting high-quality development. According to traditional theories and the operations of various countries, monetary policy is essentially a total quantity control tool, but in China, for a long time, monetary policy has actually been a combination of total quantity control and structural control. Especially in recent years, China's structural monetary policy tools have been continuously innovated and have played an increasingly important role. They are effective means to support weak links in the economy (such as small and micro enterprises, preventing and resolving real estate risks, etc.) and key areas (such as scientific and technological innovation, advanced manufacturing, green development, etc.), and to promote high-quality economic development.

In fact, structural monetary policy also complements fiscal policy because adjusting the structure is one of the tasks of fiscal policy. Data shows that at the end of September, the balance of various structural monetary policy tools totaled 7 trillion yuan, accounting for 17.2% of the total assets of the People's Bank of China (40.8 trillion yuan), an increase of 0.8 percentage points compared to the end of June, and an increase of 1.7 percentage points compared to the end of last year.

Under the stabilization of the China-US interest rate differential, the renminbi appreciates moderately

With the Federal Reserve's interest rate hikes approaching an end, and the market's expectations for China's stimulus policies remaining high, the renminbi has been appreciating recently, with a cumulative appreciation of nearly 2000 basis points compared to its weakest level in the previous two months.

Sheng Songcheng believes that the China-US interest rate differential will enter a stable period, but China's monetary policy needs to consider the balance between internal and external factors (the current China-US interest rate differential is still nearly 200 basis points), which is also one of the reasons why China is more cautious about cutting interest rates. In the future, the interest rate differential between China and the United States and its trend of change will be one of the important factors determining the exchange rate, so the renminbi may maintain a moderate appreciation trend, but the appreciation will be limited.

In his view, the Federal Reserve does not have the basis for cutting interest rates in the short term. On the one hand, even if the inflation level in the United States falls somewhat, it is still far above the Federal Reserve's 2% target. On November 30, the latest data from the U.S. Department of Commerce showed that the core PCE price index, excluding food and energy, fell from 3.7% in September to 3.5% in October on a year-over-year basis; on the other hand, the current U.S. economy is still relatively strong, and the job market is tight, so there is no need to cut interest rates.Recent market expectations for interest rate cuts have been heating up. Christopher Waller, a member of the Federal Reserve Board, a voting committee member, and one of the representatives of the hawkish faction, mentioned this week that the current interest rate level is already sufficient to bring inflation back to the 2% target level. He stated that if the data continues to decline over the next 3 to 5 months, he would consider cutting interest rates, regardless of whether the economy is in recession or slowing down. Following these remarks, the interest rate market bet that there will be about 110 basis points, or a maximum of 5 interest rate cuts, next year, which is the most aggressive forecast since September. However, on Friday, Federal Reserve Chairman Jerome Powell refuted market speculation about interest rate cuts in his speech at Atlanta's Spelman College. He said, "It is premature to conclude that we have achieved a sufficiently restrictive stance, or to speculate about when policy might ease."

Powell added, "If the timing is right, we are prepared to further tighten policy." However, he also pointed out that monetary policy has entered a restrictive territory.

Sheng Songcheng mentioned, "At least until the first quarter of next year, the Federal Reserve will not cut interest rates, and interest rate cuts may even have to wait until the second half of the year. Of course, the Federal Reserve will still make decisions based on the latest economic data."