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  • 2024-07-21

Stimulus, clearing and restructuring need to go hand in hand

In conclusion, I would like to emphasize that what we are facing today is not an ordinary economic downturn. Neither loose stimulus nor aggressive market clearing can resolve the issue. We need to advance some necessary structural adjustments and reforms to stabilize and revive the economy, and bring economic growth back on track. Since the late 1990s, when China began housing reform, our fiscal system has largely depended on land finance. While land finance has indeed had many problems, it has also spurred competition among localities, accelerated urbanization and industrialization in China, and imposed a certain hard budget constraint on local governments. However, with the real estate industry's four-year decline, land finance revenue has plummeted, and the vast majority of local governments are facing immense fiscal pressure. The current downturn in the real estate industry is not a simple cyclical phenomenon but an inevitable major structural adjustment after more than two decades of rapid development. Although the real estate industry may stabilize in the coming years, it is impossible to return to the peak levels of the past. Under these circumstances, it is necessary to make some necessary adjustments to China's fiscal system, especially the relationship between the central and local governments. For instance, by reforming the consumption tax, we can encourage localities to reduce unnecessary capacity investment and promote consumption; reasonably allocate transfer payments to make them more transparent, thereby motivating local governments to develop the economy and advance social reforms; and scientifically distribute debt quotas among localities and set total debt quotas. In summary, after the decline of land finance, how to promote healthy competition among localities and re-harden budget constraints is a key issue in the coming years. To ensure that China's economy maintains a relatively stable growth rate, it is imperative to improve efficiency, reduce unnecessary waste and inefficient investment, and thus implement necessary fiscal reforms.

Furthermore, during the process of reform and structural adjustment, the opportunity to increase central government expenditure should be utilized to improve China's pension and healthcare systems. In terms of pensions, it is necessary to moderately raise the pension levels for urban and rural residents, who account for 55% of the pension recipients (mainly rural elderly). Their current average monthly pension is only 225 yuan. Increasing their pensions will not only effectively increase the consumption expenditure of this group of 170 million elderly people but also indirectly benefit nearly 300 million migrant workers. This is because it can alleviate their current burden of supporting the elderly and enable them to reduce current savings and increase current consumption due to the expectation of increased future income.

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