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Stable 2022 calls for tailored macro policies

By Yao Xi and Xu Qiyuan | China Daily | Updated: 2021-12-20 09:44
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The most important word that emerges from this year's Central Economic Work Conference was "stability", which means the economic work in 2022 will prioritize stability while pursuing progress.

It also means that next year, policy will be more focused on supporting growth, compared to this year's policy that has done more to prevent risks such as deleveraging and regulatory crackdowns.

To achieve such goals, China will continue to implement proactive fiscal policy and prudent monetary policy next year, and this has been decided at the meeting. Why China chose to adopt such a macroeconomic policy mix and whether stable growth can be better guaranteed in 2022 are matters worth exploring.

Looking first at monetary policy, the tone for next year is still "prudence", and any adjustments should be flexible and appropriate. Liquidity should be maintained at a reasonable and ample level, the meeting said.

Due to contracting demand, supply shocks and weakening expectations, China's economic growth has been facing downward pressure since the third quarter. Market entities are expecting monetary policy to be more accommodative. The People's Bank of China, the central bank, has responded quickly this year, cutting the reserve requirement ratio for banks effective Dec 15, its second such move this year, releasing 1.2 trillion yuan ($188 billion) in long-term liquidity to counter slowing growth. However, room for the central bank to ease monetary policy further next year is limited, especially as the United States continues to tighten its monetary policy.

The Federal Reserve began to exit its quantitative easing policy by tapering off monthly bond purchases since November. The first schedule has been announced and will reduce $15 billion each month from the current $120 billion a month that the Fed is buying. As inflation in the US has been more persistent and higher than expected, markets are anticipating that the Fed will start to raise interest rates from near zero much earlier next year, and will perform interest rate hike more than once.

As the US may transition away from its loose monetary policy more rapidly than expected, China's monetary policy is facing challenges to stimulate economic growth while keeping exchange rates and financial markets steady. The PBOC is also facing pressure to further cut interest rates next year.

Fortunately, while overall policy wiggle room is not unlimited, structural optimization can be another focus of monetary moves next year. The meeting underlined efforts to guide financial institutions to ramp up support for the real economy, especially for small and micro enterprises, as well as technological innovation and green development.

As for fiscal policy, the tone for next year is "proactive", which should be more effective, precise and sustainable. It is also necessary to ensure a certain spending scale and pace, which was underlined by the meeting. The meeting also called for efforts to implement new tax and fee cut policies and strengthen support for small and medium-sized enterprises, individually run businesses and manufacturing. Riskaverse practices as well as a moderately proactive approach in advancing infrastructure investment were encouraged.

The critical risks facing China's economy will stall growth for the next year, compared with a relatively strong growth this year. There are three adverse factors. First, exports won't be as strong as this year. The purchasing managers index new export orders index has been below the threshold of 50 for seven consecutive months since May, which shows weak overseas demand.

Second, expanding investment has its difficulties, especially within the manufacturing and real estate sectors. Third, personal consumption has been greatly affected by the COVID-19 pandemic, with sluggish consumption in the services sector. And the external environment is becoming increasingly complicated, grim and uncertain, the meeting said.

Despite such pressures, fiscal policy will play a more active role than monetary policy in 2022. There is plenty of room for China to expand fiscal spending, with its much lower debt burden than Western countries. And in 2021, as fiscal revenue rebounded while spending was slow, China recorded a significantly higher fiscal deposit balance of about 1.3 trillion yuan in the first 10 months compared to previous years.

There are policy options for China to utilize. One direction can be "new infrastructure", such as new energy and 5G facilities, which will undoubtedly improve productivity. Another direction could be improving traditional infrastructure, such as urban drainage systems and parking systems. These projects can not only stabilize investment and stimulate economic growth, but also have a positive effect on people's livelihoods.

All in all, to safeguard macroeconomic stability and keep major economic indicators within an appropriate range, China needs to take a more proactive fiscal policy and an adaptive monetary policy next year. Such a macroeconomic policy mix will relieve downside economic pressure and help maintain macroeconomic stability, which is crucial for maintaining social stability as well as preparing for the 20th National Congress of the Communist Party of China next year.

The writers are: Yao Xi, assistant research fellow of the Institute of World Economics and Politics (IWEP) at the Chinese Academy of Social Sciences; Xu Qiyuan, a research fellow of the IWEP, and deputy director of the research center for international finance of the CASS.

The views don't necessarily reflect those of China Daily.

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