China's continuous strengthening of expansionary fiscal policy under expectations of declining exports

Editor's note:  Fei Zhaoqi is a senior researcher of Institute of Finance & Banking at the Chinese Academy of Social Sciences. The article reflects the author's opinions and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity.

Macroeconomic context of expansionary fiscal policy

Amid the impacts of "de-globalization," declining exports may become a long-term trend for China's economy. On the supply side, it is imperative for China's production model to rapidly transition from supplying mid- to low-end industrial goods for the global market to providing products and services in related fields such as in securing people's livelihood and technological innovation for the domestic market. On the demand side, boosting domestic demand to compensate for the decline in external demand has become essential for stabilizing economic growth.

Critical role of expansionary fiscal policy

As China's international balance of payments gradually shifts from a surplus to an equilibrium, only when government fiscal expenditures exceed revenues or when there is deficit spending can Chinese residents and businesses achieve a net surplus. Hence, fiscal expansion, including increasing the fiscal deficit and the government taking on more leverage, is a vital policy to drive sustainable economic growth, especially in the current scenario where the balance sheets of residents, businesses, and local governments are under pressure, monetary policy transmission mechanisms are not smooth, and savings are not flowing effectively into investments. The central government can expand its balance sheet by issuing treasury bonds, thereby offsetting the balance sheet contraction of related sectors. This is an efficient and feasible approach to countercyclical adjustment.

Key areas for the allocation of fiscal funds

On the one hand, fiscal funds contribute to the restoration of government investment growth whether they are used for debt resolution or transfer payments. When allocated to initiatives such as trade-ins or cash subsidies for residents to directly support consumption, these funds' impact on economic stimulation is even more pronounced. On the other hand, high-quality supply is a crucial foundation for driving demand upgrades and ensuring demand security. First, amidst de-globalization, as the "learning by doing" pathway for technological progress is hindered, the government must take on the responsibility of promoting the transitioning of technological advancement pathways, utilizing top-level design, and pooling financial resources to drive "independent innovation" in key sectors. At the same time, it should facilitate broader technological advancements across related industrial chains. Second, in the context of global turmoil and the failure of market-based resource allocation mechanisms, using fiscal funds to support the restructuring of grain and energy supply channels, along with related resource supply chains, is a critical means for China to safeguard food and energy security.