Starting with the Two-Year "Four Trillion Yuan Plan"

Faced with new situations and issues in the current economic operation, increasing the intensity of counter-cyclical regulation has become a consensus among all parties. Recently, many experts have called for drawing on the experience of dealing with the impact of the 2008 global financial crisis and also introducing a package of economic stimulus plans. At the recent press conference held by the State Council Information Office, reporters repeatedly asked about the expected scale of the package of policies.

The Origin of the Two-Year "Four Trillion Yuan Plan"

In September 2008, the U.S. subprime mortgage crisis evolved into a global financial tsunami (also known as the "2008 Global Financial Crisis") and a world economic recession. Affected by this, China's economic growth rate fell rapidly, exports declined, and a large number of migrant workers returned to their hometowns. In view of this, on November 5, 2008, the State Council's executive meeting studied and deployed further measures to expand domestic demand and promote the stable and rapid growth of the economy.

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The meeting identified ten measures to further expand domestic demand and promote economic growth, including accelerating the construction of affordable housing projects; accelerating the construction of rural infrastructure; accelerating the construction of major infrastructure such as railways, highways, and airports; accelerating the development of medical and health, cultural, and educational undertakings; strengthening the construction of the ecological environment; accelerating independent innovation and structural adjustment; accelerating the post-disaster reconstruction of all earthquake-affected areas; increasing the income of urban and rural residents; fully implementing the transformation of value-added tax reform in all regions and industries across the country, encouraging enterprise technical transformation, and reducing the burden on enterprises by 120 billion yuan; and increasing the financial support for economic growth. Preliminary estimates indicate that the above expenditures would require about 4 trillion yuan by the end of 2010. This is the origin of the "Four Trillion Yuan Plan."

The sources of funds are not all government. According to the National Development and Reform Commission, a part is an additional central investment of 1.18 trillion yuan, accounting for 29.5%, mainly from central budgeted investment, central government funds, other public investments of the central finance, and the central finance post-disaster recovery and reconstruction fund; another part is other investments of 2.82 trillion yuan, accounting for 70.5%, mainly from local fiscal budgets, central finance on behalf of local governments issuing bonds, policy loans, corporate (company) bonds and medium-term bills, bank loans, and attracting private investment, etc.

The use of funds is not all investment. In September 2009, then Premier Wen Jiabao clearly stated at the Summer Davos Forum that simply describing the package plan as a 4 trillion yuan investment is a misunderstanding. First, this is a plan that mainly expands domestic demand and combines consumption with investment to drive growth. In the two-year investment plan, the central government's investment mainly plays a role in leveraging local and social funds to participate in construction. We will also vigorously stimulate consumption and promote economic growth to shift towards domestic demand, especially driven by resident consumption demand. Second, this is a plan that combines the current and the long-term, maintaining growth and adjusting the structure in a unified manner. The direction of the central government's expanded investment is mainly used to strengthen the weak links in economic and social development, eliminate the constraints of national economic bottlenecks, and promote structural adjustment and the transformation of development methods while actively stimulating domestic demand. Third, this is a plan that unifies the roles of the government and the market, and promotes development and reform. Government funds are mainly invested in the public domain and play a guiding role for social funds. At the same time, by structural tax cuts, enhance the investment capacity of enterprises and the consumption capacity of residents; use fiscal interest subsidies, taxes, and other means to guide enterprises to adjust structures, and merge and reorganize. Finally, this is a plan that maintains growth and benefits people's livelihoods. We will tilt the allocation of public resources towards livelihood projects, pilot a new type of rural social pension insurance in 10% of counties and districts across the country, comprehensively promote the reform of the medical and health system, solve the medical security issues of retired personnel from closed and bankrupt state-owned enterprises, and expand employment, especially for key groups such as college graduates and migrant workers.

At the beginning of 2010, then Director of the National Development and Reform Commission, Zhang Ping, introduced at the National Two Sessions press conference that these four trillion yuan were mainly distributed in: livelihood projects, which are investments in social undertakings such as education, health, and culture, accounting for 44%; independent innovation, structural adjustment, energy conservation and emission reduction, and ecological construction, accounting for 16%; major infrastructure construction, including transportation infrastructure, railways, highways, and major water conservancy projects, accounting for 23%; post-disaster recovery and reconstruction of the Wenchuan earthquake, accounting for 14%; other public expenditures, accounting for 3%.

Although there are mixed opinions on the "Four Trillion Yuan Plan," it cannot be denied that at that time, the Chinese government acted decisively, quickly boosting market confidence and leading China's economy to achieve a V-shaped rebound. It also made a positive contribution to the recovery of the world economy. In 2009 and 2010, China's fixed asset investment grew by 30.4% and 24.5% respectively compared to the previous year, among which, infrastructure construction investment grew by 42.2% and 18.5% respectively, private investment grew by 33.7% and 32.1% respectively; central finance's livelihood expenditures on education, medical and health, social security and employment, housing security, and culture increased by 31.8% and 19.9% respectively.The potential scale of this round of economic support plans is already considerable.

On July 18th of this year, the communique of the 20th Central Committee's third plenary session emphasized the unwavering determination to achieve the annual economic and social development goals. On July 30th, the Central Political Bureau meeting pointed out that macro policies should continue to exert effort, be more effective, strengthen counter-cyclical adjustments, accelerate the comprehensive implementation of policies and measures already determined, and prepare and timely introduce a batch of incremental policy measures. On September 26th, the Central Political Bureau meeting further emphasized the need to truly enhance the sense of responsibility and urgency in doing economic work, effectively implement existing policies, intensify the introduction of incremental policies, and strive to complete the annual economic and social development goals and tasks.

According to the National Development and Reform Commission's introduction at a press conference on October 8th, a package of incremental policies will be introduced around five aspects: increasing counter-cyclical adjustments of macro policies, expanding domestic effective demand, increasing the intensity of enterprise assistance, promoting the stabilization of the real estate market, and boosting the capital market. Undoubtedly, if the relevant support policies can be quantified, their scale will be quite considerable.

Taking the promotion of people-oriented new urbanization as an example. At the end of July, the State Council issued the "Five-Year Action Plan for Deeply Implementing the People-Oriented New Urbanization Strategy," proposing a new round of urbanization of agricultural transfer population, promotion of urbanization levels in potential areas, cultivation of modern metropolitan areas, and improvement of urban safety and resilience levels, which are the "four major actions." After five years of effort, the urbanization rate of permanent residents is expected to increase by about 4 percentage points to 70%. The core of new urbanization is the integration of urban and rural infrastructure and the equalization of public services.

The Development and Reform Commission did not disclose the investment scale that the four actions may involve, but only listed the example of underground pipeline construction and renovation in the action to improve the level of urban safety and resilience. It is estimated that in the next five years, the total length of various types of pipelines such as urban gas, water supply and drainage, and heating that need to be renovated will be nearly 600,000 kilometers, with a total investment demand of about 4 trillion yuan. Last year and this year, more than 470 billion yuan of central budget investment, additional government bonds, and ultra-long-term special government bond funds have been arranged to focus on supporting urban gas, drainage, and other underground pipeline renovations, as well as the renovation of old urban communities and other urban renewal projects. In the two billion-yuan project lists and investment plans issued in advance at the end of this year, urban renewal still accounts for a certain proportion.

The recent market hot topic, Mr. Liu Shijin's proposal for a 10 trillion yuan economic stimulus plan over two years, is an important part of the aforementioned new urbanization construction. Recently, he publicly called for raising funds mainly by issuing ultra-long-term special government bonds, to form an economic stimulus scale of not less than ten trillion yuan within one to two years. He mentioned two breakthroughs: one is to significantly improve the basic public service level in terms of affordable housing, education, medical care, social security, and pension for new citizens mainly composed of migrant workers entering the city; the other is to accelerate the construction of small and medium-sized towns within the scope of metropolitan areas, drive the second wave of urbanization in China, and form a high-quality, sustainable, and modern urban system based on the integrated development of urban and rural areas. At the same time, he also pointed out that the focus in the past was on physical capital investment, while this time it is human capital investment.

The "Action Plan for Promoting Large-Scale Equipment Renewal and Consumer Goods Replacement" formulated at the beginning of the year can also be an important part of the economic stimulus plan, including the "two new" actions, recycling and utilization, and standard improvement "four major actions". According to the Development and Reform Commission, preliminary estimates show that the demand for equipment renewal will be a huge market with an annual scale of more than 5 trillion yuan, and the renewal and replacement of automobiles and home appliances can also create a market space of trillions of yuan. On July 19th, the State Council's executive meeting decided to arrange 300 billion yuan of ultra-long-term special government bonds to support the "two new". The current related amounts have been fully allocated, playing an important role in driving investment growth and releasing consumption potential. In addition, issuing and using ultra-long-term special government bonds well, and high-quality support for the implementation of national major strategic projects and key field security capacity construction ("two heavy" construction) are also current key work. Moreover, the third plenary session clearly proposed in the deployment of "improving the long-term mechanism for expanding consumption" to reasonably increase public consumption.

In summary, it is not difficult to form a package plan that far exceeds the scale of the 2008 stimulus. The key is whether the related work is government-led or market-led, whether the government expenditure is mainly central or local, and whether the government expenditure direction is investment-led or livelihood-led.

After the implementation of the "four trillion investment plan", in 2009 and 2010, China's unadjusted public finance revenue and expenditure deficit (narrow deficit) accumulated to 1.39 trillion yuan, and the broad deficit accumulated to 847.6 billion yuan, including the balance of government fund revenue and expenditure. During the same period, the completion amount of fixed asset investment increased by 4.6 trillion yuan and 9.32 trillion yuan compared to 2008, respectively.

Increasing fiscal support is equally important as deepening fiscal and tax reform.Following the announcement of a package of financial support policies by the three major financial regulatory departments on September 24th, the Ministry of Finance also disclosed a set of incremental fiscal policies on October 12th. At the outset, the Ministry of Finance stated that the national general public budget revenue growth rate is expected to fall short of expectations, but it clearly indicated that the fiscal sector has sufficient resilience and, by adopting comprehensive measures, can achieve a balance of revenue and expenditure and fulfill the annual budget targets.

The incremental fiscal policies mainly consist of four points: First, to strengthen support for local governments in resolving government debt risks, a significant increase in debt quotas is planned to support the resolution of implicit debts, allowing localities to free up more energy and financial resources to promote development and ensure people's livelihoods; Second, the issuance of special government bonds to support large state-owned commercial banks in replenishing their core tier-one capital, enhancing these banks' risk resistance and credit extension capabilities, and better serving the development of the real economy; Third, the integrated use of local government special bonds, special funds, tax policies, and other tools to support and promote the stabilization of the real estate market; Fourth, to increase support and protection for key groups, one-time living subsidies have been distributed to people in difficulty before the National Day, and next steps will include increasing support for students.

In addition, other policy tools are under study, such as the central government's significant room for debt issuance and deficit expansion.

The central government's leverage increase is a basic consensus among all parties. The central financial work conference at the end of 2023 clearly proposed to optimize the debt structure of central and local governments. In the public finance revenue and expenditure budgets for 2023 and 2024, the local government deficit scale remains unchanged, while the central government deficit continues to increase year by year. The aforementioned second and fourth items both involve spending the central government's money, and the last item under study requires a legal process, which also involves the central government's coffers. The market estimates that, considering the current public finance revenue gap, the initial scale of central government debt issuance is expected to reach 2 trillion yuan. Of course, with little time left this year, the main task is to curb the economic downturn. The market is more concerned about the deficit ratio and government debt arrangements in next year's fiscal budget.

Another more radical fiscal stimulus proposal in the current market is proposed by Mr. Li Xunlei, who suggests issuing 5 trillion yuan per year for 10 years, totaling 50 trillion yuan in ultra-long-term special government bonds. However, whether it is special government bonds or local government special bonds, most require corresponding assets and even demand returns on investment to avoid being included in the deficit. And this kind of money is not easy to use. According to the National Development and Reform Commission, the 700 billion yuan of central budget investment for this year has been issued, with a current project start rate of 58%; the 700 billion yuan in ultra-long-term special government bonds used for "two heavy" construction has also been fully issued, with a project start rate of 50%; the local government special bonds used for project construction this year, with an issuance rate of 90% by the end of September, have a project start rate of 85%; the additional 1 trillion yuan of government bonds issued in the fourth quarter of last year, all projects have started by the end of June this year, with a current investment completion of 770 billion yuan. The accountability mechanism for government investment projects may be an important reason for the different performance of proactive fiscal policies in promoting economic growth compared to the crisis responses in 1998 and 2008.

If it is expenditure on people's livelihood and social security, using the issuance of special government bonds or local government special bonds to solve it, not including it in the deficit seems inappropriate, and it should increase the deficit and increase the issuance of general government bonds. Of course, looking at the international community, welfare societies also have a lot of problems, so the third plenary session of the 20th Central Committee proposed to adhere to doing our best and acting within our capabilities, to improve the basic public service system, and to strengthen inclusive, foundational, and bottom-line people's livelihood construction.

As for the grassroots "three guarantees" issue, in the short term, it relies on increasing the intensity of central government transfer payments and increasing the intensity of local debt resolution to supplement local financial resources. In the long term, it still depends on deepening the reform of the fiscal and tax system, enhancing local autonomous financial resources, reshaping the central and local fiscal relationship, and improving the government debt management system. More importantly, as mentioned earlier, after the introduction of a package of stimulus plans, where the government's money is spent, which level of government spends this money, and where the government's money comes from, all need to be resolved through deepening reforms and forming foundational systems.

Promoting the reform of the fiscal and tax system from three aspects: urgently introducing reform implementation plans, urgently promoting the implementation of reform measures, and focusing on the combination of top-level design and grassroots exploration, should also become an important highlight of the next stage of incremental fiscal policies.