Macro Control Evolution and Current Supply-Demand Imbalance

The decisions on comprehensive reforms from several Third Plenary Sessions during the reform era provide authoritative historical documents for reviewing and understanding the proposal and development of China's economic system and macroeconomic regulation paradigm. Since the Third Plenary Session of the 11th Central Committee in 1978, 46 years have passed, and the Communist Party of China has held a total of 10 Third Plenary Sessions. Among them, 4 sessions focused on sectoral reforms and the deployment of macro policies under emergency situations, while the remaining 6 sessions made decisions on comprehensive reform issues at different stages. These sessions have recorded the practice and understanding of China's market economic system reform exploration, and the proposal and positioning of the macroeconomic regulation topic constitute one of the important themes in the construction and development of the new system. From this perspective, the latest Third Plenary Session's reform decision focuses on "improving the macroeconomic governance system" and proposes some entirely new policy expressions.

The fundamental characteristics and successful experiences of China's system transformation and reform planning are to follow the principles of seeking truth from facts and problem orientation. Starting from the real economic contradictions and the background conditions of the existing system, we explore the direction of system reform and the path of policy adjustment. The proposal and evolution of the concept of macroeconomic regulation are closely related to the characteristics of the macroeconomic situation and the practical problems faced by policy practices in different periods. In recent years, the overall trend of China's economic operation has shown a total imbalance contradiction between strong supply capacity and weak demand growth, reflecting the positive factors and constraints of the new stage of economic development. Objectively, it is necessary to promote economic rebalancing through a combination of implementing macroeconomic regulation and deepening reforms.

Let's discuss two points: First, briefly review the proposal and evolution process of the concept of macroeconomic regulation in the reform era, and observe and understand the new expressions and impacts of the latest reform decision on macroeconomic policy guidelines. Then, observe the unbalanced situation of strong supply and weak demand in recent years' economic operation, and discuss the new characteristics of imbalance and the requirements for rebalancing policies from a historical comparative perspective.

I. The Proposal, Development, and New Expression of "Macroeconomic Regulation"

There was no concept of macroeconomic regulation in the planned economy period. The concept of "macroeconomic regulation" that people are familiar with today has gone through a long evolution process of brewing, proposal, and enrichment and improvement, and has been presented in a concise and authoritative manner in many reform decisions of the Third Plenary Sessions. This situation provides a necessary background for learning and understanding the latest reform decision on new propositions.

During the planned economy period, the operation of the national economy would inevitably involve macro-level relationships: such as whether the economic growth rate is reasonable, whether the structural proportions are coordinated, whether the issuance of currency is moderate, etc. In this sense, the national economic management at that time naturally also included the content of macroeconomic regulation commonly referred to today. However, in line with the economic internal and external environment and institutional arrangements at that time, there was a complete set of economic theories and concepts supporting policy analysis during the planned period. The academic community and decision-making departments generally did not use modern economic concepts such as macroeconomics or macroeconomic policies. At that time, the state and government departments, as the sole entities for formulating and implementing plans, comprehensively controlled the national economy without distinguishing between micro and macro, and there was no logic and practical basis for proposing the concept of macroeconomic policy.

After entering the reform and opening-up era, the situation changed quickly. As an important measure for system transformation in the early stage of reform, the state relaxed administrative control in many economic fields and granted enterprises and other economic entities a certain degree of micro decision-making rights to varying degrees. The prospect of the government withdrawing from direct control at the micro level gradually became clear. In the new institutional environment of the reform era, what new ways the state should adopt to intervene in and manage the economy has become a major practical and theoretical issue facing the academic community and decision-making departments.

For example, the "Decision on Economic System Reform" of the Third Plenary Session of the 12th Central Committee of the Communist Party of China in 1984 discussed this issue in detail. The sixth part of the decision focuses on "separating government and enterprise responsibilities, and correctly playing the role of government agencies in managing the economy." It summarizes the experiences and lessons of the government's direct control of the economy during the planned economy period, pointing out that in the future, government departments at all levels will no longer directly operate and manage enterprises in principle. Based on practical experience, it proposes various functions of government economic management, including formulating development strategies and plans, deploying key projects in infrastructure and basic industries, and mastering and using economic regulatory means, etc. However, the discussion did not use the concept of "macroeconomic regulation." This example also shows that China's economic system exploration and choice are by no means simply based on academic logic design, but start from the real contradictions faced by development practice, and scientifically and cautiously evaluate and choose through original analysis.

Major progress in system transformation is often influenced by seemingly accidental factors at historical key moments; the official determination of the "macroeconomic regulation" concept in the 1980s was directly influenced by the severe inflation situation in 1988: Faced with the risk of inflation out of control due to panic buying of some goods and bank runs, the central government decisively decided at the Third Plenary Session of the 13th Central Committee on September 30, 1988, to "put the focus on regulating the economic environment and rectifying the economic order in the next two years of reform and construction," and make efforts to compress the total social demand and curb inflation. At the same time, it emphasized that "regulating the economic environment and rectifying the economic order must be combined with strengthening and improving macroeconomic regulation during the transition period between the old and new systems": it began to clearly use the important policy guideline concept of macroeconomic regulation.In 1992, when the 14th National Congress of the Communist Party of China (CPC) established the goal of the socialist economic system, it affirmed two interrelated propositions: one was that the market mechanism plays a foundational role in resource allocation, and the other was that the government exercises macroeconomic regulation over the operation of the economy. The political report of the 14th Congress expressed these two points as: "Make the market play a foundational role in resource allocation under the macroeconomic regulation of the socialist state," where macroeconomic regulation even had a precedence over market resource allocation in textual form. This showed that at that time, while the decision-making layer made a breakthrough decision on the goal of economic system reform, it highlighted "macroeconomic regulation" to demonstrate a prepared mindset and response strategy for potential fluctuations and risks during the system transition.

Subsequent decisions on economic system reform have all innovated and interpreted the positioning and main tasks of macroeconomic regulation policies in combination with practical experience of system transformation. The reform decision of the 3rd Plenary Session of the 14th Central Committee in 1993 more calmly stated the policy as "transforming government functions and establishing a sound macroeconomic regulation system," stipulating that the main tasks of macroeconomic regulation are to "maintain the basic balance of the total economy" and to promote the optimization of economic structure, among others. The reform decision of the 3rd Plenary Session of the 16th Central Committee in 2003 proposed further improving the macroeconomic regulation system that coordinates national planning and fiscal and monetary policies, requiring monetary policy to play an important role in maintaining the stability of currency value and overall balance. The 3rd Plenary Session of the 18th Central Committee in 2013 proposed a new policy of "scientific macroeconomic regulation," emphasizing the "improvement of a macroeconomic regulation system oriented by national development strategies and plans, with fiscal and monetary policies as the main means," and its main tasks still include maintaining the balance of the total economy, among others.

The reform decision of the 3rd Plenary Session of the 20th Central Committee continued the policy of "scientific macroeconomic regulation" from the 3rd Plenary Session of the 18th Central Committee eleven years earlier. However, the specific content discussion showed changes in many aspects. First, the central term in the fifth part became "improving the macroeconomic governance system," with the earlier "macroeconomic (economic) regulation system" upgraded to "macroeconomic regulation system." Second, the "national strategic planning" was highlighted for its special role in the "macroeconomic governance system," requiring "to promote fiscal, monetary, industrial, price, employment, and other policies to work together around the implementation of national development plans and major strategies." Compared with the policy of macroeconomic regulation "oriented by national development strategies and plans, with fiscal and monetary policies as the main means" eleven years earlier, the role of "national development plans and major strategies" in the implementation level has significantly increased. Third, unlike previous reform decisions, the policy orientation and main tasks of macroeconomic regulation were not directly stated in the text; however, many contents in the fifth part of the decision on deepening the reform of fiscal and financial systems reflected the intention to address current real economic problems.

Although the expression of macroeconomic governance was first used in the reform decision of the 3rd Plenary Session of the 20th Central Committee, this concept has been proposed in recent years. In May 2020, the Central Committee's "Opinions on Accelerating the Improvement of the Socialist Market Economic System in the New Era" proposed "innovating government management and service methods, improving the macroeconomic governance system: ... innovating and improving macroeconomic regulation, and further improving the ability of macroeconomic governance. (1) Construct a new mechanism for effective and coordinated macroeconomic regulation. Improve the macroeconomic regulation system with national development plans as the strategic orientation, with fiscal policy, monetary policy, and employment priority policy as the main means, and investment, consumption, industry, regional, and other policies working together to enhance the forward-looking, targeted, and coordinated nature of macroeconomic regulation. Scientifically and prudently grasp the counter-cyclical adjustment strength of macro policies."

The "14th Five-Year Plan and Long-Term Goals Outline for 2035" released in March 2021 proposed "innovating and improving macroeconomic regulation, and improving government governance effectiveness. Improve the macroeconomic governance system with national development plans as the strategic orientation, with fiscal and monetary policies as the main means, and employment, industry, investment, consumption, environmental protection, regional, and other policies closely coordinated, with optimized goals, reasonable division of labor, and efficient synergy. Improve counter-cyclical adjustment capabilities, and promote the balance of the total economy, optimization of structure, and internal and external equilibrium." In the political report of the 20th National Congress in October 2022, it was required to "improve the macroeconomic governance system, give play to the strategic orientation role of national development plans, strengthen the coordination and cooperation of fiscal and monetary policies, focus on expanding domestic demand, enhance the foundational role of consumption in economic development, and the key role of investment in optimizing the supply structure."

There are two observations on this. First, the decision requires "to promote fiscal, monetary, industrial, price, employment, and other policies to work together around the implementation of national development plans and major strategies." The market needs to understand the operating rules and mechanisms of macroeconomic regulation departments, and perhaps needs to systematically understand the content of national plans and major strategies, to understand what the connection is between the longer-term plans and strategies and the macro policies that are usually considered to target short-term situations. This is obviously a challenging requirement for market analysts who need to pay attention to policy trends. In addition, macroeconomic regulation departments need to maximize the realization of policy intentions and also need to pay attention to effective communication with the market and the public to make them fully understand the internal logic and expected effects of macroeconomic regulation policies. The macroeconomic regulation has gradually formed a set of policy logic, and now it has been upgraded to macroeconomic governance, and the implementation of macroeconomic regulation policies needs to "revolve around" national plans and major strategies. Relevant departments may need to more clearly elaborate on the new macroeconomic regulation mechanism to help the market and the public understand more accurately, so that macroeconomic regulation can achieve twice the result with half the effort.

Second, since the 14th National Congress established the proposition of macroeconomic regulation, all the decisions of the 3rd Plenary Session of the Central Committee on comprehensive reform have included discussions on the positioning of macroeconomic regulation and its goals of maintaining total balance, etc. Perhaps it was because the 14th Five-Year Plan and Long-Term Goals Outline formulated in 2021 already had expressions on this, or perhaps it was because the current macroeconomic operation is relatively stable, this "Decision" did not directly and positively elaborate on the functions and tasks of macroeconomic regulation, which is the first time in more than 30 years of comprehensive reform decisions of the 3rd Plenary Session of the Central Committee to handle it in this way. However, the "Decision" clearly adheres to the expression of "scientific macroeconomic regulation," and the reform measures of fiscal and financial departments involve macroeconomic regulation content in many aspects. In addition, macroeconomic regulation still reflects the policy intentions of counter-cyclical regulation and the pursuit of total balance in recent years. It can be seen that the decision-making layer's emphasis on macroeconomic governance in recent years does not mean giving up the basic principles and guidelines of macroeconomic regulation established earlier.

Over the past few decades, China has proposed and continuously improved and perfected macroeconomic regulation in the practice of market-oriented reform, attaching great importance to the total balance of the macroeconomy, counter-cyclical regulation, the relationship between long-term and short-term, the relationship between total and structure, the relationship between price tools and quantity tools, etc., playing an important role in safeguarding system transformation and economic development, and accumulating rich and valuable experience. In recent years, according to the changes in the internal and external economic environment of the new era, new propositions and guidelines such as macroeconomic governance, macroeconomic regulation system, cross-cycle regulation, and implementing macro policies around plans and strategies have been proposed, reflecting an innovative and change-oriented approach. How to combine theoretical and conceptual innovation with solving new problems in macroeconomic operation, and to test and develop new paradigms of macroeconomic regulation in dealing with and resolving real contradictions, is an important issue faced by current theoretical research and practical exploration.

II. Pay attention to the new type of imbalance between economic supply and demand strength and weakness

In recent years, while China's economy has maintained a resilient growth trend, it has gradually shown a new type of total and structural imbalance characterized by strong supply and weak demand, which has obviously constrained and troubled China's economic growth. It is necessary to pay attention to the characteristics and impact of the new type of imbalance between economic supply and demand strength and weakness, and to combine necessary macroeconomic regulation and reform to effectively govern and promote economic rebalance according to its special causes. Based on a brief observation of the phenomenon of strong supply and weak demand imbalance, combined with the examination of several historical situations of insufficient demand, this paper analyzes its characteristics and the necessity of adjustment and reform.If the downturn in real estate investment is linked to the drag on domestic demand and changes in specific policy environments, the insufficient consumption that affects the weak demand in this round has deeper systemic and economic roots. From international comparative data, China's per capita GDP is close to the world average and about one-third higher than that of the G20 emerging economies. However, the national savings rate and consumption rate are significantly higher and lower than the global averages, respectively, and the consumption rate of residents is also very low. Although considering the "in-kind social transfer" factor significantly increases China's residential consumption rate, this indicator still falls significantly below the global average and the average of G20 emerging economies after adjustment.

Consistent with the aforementioned data, there is a significant discrepancy in China's global share of consumption, GDP, and investment. Compared to the insufficient consumption during the weak domestic demand at the turn of the century, the reasons for the current sluggish consumption are more complex, and the lack of residential consumption is clearly rooted in the system and its origins. For example, looking at the annual per capita pension of three types of citizens, the huge differences highlight the contrast between the system and the countryside, which is related to the lagging transformation of public finance to some extent. Another important reason for the lack of residential consumption is that China's public sector controls a large amount of resources, a significant proportion of which is invested in improving the supply side capacity of the economy through different channels over a long period, while the proportion used to support the growth of residents' income and the improvement of residents' consumption is relatively insufficient.

Finally, the strengthening of the supply side, manufacturing upgrades, and insufficient domestic absorption have increased foreign trade competitiveness and surplus scale, accompanied by new contradictions in external economic and trade relations. Especially China's electric vehicles and other "new three items" exports have soared, quickly triggering trade protection measures from Western countries. The United States has decided to impose an additional 100% tariff on China's electric vehicles on the grounds of overcapacity. The European Union launched an anti-subsidy investigation on China's electric vehicle imports in October last year and temporarily imposed tariffs from July 4. The aforementioned policies of the United States and Europe reflect their protectionist tendencies, while the objective reason is the structural characteristics of China's new round of export surplus and the new competitive relationship formed between China and Europe and the United States in the field of economic and trade, which has strategic significance for the green transformation. The soaring exports of the new three items have made Europe and the United States more entangled. In addition, the overall strategic evolution and competitive game motives of Western countries towards China have also played a role in promoting the situation.

III. Summary

Overall, the pattern of strong supply and weak demand is a contradictory or dialectical phenomenon: the "strong supply" is an encouraging phenomenon in China's economic growth, especially the upgrading of industries such as manufacturing, while the "weak demand" is an unfavorable factor derived from various internal and external environments and systemic factors during the economic development process. However, the positive and negative factors here cannot naturally offset each other, but form an imbalanced relationship and problems at the level of economic total and structure. Compared with the insufficient total demand in the early stages of the reform period, the imbalance of strong supply and weak demand in recent years has presented many new characteristics, becoming one of the global factors that restrict the full release of China's economic growth potential and are not conducive to high-quality development.

Looking at the process of China's economic system reform, the proposal and development of macroeconomic regulation is one of the important themes of systematic transformation practice exploration and theoretical innovation, and maintaining the balance of economic total and reasonable structure is one of the basic goals of macroeconomic regulation. The new reform decision highlights the leading role of "national strategy and planning" on "macroeconomic governance system", showing the adjustment and innovation of macroeconomic regulation decision-making thinking. Considering the full release of growth potential to achieve the two-step modernization goal is the core content of the top-level strategic planning formulated by the ruling party, and the concept of the macroeconomic governance system has a broad perspective beyond short-term macroeconomic regulation. Subsequently, under the guidance of the latest reform decision, it is necessary to increase the implementation of active macroeconomic regulation policies in response to the actual contradictions of strong supply and weak demand, while "taking economic system reform as the traction" to promote macroeconomic rebalance.