The overall economic performance is stable and improving, but insufficient effective demand remains the main contradiction

Although the GDP growth rate in the second quarter fell by 0.7 percentage points compared to the first quarter, the actual growth rate in the first half of the year was 4.7%, which is overall in line with the expected growth target of 4.5% -5% for the whole year. Compared with major economies around the world, the Chinese economy still maintains relatively good performance, showing characteristics such as a new and optimized industrial structure, overall stable employment and prices, and impressive foreign trade performance. This reflects the resilience and growth potential of China's super large scale economy, and demonstrates an overall trend of stability and improvement. According to the latest data, the pattern of insufficient domestic demand and strong supply with weak demand has not fundamentally changed. To achieve the annual growth target, boosting domestic demand remains an important task of macroeconomic policies in the second half of the year.

The insufficient effective consumption demand is first constrained by income. Income includes wage income and property income. Wage income is directly related to employment rate and employment quality. The current manufacturing and service industries are relatively sluggish, and they are the main force of employment. Secondly, residents' property income is affected by the adjustment of the real estate market. The decline in housing prices leads to the contraction of household balance sheets, weakening the wealth effect of residents, and thus restricting their consumption ability and willingness.

The demand for effective investment is also insufficient. The growth rate of fixed assets investment across the country was sluggish, especially the fixed assets investment of private enterprises declined significantly. Corporate investment not only depends on financing costs, but also on expectations of future market demand and profit returns. Against the backdrop of strong supply and weak demand, as well as overcapacity in some industries, "inward competition" continues to compress the profit margins of enterprises, especially affecting the manufacturing industry and downstream enterprises.

The investment capacity of local governments has also significantly declined. In the past, local governments not only undertook large-scale infrastructure and public product investments, but also participated in economic activities through local state-owned enterprises. In recent years, due to factors such as fiscal revenue and expenditure gaps, debt repayment pressure, and increased risk constraints, the investment capacity of local governments has weakened, further exacerbating the insufficient demand for effective investment.

The key lies in stabilizing and increasing residents' income

Continuous growth in consumption requires a stable income base. Under a fixed price level, only when residents' income continues to improve can consumer demand achieve substantial expansion. Therefore, we need to increase the income of workers through policy choices and reforms in the income distribution system, enhance the sense of achievement of the people in reform and development, and boost consumption through income growth.

Firstly, the prerequisite for stable income is stable employment. Most households' income comes from labor employment, so stabilizing income first requires stabilizing employment. It is necessary to expand employment opportunities and promote reasonable wage growth. The foundation of stable employment is stable enterprises. If enterprise investment and operation continue to shrink, employment and wage growth will also be affected. Therefore, it is necessary to improve the business environment, support the stable development of the real economy, and enhance the employment creation ability of enterprises. As private enterprises are the main force in absorbing employment, vigorously developing the private economy can help improve the level of employment.

Secondly, stabilize residents' property income. Real estate and capital markets are important carriers of residents' property income. Stabilizing the real estate market and promoting the healthy development of the capital market can help improve household balance sheets and wealth expectations. It is still difficult to rely solely on the spontaneous force of the market to repair the real estate market. It is possible to consider taking necessary intervention measures by the government to promote the recovery of the real estate market while fully leveraging the market's regulatory role.

Thirdly, further implement policies that invest in people, and enhance the ability of fiscal policies to stimulate consumption through the redistribution of national income. Finance is an important tool for redistributing national income. Traditionally, proactive fiscal expenditure policies have focused more on investing in goods, such as increasing investment in infrastructure, but now emphasize investing in people, that is, shifting more towards social security areas such as employment, education, healthcare, and elderly care, increasing transfer payments to low-income groups, and improving transfer payments to rural farmers. This can reduce the uncertainty of households in healthcare, elderly care, and employment, help reduce precautionary savings, and increase consumption tendencies.

Fourth, optimize the supply of consumer goods and services. In the context of rapid development of the digital economy and artificial intelligence, we should promote the upgrading of the supply structure of consumer goods, enrich new consumption scenarios, improve the quality of life services, and better meet the multi-level and personalized needs of residents. Improving supply quality can also create new effective consumer demand.

Improve the macro environment of strong supply and weak demand, and increase the expected investment return of enterprises

It is crucial to maintain an appropriate investment growth rate in order to achieve the expected annual growth target of 4.5% -5%, as investment is the material foundation of GDP growth. Whether a company expands its investment depends not only on the investment cost, but also on the supply and demand situation of the product market, as well as future price and profit expectations. Improving the pattern of strong supply and weak demand, and promoting a reasonable rebound in the overall price level, are the foundation for restoring enterprise investment confidence.

Firstly, continue to increase the stimulus of macro policies. In response to the recent weak investment and consumption data, it is necessary to further enhance the strength and coordination of macroeconomic policies in the second half of the year, strengthen the coordination between countercyclical policies and cross cyclical policies, incremental policies and stock policies, aggregate policies and structural policies, fiscal policies and monetary policies, unblock the transmission mechanism of macroeconomic policies, improve the efficiency of macroeconomic policies, enhance aggregate demand, improve the macro environment of strong supply and weak demand, and enhance the investment confidence and profit expectations of enterprises.

Secondly, relying on market-oriented reforms to govern "internal competition". At present, "involution" competition mainly occurs in manufacturing, competitive industries in the middle and lower reaches, and low-end service industries, which are the main employment areas for ordinary households. Therefore, governing "involution" competition is not only important for expanding investment in these industries, but also for stabilizing income and employment for ordinary households. The governance of low price and homogeneous competition should not mainly rely on government administrative intervention and expanding expenditures, but should give more play to the regulatory role of the market and clean up ineffective and inefficient supply through market mechanisms. To achieve this, it is necessary to deepen the reform of state-owned enterprises, harden hard budget constraints, regulate local government investment and investment behavior, reduce redundant construction and inefficient competition, and enable the market to play a decisive role in resource allocation.

Thirdly, a series of policies and measures will be introduced to stabilize enterprises. Confidence is more important than gold, and boosting investment confidence is closely related to creating a favorable investment environment. We should further reduce the institutional transaction costs and operational burdens of enterprises, and create a stable, transparent, and predictable development environment. Especially to improve the development conditions of private enterprises, enhance the confidence of entrepreneurs, and promote the expansion of effective investment in manufacturing and the real economy.

Fourth, restore the reasonable investment capacity of local governments. During the period of rapid growth, local governments played a crucial role in expanding investment and other aspects. In order to leverage the proactive role of local governments in boosting investment, efforts need to be made from three aspects: firstly, efforts should be made to address the mismatch between local government financial and administrative powers, as well as fiscal deficits. We need to further implement the spirit of the Third Plenary Session of the 20th Central Committee of the Communist Party of China, implement the requirements of fiscal system reform, further streamline the financial and administrative relationships between the central and local governments, and alleviate the contradiction between grassroots fiscal revenue and expenditure; Secondly, we should continue to promote the resolution of local government debt, reduce the pressure of repaying principal and interest, and create space for local governments to carry out necessary public investment and infrastructure construction; The third is to improve positive incentives for local governments.

Fifth, expand long-term investment space through the conversion of growth momentum. Boosting investment cannot rely solely on short-term policy stimulus, but should also be combined with the construction of a modern industrial system. New investment growth points should be formed around areas such as technological innovation, advanced manufacturing, digital economy, green transformation, and public services to improve investment efficiency and long-term returns. (Outlook New Era)

Author: Yang Ruilong (National First Class Professor and Co Director of the Institute of Economics at Renmin University of China)