SFC Markets and Finance丨Jia Kang: Expanding domestic demand requires coordinated efforts of policies

南方财经全媒体记者黄子潇 见习记者梁旭琦 横琴报道

Financial regulators have released positive signals, indicating an unprecedented intensity in monetary policy efforts. The direction and magnitude of fiscal policy interventions are now a focal point of keen market interest.

Recently, a SFC reporter conducted an exclusive interview with Jia Kang, President of China Academy of New Supply-side Economics. Jia Kang believes that expanding domestic demand is pivotal in the current counter-cyclical adjustments. He argues that fiscal policy should also enhance its effectiveness within the coordinated framework of fiscal and monetary policies, actively rolling out incremental measures.

Concerning the interplay between fiscal policy, investment, and consumption, Jia Kang posits that meeting consumer demand is the cornerstone and ultimate goal of all economic activities, while effective investment serves as the initial phase of production and business operations. He advocates for a systematic approach to how investment and consumption, two critical aspects of economic activity, can synergistically foster a healthy economic cycle.

He also highlights the importance of a robust social security system in alleviating citizens' future financial concerns, which encourages a higher marginal propensity to consume and fosters a beneficial supply-demand interplay.

SFC Markets and Finance: How should we interpret the statement “intensify the counter-cyclical adjustment of fiscal and monetary policies” emphasized by the Political Bureau of the Communist Party of China (CPC)?

Jia Kang: The economy experiences waves of growth and contraction. Amid these cyclical fluctuations, during downturns like the current one where domestic demand is weak, expanding domestic demand is a must. This is the core idea behind what we call counter-cyclical regulation. Expanding domestic demand requires the coordinated effort of two key macroeconomic policies, fiscal policy and monetary policy. In our policy guidelines, what impressed me most is that fiscal policy must increase strength and efficiency. It should exhibit a proactive, expansionary stance, while monetary policy should ensure adequate liquidity.

Moreover, monetary supply should not be viewed through traditional indicators alone. Special attention must be paid to its relationship with prices. This has been a repeated emphasis of the central government in the past two years. Whether the money supply is excessive or insufficient, there are various analyses. But ultimately, if it affects daily life, it will be reflected in price levels. In recent years, we haven't seen inflationary pressure. Instead, there are emerging signs of deflation. At this point, we must pay more attention to ensuring that the money supply reflects expansionary characteristics.

When these two policies are combined, they form the counter-cyclical approach to boosting domestic demand. These two major indirect regulatory tools work in coordination to counteract the lack of economic vitality. It keeps economic activity at the desired level and provides the necessary support to maintain the economy's reasonable growth pace.

SFC Markets and Finance: In the long term, how should fiscal policy coordinate with monetary policy and capital market policy to form a synergistic effect?

Jia Kang: After a prolonged period of decline in the stock market, we are now seeing signs of recovery. The monetary policy has introduced a new design mechanism that further eases conditions. This, of course, aligns with the goal of expanding domestic demand as discussed earlier. It offers more liquidity to support trading channels in the stock market, which helps sustain the broader market expectations linked to the stock market. The focus is on how to improve these expectations and boost confidence.

While pursuing such policy goals, the fiscal policy should firmly collaborate by increasing its strength and efficiency. In many research discussions, many scholars have already expressed their views and suggestions. They suggest that, in addition to the existing policy mix, additional expansionary policies should be actively considered.

SFC Markets and Finance: Should current fiscal policy focus more on supporting consumption or supporting investment?

Jia Kang: In general, investment and consumption should be seen as two essential concepts within the broader economic framework that need to be understood in an integrated way. The economic cycle is essentially the interaction between supply and demand. Demand is mainly reflected in final consumption, which is the direct manifestation of human needs. All economic activities ultimately aim to meet the people's desire for a better life. This fulfillment is directly realized when consumer goods reach the people. This consumption can take the form of products or services. Final consumption is what gives people a sense of fulfillment and happiness. This is why the central government says consumption is the foundation of the economy. Our starting point and destination both lie in consumption. This is a fundamental human-centered perspective.

But what ensures the sustainability of consumption? Effective supply. Then where does the effective supply come from? At the root of social reproduction, there must first be effective supply from production activities that respond to people's needs for survival, development, and quality of life. The initial step in these production activities is effective investment. Investment generates capacity that aligns with demand. This is what we call effective capacity driven by effective investment. The operation of this capacity then leads to job creation. Because production, whether it involves goods or services, requires the involvement of labor and human capital. Employment is critical. People's stability and well-being are closely connected to employment. Only when employment meets the basic needs of society can we ensure a stable foundation. This is the basis of social harmony, which is something we can all easily understand.

Therefore, effective investment is crucial for job creation, which is key to people's stability and well-being. Through employment, individuals earn income with purchasing power. In modern economies, this income comes in the form of wages, salaries, and bonuses. With their income, they naturally engage in consumption to meet their own and their family’s needs. Another important factor is how to alleviate their concerns so that current income doesn’t result in excessive savings, but instead encourages a higher marginal propensity to consume. This requires strengthening the social security system as we navigate the economic and social transition. This includes pensions and housing security for individuals and their families, as well as healthcare, especially support for serious illnesses, which needs systematic institutional assistance, and also includes children's education.

If our social security system is well-established, it will give people peace of mind and reduce their concerns about the future. As a result, their tendency to save will decrease, leading to a higher marginal propensity to consume. This demonstrates the immense potential of China's large-scale economy, where vast consumer potential will continuously emerge, supporting economic growth and prosperity in real life. This creates a virtuous cycle of supply and demand. Therefore, I want to emphasize, we shouldn’t simply categorize our economy as consumption-driven or investment-driven, or whether policies should mainly stimulate investment or consumption. They should be organically connected, forming a systematic understanding, where both consumption and investment follow objective rules, to create a virtuous cycle of supply and demand in economic life. In short, I would refer back to the central government's statement: Consumption is the foundation, as I explained earlier, and effective investment is the key. The core value of effective investment lies in the job opportunities it creates, providing employment, which continuously gives people purchasing power through their income, and enables them to fulfill their consumption needs and enjoy a better quality of life.

SFC Markets and Finance: How should we understand the monetization of fiscal deficits?

Jia Kang: Deficit monetization refers to when fiscal revenue falls short of expenditure, and other methods to cover the deficit are no longer viable. For example, past surpluses are exhausted and can’t be used to cover the deficit. Issuing government bonds is an option, but to whom are they sold? If individuals, companies, or banks buy these bonds, such as commercial banks purchasing them, it is generally not considered deficit monetization, because it does not involve the issuance of base money. It simply reallocates money within the system under the PBOC’s control, as bondholders adjust their holdings to purchase government bonds and cover the deficit.

However, when the PBOC gets involved, it becomes a different scenario. There are two types of the PBOC purchases of government bonds. One is when the PBOC, following international practice, buys government bonds on the secondary market and issues base money. Of course, it can also operate in the reverse, by selling the government bonds it holds to withdraw money from circulation. But generally speaking, during periods of economic downturn, it is relatively regulated because it has market constraints.

Another one, which many scholars find unacceptable in discussions, is when the fiscal authority directly instructs the PBOC to purchase government bonds, and in more extreme cases, these bonds are never repaid. This essentially means the PBOC is extending credit to the fiscal authority, and although repayment is promised, it is often delayed, which is no different from an overdraft. Without market constraints, this could lead to outcomes we believe are likely to occur, which are arrangements that do not meet the high standards of policy execution. The scenario with market constraints and the one without are clearly different in terms of impact.

SFC Markets and Finance: Recently, the Standing Committee of the National People's Congress passed a decision to implement raising the retirement age in progressive steps. What impact does this have on fiscal revenue and expenditure?

Jia Kang: The issue of delaying retirement in China has been discussed for years. This stems from the realization that after China's reform and opening up, economic and social development led to the "aging before affluence" demographic structure. China has yet to reach the status of a high-income economy, and for many years, China's population was the largest in the world. Although just recently surpassed by India, our population remains over 1.4 billion. Within this enormous population, aging trends are becoming increasingly evident. In terms of the degree of aging, we are already comparable to developed economies. This is what we mean by "aging before affluence," as we are still in the middle-income stage, but we must compare the aging of our population with that of developed economies, and study how to address the challenges.

This leads to a focus on the pension system, and how to establish a system that supports sustainable development. In recent years, we have developed a three-pillar framework, with basic pension insurance as the first pillar. This fund is sourced from mandatory contributions by all workers to the "five social insurances and one housing fund." Then we have occupational and corporate pensions, which form the second pillar. The third pillar is commercial pension insurance. Both the second and third pillars are supported by policies, such as deferred personal income tax payments. Personal income tax is not deducted when contributing to the pension. Tax is settled when the pension is withdrawn during retirement. These tax incentives make the pension system highly attractive.

Despite this, there is still a key issue to address. On average, the health of our population is improving. Life expectancy continues to rise. However, the retirement age has remained unchanged for many years. Typically, men retire at 60, and women at 55. Some occupations allow retirement at 50. In extreme cases, women in some jobs can retire as early as 45. But after retirement, they no longer have income from work. They have to rely on pensions as their retirement income. The question is whether pensions can sustainably support the growing number of retirees in an aging society.

In addressing this challenge, we have turned to international experiences. It involves exploring various measures, including the possibility of raising the retirement age. Developed economies provide valuable lessons in this regard. After years of research, we finally see signals from the decision-makers. We will proceed cautiously, step by step. Over an extended period, society will gradually adapt, as we raise the retirement age to, for example, 63 for men and 58 or 60 for women. Some professionals have already seen flexibility in the past. In my experience at my former workplace, these intellectual, expert-type female researchers were allowed, under certain guidelines, to retire at 60 instead of 55. These policies are likely to continue.

Combining these factors, raising the retirement age to align with current life expectancy, and reasonably adjusting it according to modern health and retirement conditions, will benefit society as a whole. Our citizens can better apply their talents and wisdom, contributing to society, without affecting their actual quality of life, or the benefits they are entitled to after retirement. It will reduce the overall pressure on the pension system. This relief will support the sustainable and harmonious development of the entire economy.

（市场有风险，投资需谨慎。本节目嘉宾意见仅代表本人观点。）

策划：于晓娜

监制：施诗

编辑：李依农 和佳

记者：黄子潇 见习记者梁旭琦

制作：蔡于恬 

新媒体统筹：丁青云 曾婷芳 赖禧 黄达迅

海外运营监制: 黄燕淑

海外运营内容统筹: 黄子豪 

海外运营编辑：庄欢 吴婉婕 龙李华 张伟韬

出品：南方财经全媒体集团