[Good Morning Stock Market] "Fiscal Policy Role Important... Expecting Policy Led by Zhongyang Zhengfu in China"

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[Asia Economy Reporter Kum Bo-ryeong] As concerns about the global economy have expanded due to the novel coronavirus infection (COVID-19) crisis, countries are rushing to announce policies one after another. However, as worries about monetary policy also increase, there are claims that the role of fiscal policy will become more important. In the case of China, voices are also emerging that policies at the central government level, rather than local governments, are crucial.

◆ Huh Jae-hwan, Researcher at Eugene Investment & Securities = Unprecedented monetary policies surpassing those during the financial crisis are pouring out due to the COVID-19 crisis. However, monetary policy alone is not enough. There are also growing concerns about how many and what monetary policy options remain in the future. In this situation, fiscal policy is being strengthened. This is why interest in MMT (Modern Monetary Theory) is increasing. In the short term, policy options such as bailouts and evolved forms of QE remain. However, looking at past cases where policy paradigms changed, the role of fiscal policy is expected to become more important than monetary policy gradually. This is also expected to influence the direction of interest rates in the long term.

Although fiscal policy is not a cure-all, there is an argument that it is desirable at least in the current situation. This is MMT. Generally, governments collect taxes or issue deficit bonds to finance fiscal spending. MMT theory argues for 'money printing' rather than tax increases or bond issuance to stimulate the economy. In a low growth, low inflation, and low interest rate environment, fiscal policy is more effective than monetary policy, and money should be injected until full employment is reached. This is possible when inflation is not a problem, and if inflation occurs, it can be controlled through tax increases. Although it is far from mainstream economics, MMT theory gained attention because of U.S. Democratic presidential candidate Bernie Sanders. Stephanie Kelton, who served as Sanders' economic advisor in 2016, was a key theorist of MMT.

◆ Sung Yeon-joo, Researcher at Shin Young Securities = Due to concerns about the slowdown of the Chinese economy caused by COVID-19, there has been much market over-interpretation of the Chinese government's 'new infrastructure' and 'old infrastructure' policies recently. In conclusion, a stimulus policy led by the 'central government' has not yet been announced and is expected to be announced around the National People's Congress (mid-April). Most of the stimulus policies announced so far are included in the 'local government' budgets, and since local government budgets are limited, there is a large difference from the actual investment amount. Therefore, the scale of fiscal policy led by the central government is important.

At the Politburo meeting held on the 27th, an upward adjustment of the fiscal deficit ratio (about 3% to 3.5%, an increase of 1 trillion yuan) and expansion of local government bond issuance were mentioned. Among them, the issuance of 'special bonds' was raised for the first time in the meeting content. Therefore, with limited local government bond issuance and fiscal capacity, the issuance of special bonds is expected to be implemented for the first time in 13 years. This was done during the 1998 financial crisis and in 2007. If the issuance of special bonds becomes visible, the People's Bank of China is expected to lower the reserve requirement ratio soon. Since the issuance of special bonds does not require approval from the National People's Congress, it can be implemented immediately if conditions are met. The expected scale of special bond issuance is about 1 trillion to 3 trillion yuan, and it is expected to be used for consumption stimulus and new and old infrastructure investment funds.

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