The following is a transcript of the discussion at Roundtable Two: Outlook for China's Economy and Policies.

Wang Qing (Host):The first question is: the credit data for April was just released yesterday, and it was significantly lower than expected. What impact will this have on the monetary system? Is there a need for further easing of fiscal policy?Chief Scientist Lu Ting recently adjusted your forecast for China's economic growth, giving a relatively lower prediction. Obviously, this data is in line with your predicted trend, so we hope Chief Scientist Lu can analyze it based on the latest data.My second question is about the real estate industry, which is in a very bad state. The government has tried its best to stabilize it and has introduced various policies. Could you please talk about the effects and how real estate policies will be adjusted in the future?

Lu Ting:Thank you, Chief Scientist Wang. Yesterday's data release left two very strong impressions. First, medium- and long-term loans have decreased significantly compared to both March and last year, indicating a lack of confidence. Short-term credit demand has also dropped sharply; without substantial bill financing, the decline would have been even more pronounced, suggesting a slowdown in short-term economic activity. This reduces the probability of a reserve requirement ratio (RRR) cut, which would provide more available lending funds. Banks are currently facing a shortage of good assets, which many refer to as an asset scarcity problem.

There's a strong public demand for a reserve requirement ratio (RRR) cut, which might increase the probability of an interest rate cut. However, there are many limitations to cutting interest rates now. The probability of a rate cut before the end of the year or in the next month or two has increased significantly, but the magnitude will be very small, perhaps around 10 percentage points. When we see that the space and effectiveness of monetary policy are very limited, proactive fiscal policy is more important, which is the traditional approach. Fiscal policy can be considered from two aspects: fiscal revenue and fiscal expenditure. In fact, the self-determined budget in March may have overestimated our fiscal revenue this year, especially the revenue of national government funds. This year's fiscal expenditure aims to maintain the increase in expenditure, adding 2 trillion yuan compared to last year, but we may face the problem of insufficient funds. Where will the money come from? First, increasing taxes and fees is impossible; in fact, they should be reduced. Second, increasing the contributions of specific institutions. This year's contribution of 1.65 trillion yuan is also quite difficult. Third, adjusting the deficit size. Given the new situation, this is not entirely impossible and is somewhat necessary, but it requires certain procedures. Fourth, increasing special treasury bonds, which, like adjusting the deficit size, requires the procedures of the Standing Committee of the National People's Congress, making it more difficult. Another policy used over the past 20 years has been to increase lending by policy banks, including the central bank and other state-owned commercial banks, to obtain loans from them. Fifth, historically, increasing borrowing by local government financing platforms has been frequently used. However, in my view, local government special bonds are still relatively abundant, so I believe caution is warranted. Several other measures, especially adjusting the deficit scale with special treasury bonds or increasing borrowing by policy banks, are worth considering.

The next question is where has the fiscal budget been allocated so far? I'll briefly outline a few principles: First, relief is the priority. We used to talk about the "six guarantees," especially emphasizing three points: 1. Guaranteeing basic livelihoods; 2. Guaranteeing market entities; 3. Guaranteeing the operation of grassroots organizations.

This year's fiscal spending must prioritize these three aspects: specifically, reducing or exempting social security contributions for market entities and providing policy subsidies; and, in my view, increasing fiscal spending for specific industries in severely affected areas.

A small portion of the basic wage is subsidized to protect employment.These policies were used in some developed countries in 2020. I think we should reduce or exempt funds for some areas severely affected by the pandemic. For some places and industries, it is necessary to provide loans to the unemployed.

The second aspectWe will use our fiscal funds to leverage effective credit demand and provide guarantees for subsidized loans and short-term work.

The third aspectRegarding infrastructure and affordable housing, I think we need to be cautious. We need to consider returns and allocate more funds to the early stages of the process. We should make good use of this year's special bonds for infrastructure and affordable housing. Last year, there were still over one trillion yuan of special bonds that had not been used. If we make good use of one trillion yuan plus 3.65 trillion yuan this year, that will be about right. So, affordable housing should be prioritized.

Finally, let's briefly talk about the real estate industry.What are the effects of the current easing and stimulus policies for the real estate market? The effects are certainly not yet very noticeable. One of the most important indicators is new home sales. In April, the sales of the top 100 real estate companies decreased by 59% year-on-year. I think there are several reasons behind this. One reason is that much of the demand, especially in first-tier cities, was brought forward in previous years.

The second reason is that many regulatory policies, such as the "three red lines" and "two red lines," are still in place. So, although many local governments have indeed introduced many easing policies, some regulatory policies are still in place, which has a negative impact on sales and other indicators. Another point is that we are now entering a downward spiral. Local governments will not relax their management of advance payments, so the real estate industry is currently facing a very tight funding situation.

In my view, we should focus on the following two or three points regarding the real estate sector in the short term. We should pay close attention to the risks brought about by the downturn in the real estate industry, as well as the risks of economic downturn. Real estate is too important to the fundamentals of China's economy and financial system. We cannot allow certain problems to spread excessively. This is the first point, and the short-term approach.

From a medium- to long-term perspective, and considering the short-term implications, I believe that under the fundamental principle of "housing is for living in, not for speculation," supply-side reform should be the guiding principle. Public housing should be well-developed, built in areas where there is genuine demand due to population inflows. On the other hand, the market should be allowed to function more effectively, especially through reforms to land-related factors. Our biggest concern in previous relaxations of real estate control policies was a sharp rise in housing prices in some areas; this time, we need to prepare for that. In areas with large population inflows, especially central cities and urban clusters, we should expand land supply and future new housing supply in these hot cities, linking land supply to population inflows. I believe this will allow people to rationally expect that future housing prices will not rise rapidly. Furthermore, we can appropriately offer preferential treatment to new urban residents, including migrant workers and recent graduates. We can also remove some unnecessary restrictions on household registration. In my view, the supply-side reform approach is crucial in this process.

Wang Qing:Thank you, Chairman Lu, for your very detailed answer, but frankly, it hasn't resolved my short-term concerns about the real estate market. I would like to ask Chairman Li Xunlei...Given the weakening expectations of an economic downturn, should monetary and fiscal policies be strengthened, or should more monetary policy tools or fiscal policy tools be used? Which is more effective, especially given the weakening expectations? Exports are currently doing well, but the latest data shows a weakening trend. Xunlei (a financial commentator) mentioned that China's share of global exports has reached a peak and is about to turn around. The same applies to real estate investment, with sales showing negative growth, a 30% year-on-year decline. How can we ensure smooth domestic circulation?

Li Xunlei:Thank you, Mr. Wang. I believe monetary policy certainly plays a role, but the key difference lies in the fact that the problems we face now are different from those of the 2008 financial crisis. In 2008, it was an economic problem; the US had over-leveraged, and later, excessive innovation in financial derivatives led to the crisis. The solution then was simple: we increased the strength of monetary policy. Now, we face two factors: the virus and the Russia-Ukraine conflict. These are not economic problems themselves, but they severely impact the healthy development of the economy. These problems have led to issues such as high inflation, severe disruptions to population, goods, and logistics, and significant obstacles to our production and business activities. Under these circumstances, using economic and monetary tools to address these issues is clearly insufficient.

Historically, monetary policy is often effective when reducing monetary policy, while fiscal policy is more effective when expanding fiscal policy. So, we are currently in an economic downturn. During an economic downturn, fiscal policy can solve many structural problems, so we need to use fiscal policy more. However, last year our nominal fiscal deficit ratio reached 32%, which is relatively high, but in reality, fiscal expenditure was almost zero growth. This year, the intensity of fiscal expenditure has increased significantly, and I think it can be further increased.

Our government's leverage level is still relatively low. The US government's leverage level is around 130%, while our official figure is around 40%. Now, if we add up the hidden debt, it's around 60% or 70%. However, our government sector has the largest asset scale in the world, so our government has considerable room to increase leverage. In this regard, I think we should focus our fiscal efforts precisely, especially on consumption.

The second question concerns exports. This is related to the domestic structure. my country is currently facing an aging population; the era of rapid population growth has ended, and the external environment is not very favorable. To illustrate, 60 years ago, China's share of global GDP growth was 3%, while the US's was 39%. Now, the US's share has dropped from 39% to 24%, a decrease of 15 percentage points, while China's has increased from 3% to 15%, an increase of 15 percentage points. Simply put, the share lost by the US is the share gained by China. Maintaining the same friendly environment between China and the US as before is unlikely. Therefore, our exports have been affected by changes in the external environment, as well as by domestic factors such as an aging population and the slowdown in the development of traditional processing industries. Relying on exports is no longer realistic. In the past two years, due to China's effective control of the pandemic while other countries around the world have experienced continuous outbreaks, a unique factor contributing to China's GDP growth has been the contribution of exports. However, while exports benefited in the past two years, this year it will be more difficult. At this time, we should focus more on expanding domestic demand. Specific measures will be discussed in the previous speech.I've given you a report, thank you!

Wang Qing:Thank you, Chairman Xunlei. Earlier, our Chairman Shen Jianguang emphasized the crucial role of issuing consumption vouchers in promoting consumption.Now, Chairman Shen, please talk about the US stagflation and how China should respond.

Shen Jianguang:First, how to address the challenges facing exports? The US faces high inflation and stagflation resulting from the New Monetary Theory, with overly rapid interest rate hikes potentially causing a recession. Other chief economists have also pointed to even greater risks, such as the risk of recession in the EU. Therefore, China's exports face four major pressures, one of which is the economic recession in Europe and the US, such as the decline in demand for Chinese exports due to stagflation in the US.

Another issue is the deteriorating terms of trade, with import prices rising sharply while export prices remain relatively stable. I've looked at import prices from all countries in the US, and Chinese goods prices are the most stable. This helps the US control inflation, and it also...

The US is discussing removing tariffs from the trade war with China, which would be beneficial for controlling inflation, but for us it would significantly increase energy import costs.

The third and fourth are not cyclical, and we should pay special attention to them:

Thirdly, we need to ensure the stability of the industrial chain and address the issue of industrial chain relocation. The pandemic, and even before that, rising labor and land costs led to the relocation of industrial chains to Southeast Asia and Mexico.

Fourth, the latest data shows that these countries' export substitution competition, especially in the US market this year, has been eroding China's market share after Southeast Asia and Mexico resumed production following the pandemic. I think from an export perspective, we need to pay particular attention to the impact in the second half of this year. Therefore, the response must be to protect exports and the fundamentals of foreign investment. This is also why I noticed Premier Hu's recent remarks at the foreign trade work conference that it is crucial to stabilize the fundamentals of foreign trade.

Of course, China also has measures in place, and currency devaluation is one such change. Although the currency has depreciated significantly, its exchange rate fluctuations against the US dollar are still far lower than those of other countries, such as Japan and Europe, where currency devaluations are often 15% or 20%, while ours are only a few percent. Therefore, devaluation is also beneficial to exporters, along with export tax rebates and support for supply chains. This comprehensive support for foreign-invested enterprises and export companies is a major response, focusing on the issue of exports.

The second issue is the consumption voucher. While exports are largely beyond our control, domestic demand is. Many question the effectiveness of consumption vouchers, arguing they are only effective in the short term and offer little or no long-term structural benefit. I want to emphasize that consumption vouchers are a short-term stimulus, used now when economic stimulus is most needed. They not only benefit short-term economic rebounds but, more importantly, boost confidence. They can also be used in conjunction with tax cuts...

When tax and fee reductions are combined, businesses, especially small and medium-sized enterprises (SMEs), face problems such as insufficient revenue and profits. In this situation, the benefits of tax and fee reductions are minimal. For them to generate revenue, people need to buy goods and increase consumption. Therefore, the role of consumption vouchers is not solely to stimulate consumption. Subsidizing residents' consumption indirectly helps businesses, especially since they can enjoy the benefits of tax and fee reductions after generating revenue. Therefore, tax and fee reductions and consumption vouchers are not mutually exclusive but should be a combined approach. Only with consumption vouchers and existing revenue can businesses enjoy the benefits of tax and fee reductions.

In reality, various regions in China have issued national consumption vouchers. JD.com participated in the issuance of consumption vouchers in Harbin, Beijing, Suzhou, and the latest round in Shenzhen. Moreover, China's digital economy provides strong technological support, allowing for highly precise targeting of different consumer groups and preferences in various regions, tailoring leverage ratios for different goods. For example, trade-in programs for home appliances and mobile phones, and rural appliance subsidies, implemented in 2008 and 2009, achieved leverage ratios of up to 8 times. At that time, these were all funded by the central government; a 300 yuan subsidy, for example, could stimulate 3,000 yuan in air conditioner sales, resulting in a very high leverage ratio. Unlike Hong Kong, which has no leverage, consumption vouchers played a significant role in Hong Kong's retail recovery and economic recovery last year. When consumption vouchers were issued after the pandemic, shops and restaurants were packed, demonstrating the excellent results of implementation across China.

The source of funding should not be seen as opposed to tax and fee reductions. Besides having a short-term stimulating effect and boosting confidence, consumption vouchers can also help maximize the effectiveness of tax and fee reductions. In particular, there's the issue of government bonds. In 2020, China issued one trillion yuan in special government bonds to combat the pandemic. As everyone agrees, the current pandemic situation is no easier than in 2020. Therefore, the issuance of one trillion yuan in special relief bonds for people's livelihoods and post-pandemic recovery can also be used for the issuance of consumption vouchers. This is mainly implemented by the central government through local governments.

I'd like to specifically mention that consumption vouchers were also implemented in 2008 and 2009, particularly in the form of trade-ins and rural appliance subsidies. These played a significant role in the recovery of consumption of automobiles, refrigerators, and electronic products. This round of automobile, appliance, and mobile phone sales can also directly stimulate the economy. Appliances, furniture, and home renovations are all closely related to new home sales. I strongly agree with what the others have said. The key is consumption vouchers, especially government bonds. In the current recovery from the pandemic, their role is much greater than imagined. They not only boost consumption but, more importantly, their ability to boost confidence will greatly help people recover from the pandemic.

Wang Qing:Thank you, Chairman Shen. As you have clearly explained, consumption vouchers are a fiscal policy tool, and their effect is even greater.We'll leave the questions regarding the RMB exchange rate and RMB exchange rate policy to Chief Analyst Guan Tao.He is the most knowledgeable and authoritative in this area among all the chief researchers, specifically addressing two questions.

First, the RMB exchange rate has depreciated relatively quickly in the short term. Although chief analysts don't consider it that fast, it feels rapid to most people. Will this trigger a new round of capital outflows? Should we be wary of the risk of a sharp depreciation? Furthermore, regarding policy, given the current international uncertainty and increased volatility, what should China's overall policy direction regarding the RMB exchange rate?Please let Chief Scientist Guan Tao answer these questions about exchange rates.

Guan Tao:Indeed, as the Federal Reserve accelerates its monetary tightening, it may narrow the interest rate differential between China and the US, potentially triggering volatility in the US stock market. This could lead to a slowdown in capital inflows into China, and, combined with other factors, could result in a period of capital outflows. In such a scenario, the RMB exchange rate would depreciate. However, I believe it is not the depreciation that causes capital outflows, but rather the capital outflows that cause the RMB to depreciate.

The issue needs to be viewed objectively. First, China's economy is large, making it relatively resilient to shocks from capital flows. Second, China has a large trade surplus and significant net inflows of direct investment, meaning we are less dependent on foreign capital inflows, thus limiting the impact on us. Third, interest rate differentials are not the only factor influencing foreign investment in RMB assets. As long as China remains a systemically important economy and a crucial component of the international financial market, it will still be attractive to foreign investors, even with the RMB market under-allocated. If you only consider interest rate differentials, you can't understand why people hold negative-yielding European and Japanese bonds; there must be factors beyond interest rate differentials influencing their asset portfolios.

Furthermore, should we be alarmed by a sharp depreciation of our currency? In reality, we should view this calmly. Since the RMB exchange rate rebounded after its initial decline in 2017, its flexibility has actually increased since 2018, currently exhibiting two-way fluctuations with both increases and decreases. Since 2018, the RMB has experienced two major price movements. The first was in early April 2018 when the RMB broke through 6.3 yuan, followed by a continuous decline, reaching 6.96 yuan in early November, a drop of 10%.

In late May 2020, the RMB fell to around 7.2 yuan, but rose to 6.6 yuan by the end of the year, an increase of nearly 10%. Therefore, in the past, we have seen that when the RMB exchange rate is at a financially reasonable level, it is prone to wide fluctuations. When the exchange rate is sufficiently flexible, it will inevitably fall after a significant rise and rise after a significant fall; conversely, if it rises quickly, it will also fall quickly, and vice versa. As Chief Analyst Wang Qing mentioned earlier, the impact of the capital market on the current economic situation is already evident. We have also seen that while US stocks have continued to adjust recently, A-shares have remained relatively resilient and have basically stabilized.

In this sense, it is possible that after some emotions in the external market have been vented, any marginal positive changes in the future, even if they are not fundamental changes but only marginal changes, may lead to a reverse adjustment in the exchange rate. Therefore, we can expect the exchange rate to exhibit a wide range of fluctuations at a reasonable level in the future, with large ups and downs, rising and falling rapidly.

However, anything is possible. From both the government's and market participants' perspectives, regarding significant fluctuations in the RMB exchange rate in the future, whether it's appreciation or depreciation (currently, there's a risk of depreciation), everyone needs to prepare contingency plans. From the government's perspective, we must maintain exchange rate flexibility. A sufficiently flexible exchange rate is essential to function as a shock absorber, absorbing internal and external shocks. Otherwise, a rigid exchange rate will affect monetary policy. If our exchange rate were still stuck at 6.3, then we shouldn't be discussing reserve requirement ratio cuts or interest rate cuts, and no one would dare discuss structural monetary policies either.

Furthermore, foreign investors are actually not so much concerned about exchange rate fluctuations, but rather about the risks associated with non-tradable assets, such as…If your exchange rate is inflexible, it inevitably means that you will have to resort to some administrative intervention measures in the future. Non-tradability is what foreign investors are most worried about.It is precisely because of the flexibility of the exchange rate that it can play its role as a regulator of the balance of payments. Under such circumstances, we believe that the government should maintain a flexible exchange rate policy.Of course, we still have managed float; if the exchange rate deviates from the expected trend...Reasonable changes still require timely intervention for expectation management and exchange rate control.4Since the RMB adjustment at the end of the month,4moon25The Bank of Japan has already taken action and begun to manage and regulate exchange rate expectations. For market participants, it is still necessary to focus on risk neutrality and control exchange rate exposure. That's all I wanted to say.

Wang Qing:Thank you. I completely agree with your assessment. In fact, many of our professional researchers and macroeconomic colleagues welcome increased flexibility and volatility in exchange rates, as it can indeed act as a pressure relief valve, mitigating the impact of external shocks on our internal operations and enabling us to truly maintain our own autonomy. Our time for this segment is up. Thank you very much to all the chief economists for sharing your insightful observations today.

The current situation is very complex, but it has indeed created a rare opportunity for discussion and debate. We have reached a high degree of consensus in today's debate; after all, truth becomes clearer through debate, and this will help us formulate correct responses for the future. It may also be helpful for our online viewers in managing their finances and investments. So, first of all, thank you again, and thank you...With the online audience listening, our second roundtable discussion has now come to an end.