What options are available for counter-cyclical policies to cope with tariff shocks?

Core Viewpoints

1. Macroeconomic policies will intensify efforts to ensure the achievement of the 5% economic target. In the first quarter, the pace of policy implementation has not been fast; with the implementation of reciprocal tariffs, the time for policy intensification has arrived. On March 23, Premier Li Qiang pointed out that "new incremental policies will be introduced when necessary to provide strong support for the sustained improvement and stable operation of the economy," and it is now "necessary."

2. The key to policy lies in three issues: rhythm, intensity, and direction.

From the perspective of policy rhythm, the April Politburo meeting is an important time window. On one hand, the earlier policies are introduced, the smaller the economic losses will be, so policies reserved for the second half of the year may be advanced to the second quarter; on the other hand, referring to last year's package of policies after September 24, stabilizing growth involves systematic policies across various departments, which requires time to assess the situation and determine policies.

From the perspective of policy intensity, efforts to stabilize growth will inevitably be intensified, but the policy approach will still follow the logic of high-quality development. Ensuring the achievement of the 5% growth target may not mean a strong stimulus in the form of excessive liquidity; adhering to high-quality development remains the main approach and logic, balancing debt risks while stabilizing growth, and releasing economic vitality through structural reforms.

From the perspective of policy direction, the potential space is ranked from large to small as follows: consumption > real estate > infrastructure investment > manufacturing investment. In January and February of this year, manufacturing investment grew by 9%, infrastructure investment (including electricity) grew by 10%, and there is not much room to further expand infrastructure and manufacturing investment, while the growth rate of retail sales at the beginning of the year was only 4%, indicating that the potential space for consumption is much larger than that for investment. Additionally, real estate sales and investment remain relatively weak, which also presents certain potential space.

3. We believe there are many policy choices for stabilizing growth, and the upcoming systematic policies may focus on three key areas: ① Preventing the spread of export risks → ② Adjusting demand structure → ③ Expanding policy scale. Below, we will discuss possible policy choices in these three directions:

(1) Preventing the spread of export risks, mainly stabilizing export chain enterprises and employment, and mitigating the impact of tariff shocks on the overall economy. Possible policies include:

① Expanding the scale of export tax rebates, referencing the increase of 0.6 percentage points in export tax rebate rates in 2017-2018, which corresponded to an increase in export tax rebates of nearly 170 billion, reaching around 2 trillion.

② Reducing import tariffs on non-U.S. countries and increasing export subsidies to non-U.S. countries (while avoiding trade frictions and anti-dumping investigations), encouraging enterprises to expand into non-U.S. markets. During the last trade war, in 2018, counter-tariffs were imposed on U.S. imports while reducing import tariffs on non-U.S. countries, resulting in a nearly one-quarter reduction in the overall tariff level for the year, from 9.8% the previous year to 7.5%

③ Promote the conversion of exports to domestic sales, certain products can be given certain subsidies, such as subsidies based on export tax rebates, or participating in domestic market "trade-in" subsidies.

④ Increase financial assistance for unemployment insurance, allowing insured unemployed individuals to smoothly receive unemployment benefits, reducing the consumption shock caused by unemployment in the export chain. According to the survey unemployment rate, by the end of 2023, among 24 million urban surveyed unemployed individuals, only 3.52 million received unemployment insurance, with a benefit rate of only 14.7%.

⑤ Referencing 2020, there may be phased tax deferrals for export enterprises, alleviating liquidity pressure and supporting enterprises through difficulties.

(2) Adjust the demand structure, mainly to stimulate domestic demand, with external demand weakening and internal demand taking over. Possible policies include:

① The existing consumption subsidies can be increased. For example, the current subsidies for home appliances, automobiles, and mobile phones can be raised by 10 percentage points, such as increasing the mobile phone subsidy from 15%, up to 500 yuan, to 25%, up to 1500 yuan, and similarly for other products.

② Expand the subsidy scope to service consumption. Consider areas such as transportation (e.g., public transport, subways, railways), dining, hotel accommodation, and tourist attractions, providing 10%-20% consumption subsidies for these service consumptions, and increasing the frequency, such as considering a subsidy voucher for each person for each type of service consumption monthly (or quarterly), expanding the coverage of the subsidy population.

③ Allow reasonable use of housing fund and personal medical insurance account funds. Many cities have significant restrictions on the withdrawal of housing funds and the use of personal medical insurance accounts, and reasonable withdrawals should be allowed to alleviate residents' income and expenditure pressure. For housing funds, all related uses such as renting, buying, and renovating houses should be allowed for withdrawal; for personal medical insurance accounts, local areas can refer to the policies of Beijing before 2021, allowing individual account funds to be deposited into personal bank accounts without restrictions on usage.

④ Expand the scale of monetary resettlement and accelerate implementation. Last October, 1 million housing renovations were supported through monetary resettlement, and consideration can be given to expanding the scale to 2 million units. Additionally, the implementation of early monetary resettlement has been slow and needs to be accelerated.

⑤ Other real estate policies, on one hand, there is still room to lower housing fund loan interest rates and commercial loan interest rates; on the other hand, the special bonds for the storage of commercial housing should be accelerated. Last October, the proposal for special bonds to store commercial housing was made, and after half a year, progress has been slow, so plans should be accelerated and, if necessary, increase the storage efforts to promote supply and demand balance in various cities.

⑥ Two directions for expanding investment, one is to support investment layouts in new productive forces such as artificial intelligence, and the other is to invest in areas like elderly care and healthcare to "fill the gaps."

(3) Expand the scale of policies, mainly through the expansion of total policies such as fiscal and monetary policies.

① In terms of fiscal policy, it can be divided into two steps. The first step is to adjust the expenditure structure and improve the efficiency of stable growth. Before extreme pressure arises, the existing structure of fiscal fund usage can be adjusted, such as using 800 billion for "dual heavy" special government bonds, which can be redirected towards industrial investment, promoting consumption, stabilizing exports, and employment, thereby improving the efficiency of existing policies for stable growth, such as the adjustment of 300 billion ultra-long-term special government bonds for equipment updates and trade-ins last July. The second step is to strengthen fiscal policy, as pointed out by the People's Daily on April 6th, "There is still room for further expansion of fiscal deficits, special bonds, and special government bonds as needed."

② In terms of monetary policy, timely reserve requirement ratio cuts and appropriate interest rate reductions are necessary to stabilize social confidence and financial market expectations, guiding financing costs to continue to decline. Additionally, structural monetary policy can be used to precisely support export enterprises impacted by tariffs, such as expanding the underwriting scale and coverage of export credit insurance, and guiding financial institutions to increase the proportion of credit allocation to export enterprises.

Author of this article: Lu Zhe and Zhan Shuo from Soochow Securities, Source: Macro Fans Zhe, Original title: "【Soochow Lu Zhe】In response to tariff impacts, what other options are available for counter-cyclical policies?"

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