Six moves likely to ensure stable growth

In the fourth quarter, a mix of predictable and uncertain external factors is expected to interact in complex ways, potentially disrupting global capital flows, exchange rates and foreign trade patterns — posing multifaceted challenges to China's economy.

At present, issues such as relatively weak domestic demand, structural overcapacity, deflationary pressure and unstable expectations remain prominent. To ensure stable economic growth, prevent a temporary downturn and achieve targets set at the beginning of the year, six policy recommendations are proposed.

First, front-load next year's government investment and financing quotas to support growth.

We believe that in the fourth quarter, the government should expedite the refinement and issuance of key projects and central budgetary investment project lists, as well as accelerate the issuance and utilization of local government special bonds, regular treasury bonds and ultra-long-term special treasury bonds to generate tangible expansionary effects on domestic demand.

The new quota for local government special bonds next year is expected to rise above 4.5 trillion yuan ($632 billion). It is advisable to front-load 1.5 to 2 trillion yuan of this quota in the fourth quarter, accelerating the issuance and utilization of local government bonds to meet funding needs for major projects in key sectors and maximize fiscal stimulus effects.

In addition, 2 trillion yuan of the 2.8 trillion yuan quota should be allocated for local debt resolution ahead of schedule in the fourth quarter to help local governments reduce hidden debt risks and improve liquidity. This would both ease fiscal stress caused by sluggish fiscal revenue growth and also address overdue payments to enterprises, thus supporting healthy business cash flow and vitality.

With 2.8 trillion yuan in treasury bonds and 630 billion yuan in local government bonds maturing in the fourth quarter, maintaining a steady pace of government bond issuances will be key to sustaining fiscal support for investment, consumption and exports. Tax and fee reduction policies should continue, unnecessary local regulatory burdens should be reduced and private-sector tax pressure should be eased to invigorate market activity.

Second, maintain proactive monetary policy signals and strengthen countercyclical adjustments.

Monetary policy should align with fiscal expansion, with possible cuts of 0.5 percentage point in the reserve requirement ratio and 0.1-0.2 percentage point in policy interest rates in the fourth quarter. A 0.5 percentage point RRR cut would release about 1 trillion yuan of liquidity, helping improve market confidence.

The central bank could also consider resuming government bond trading, with an estimated scale of 500 billion to 1 trillion yuan, to inject liquidity and support government bond issuances.

Deposit rates should be lowered to reduce banks' funding costs and alleviate their operational pressures. It is necessary to drive the loan prime rate down by at least another 0.2 percentage point to stimulate credit growth and domestic demand. It is also recommended to further cut interest rates for relending to support agriculture and small businesses, as well as various special relending programs, by 0.2-0.5 percentage point, and to introduce quarterly evaluations of structural policy tools to ensure effectiveness and prevent idle funds.

Third, loosen the thresholds for monetary tools supporting the capital market and standardize stabilization operations of Central Huijin Investment Ltd, a State-owned investment company.

Although China's capital markets have gradually stabilized this year, utilization of the 800 billion yuan in monetary policy instruments supporting capital markets remains low. It is advisable to lower the relending rate for repurchase loans for stock buybacks from 1.75 percent to 1.5 percent or below, thus easing financing costs for listed companies and major shareholders.

We also recommend expanding the scope of financial institutions eligible for the "Securities, Funds and Insurance Companies Swap Facility", enabling more nonbank institutions to access highly liquid securities assets through this tool to bolster their liquidity, broaden the range of eligible collateral and increase discount rates to enhance the tool's operational feasibility.

To improve Central Huijin's role as a quasistabilization fund, more scientific and comprehensive operational mechanisms and institutional arrangements should be established — covering funding sources, intervention triggers, operation scale, exit mechanisms, performance assessments and disclosure — to ensure standardized and effective operations while avoiding operational risks, moral hazards and other issues. It is further recommended to expand Central Huijin's asset base by integrating local asset management companies, financial holding platforms, small and medium-sized banks and insurers, and policy-backed insurers with central bank liquidity support through new structural financial instruments.

Fourth, further lower mortgage rates and enhance property-related tax incentives.

While promoting implementation of the quota of loans for China's "whitelist" real estate projects, commercial lenders should be encouraged to expand property development loans. In the fourth quarter, along with downside adjustment of the LPR, it is advisable to cut medium to long-term interest rates for housing provident fund loans by 25 basis points and slightly reduce the mortgage rates for second homes in major cities by about 0.2 percentage point.

We recommend moderately reducing or exempting taxes and fees for affordable rental housing — for example, lowering tax rates by 0.25 percentage point for homes under 140 square meters and by 0.5 percentage point for larger or second homes. The stamp duty and personal income tax on properties above 140 square meters also have room for further cuts.

To address the weak funding capacity of property developers, the roughly 8.5 trillion yuan in credit arrangements for housing projects under the "whitelist" lending program — equivalent to 60 percent of the outstanding balance of development loans — should be implemented faster to improve liquidity. Issuance of publicly issued real estate investment trusts should also be accelerated to provide alternative long-term financing and alleviate financing cost pressures associated with traditional debt financing instruments. For large developers facing financial stress, additional nonbank financing channels and bad-asset resolution mechanisms should be prepared, with support from asset management companies and local State-owned capital.

Fifth, expand the "trade-in" subsidy program and boost consumption through credit and tax reforms.

An additional 100 billion yuan should be allocated for consumer goods trade-in subsidies, extending coverage to sports and cultural equipment, home appliances and digital products, luxury jewelry and watches, and motorcycles, with complementary low-interest or zero-down-payment loan programs. The central government should increase fiscal transfers to localities to fund consumption vouchers and holiday promotions around major holidays.

The relending rate for service and eldercare consumption should be reduced by 0.2 percentage point to support financial institutions' participation. Consumption credit should be moderately expanded with lower rates and longer repayment terms to spur household spending.

To tap into the strong consumption potential of middle to high-income groups, tax authorities could introduce targeted consumption deductions based on marginal tax rates, following international practice, to stimulate marginal consumption propensity and support growth in services consumption.

Sixth, strengthen fiscal and financial support for foreign trade and new trade models.

It is advisable to establish special emergency funds in major maritime export-reliant provinces to provide low-interest loans and interest subsidies for distressed exporters to cover payroll and operational expenses, extend financing coordination mechanisms to all foreign trade enterprises to ensure credit access and loan extensions, improve export credit insurance coverage and claims efficiency, and promote supply chain financing with preferential interest rates.

We recommend continuing to implement "tax refund upon departure" policies for cross-border e-commerce exports and expand refund coverage, especially for high value-added products, and fully digitize tax refund procedures to reduce costs and waiting times. Labor-intensive industries such as textiles, toys, furniture and consumer electronics should receive higher fiscal subsidies and preferential credit support.

We believe China should encourage technological upgrades, research and development, and equipment renewal through tax incentives or special subsidies to enhance export competitiveness, as well as establish dedicated funds to support participation in international exhibitions and the development of overseas warehouses, helping companies expand into emerging markets such as members of the Regional Comprehensive Economic Partnership, the Association of Southeast Asian Nations and Middle Eastern nations.

It is also necessary to strengthen cross-border e-commerce pilot zones and promote shared overseas logistics infrastructure. For displaced export workers, we recommend extending unemployment benefits and raising compensation levels while expanding vocational training programs aligned with market demand to improve reemployment prospects.

Lian Ping is director and chief economist of the Guangkai Chief Industry Research Institute. Liu Tao serves as a senior analyst, and Wang Yunjin is an analyst at the institute. The article was translated based on a piece by the China Chief Economist Forum think tank, published on the official WeChat account of Tsinghua Financial Review.

The views do not necessarily reflect those of China Daily.