“The core factor causing current economic problems is not real estate but the contraction of government spending” according to David Daokui Li, Tsinghua University. “The entire government’s operational orientation needs to be changed by reforming the fiscal and tax systems and local officials’ assessment indicators to shift government incentives from investment and project-oriented policies to policies that provide basic social welfare and help people increase disposable income to boost consumption, transforming the government from an investment-oriented government to a social welfare service-oriented government,” Li said.

The Tsinghua professor and former monetary policy advisor to the central bank highlights the urgent need for Beijing to issue debt, expand spending, and shift from investment to subsidies for families.

One week ahead of the Third Plenary Session of the 20th Central Committee of the Communist Party of China, scheduled on July 15-18, David Daokui Li, Professor and Director of the Academy of Chinese Economic Thought and Practice (ACCEPT) at Tsinghua University, held a forum in an apparent attempt to assemble a team of Chinese experts to telegraph policy advice to decision-makers.

Below is a translation of the WeChat blog by Li’s ACCEPT summarising its forum. It was published on Monday, July 9, 2024. All emphasis is mine – Zichen Wang

On July 6, 2024, the Academy of Chinese Economic Thought and Practice (ACCEPT) at Tsinghua University, held the 47th China and World Economy Forum themed “2024 Mid-Year Macro Forum.”

The speakers included

Chai Qiang, President of the China Real Estate Appraisers and Agents Association;

Da Wei, Director of the Center for International Security and Strategy (CISS) at Tsinghua University;

Hua Changchun, Chief Economist of Greater China at KKR Investment Group;

David Daokui Li, Director of ACCEPT at Tsinghua University;

Liu Peilin, Chief Researcher of ACCEPT at Tsinghua University;

Qiao Hong, Chief Economist for Greater China and Head of Asia Economic Research at BofA Securities;

Yin Yanlin, Deputy Director of the Economic Committee of the 14th CPPCC National Committee and former Deputy Director of the Office of the Central Financial and Economic Affairs Commission

Yuan Gangming, Special Researcher at ACCEPT, at Tsinghua University

LiKe Aobo, Executive Vice President of ACCEPT, moderated the forum.

David Daokui Li, Director of ACCEPT at Tsinghua University, said

First, while maintaining confidence, there needs to be an increased awareness of potential risks to prevent short-term, cyclical factors from evolving into long-term trends due to untimely policy responses, which could affect the long-term growth potential of GDP. Government departments should be more proactive in preventing and resolving systemic risks, establishing emergency management teams for systemic risks, and implementing due diligence exemptions.

Second, the core factor causing current economic problems is not real estate but the contraction of government spending. Typically, the government collects taxes from residents and businesses, borrows money from the financial sector, and supports economic construction, procurement, and regular expenditures. Over the past four years, the broad fiscal expenditure of government departments as a percentage of GDP has fallen from 41.2% to 37.4%, borrowing from the financial sector has been hindered, financing is mainly used to repay debts, and physical workload has significantly reduced. The Chinese government is a major entity in China’s market economy, a 3.8% decrease in government expenditure inevitably leads to economic contraction.

Third, to address the current issues, comprehensive reform must be deepened. The most urgent task is to stop the contraction of government spending and increase their broad expenditure. Two imminent reform measures are needed: first, re-understanding the nature of national debt by issuing more national debt to replace local debt rather than forcing local governments to repay debt, thereby revitalising local governments’ normal economic activities and creating a conducive atmosphere for comprehensive reform in the short term. If implemented quickly, this measure is expected to improve total economic demand swiftly; second, from the perspective of long-term institutional reform, the entire government’s operational orientation needs to be changed by reforming the fiscal and tax systems and local officials’ assessment indicators to shift government incentives from investment and project-oriented policies to policies that provide basic social welfare and help people increase disposable income to boost consumption, transforming the government from an investment-oriented government to a social welfare service-oriented government.

Li further proposed that in the second half of 2024, opportunities must be seized to launch short-term policies to boost consumption and enhance the short-term growth vitality of the Chinese economy. For example, the central government........

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