Sheng Songcheng: Precise Macro Control Measures to Safeguard High-Quality Economic Development

Macroeconomic Regulation and Precise Policy Measures to Support High-Quality Economic Development

— Interview with Sheng Songcheng, Professor of Economics and Finance at China Europe International Business School, and Director of the China Chief Economist Forum Research Institute

Currently, the economy is at a critical stage of transformation and upgrading. On one hand, the fundamentals remain generally stable, resilience continues to show, and positive factors are steadily accumulating; on the other hand, issues such as boosting domestic demand, deep adjustments in the real estate market, and net interest margin challenges for commercial banks still need to be addressed.

The Central Economic Work Conference held in December 2025 emphasized that under new circumstances, economic work must “fully tap economic potential, adhere to policy support and reform innovation, ensure both ‘letting go’ and ‘regulation,’ closely combine investment in physical assets and human capital, and strengthen internal skills to meet external challenges.” Against this backdrop, the pace of macro regulation, choice of tools, and departmental coordination have become highly focused topics in the market. During the transition of monetary policy framework, how should policies of reserve requirement ratio cuts and interest rate cuts be prioritized to suit national conditions? What key areas should fiscal and monetary policy coordination focus on? What are the core measures to boost consumption, stabilize the real estate market, and optimize the financial structure? With these questions in mind, Shanghai Securities News interviewed Sheng Songcheng, Professor of Economics and Finance at China Europe International Business School and Director of the China Chief Economist Forum Research Institute.

◎ Zhang Weihua, Reporter Wang Jingbo

Effective Coordination of Fiscal and Monetary Policies

Shanghai Securities News: You have recently repeatedly stated that “reserve requirement ratio cuts are preferable to interest rate cuts,” and predict a “gradual reserve requirement and interest rate reduction cycle” over the next two years. In the context where commercial banks’ net interest margins are already at historic lows, what is the logic behind this policy prioritization? How does it fundamentally differ from Western central banks’ focus on interest rate operations, and what unique considerations of China’s macroeconomic governance does it reflect?

Sheng Songcheng: First, the view that “reserve requirement ratio cuts are preferable to interest rate cuts” is a long-standing one of mine. It does not deny the necessity of interest rate cuts but considers that reserve requirement ratio cuts are more suitable for current national conditions. In China’s macro regulation system, fiscal policy plays a leading role, while monetary policy mainly “coordinates.” Reserve requirement ratio cuts are one of the main tools for monetary policy to coordinate with fiscal policy. By directly releasing available funds for commercial banks, they help promote government bond issuance and better support proactive fiscal policies. Most of China’s government bonds are held by commercial banks—about 68% of national bonds and 75% of local government bonds are owned by banks. Additionally, in the current low-interest environment, banks’ net interest margin pressures do not support large interest rate cuts, a consensus that is well recognized in the market.

Second, the “gradual reserve requirement and interest rate reduction cycle” refers to adopting a “step-by-step” approach amid high uncertainty. Monetary policy effects often have a lag from implementation to transmission to the real economy. Fiscal policy can directly intervene in economic activities, while monetary policy mainly works indirectly, with its effectiveness largely influenced by market feedback. For example, during the 2008 international financial crisis, the Fed significantly increased liquidity, hoping banks would expand lending, but banks, worried about risks, were reluctant to cooperate, leading to a reserve surplus of 20% in 2014. This shows that without financial system cooperation, the central bank’s monetary policy goals are hard to achieve. Therefore, monetary policy should not follow rigid paths but be implemented gradually and adaptively.

Western central banks generally adopt a price-based monetary policy framework centered on interest rates, but this presupposes a low reserve requirement system. Since the 1990s, Western countries have rarely used reserve requirement tools. For example, in the US, the reserve requirement ratio for institutional time deposits was reduced to zero by the end of 1990; after the COVID-19 outbreak in 2020, the reserve requirement ratio for demand deposits above 3% was also lowered to zero. Currently, China’s statutory reserve requirement ratio for financial institutions is about 6.3%. Compared to other major countries, China still has room for reserve requirement ratio cuts. Every 0.5 percentage point reduction can provide about 1 trillion yuan of long-term liquidity to the market. Promoting a shift from quantity-based to price-based monetary policy regulation is an important future direction for China to improve its modern monetary policy framework. To make price-based tools truly effective, it is essential to ensure adequate liquidity supply—“first loosen the quantity, then strengthen price guidance.”

Shanghai Securities News: You have emphasized that “fiscal policy should play a leading role, with monetary policy coordinating effectively.” A key aspect of this coordination is how reserve requirement ratio cuts can provide funds for commercial banks to allocate government bonds. In the next step, in which specific areas should fiscal and monetary policy coordination be strengthened? What are the pathways and preconditions for the central bank gradually incorporating government bond trading into its policy toolkit?

Sheng Songcheng: Recently, the central bank announced a reduction in the interest rates of structural monetary policy tools, which is also a form of fiscal-monetary policy coordination. By providing low-cost funds to commercial banks through structural monetary policy tools, the central bank effectively “passes on benefits” to banks, supporting financial institutions to increase credit in specific sectors and industries, thereby reducing corporate financing costs. In short, various monetary policy tools aim to enhance credit availability and effectiveness. Meanwhile, fiscal policy, through measures like fiscal subsidies and industry support, fundamentally promotes increased credit demand. This year, both fiscal subsidies and structural interest rate cuts have been significantly intensified, jointly fostering the development of small and medium-sized innovative enterprises and service industries. In recent years, China’s structural monetary policy tools have been continuously innovated and are playing an increasingly important role, especially in supporting weak economic sectors (such as small micro enterprises, real estate risk prevention and resolution) and key areas (such as technological innovation, advanced manufacturing, green development), serving as effective means to promote high-quality economic development.

Government bond trading has become a new tool for the central bank to adjust liquidity, but the approach and conditions for its 2024 debut and 2025 restart differ. Under multiple factors, China’s bond yields have generally trended downward. In August 2024, the central bank conducted its first open market government bond operation, using “buy short, sell long” to increase liquidity and help maintain an upward-sloping yield curve. By the end of 2024, the bond market experienced a significant supply-demand imbalance, with yields falling rapidly. To curb market volatility and stabilize bond prices and rate expectations, the central bank temporarily suspended bond trading operations.

Since 2025, fiscal policy has been significantly expanded, with a large increase in government bond issuance, pushing yields higher. Additionally, the sustained rise in the stock market has also affected bond market allocations. As market expectations stabilize, the central bank is poised for a new policy window to re-engage in bond market operations. For example, long-term interest rates are less sensitive to rate cuts, and market issuance motivation may be insufficient, similar to issues faced during quantitative easing in the US. To reduce long-term financing costs for enterprises and local governments and to strengthen market expectation management, China’s central bank may adopt “buy long, sell short” operations to support more proactive fiscal policies and real economy investment.

Investing in People to Enable High-Quality Growth

Shanghai Securities News: You have advocated addressing real estate issues through “squeezing bubbles” rather than “popping bubbles.” Considering the policy goal of “stabilizing and stabilizing the real estate market,” what do you see as the most critical “expectation stabilization” measures currently? Long-term, beyond ensuring affordable housing, what reforms in land supply and fiscal-tax structures are needed to build a new development model for real estate?

Sheng Songcheng: Since 2024, a series of policies aimed at stabilizing the real estate market have been implemented, such as adjusting housing purchase restrictions, lowering housing provident fund loan interest rates, and increasing credit quotas for “white list” projects. Overall, key indicators like sales and fund inflows have narrowed their decline. For example, in 2025, new commercial housing sales area decreased by 8.7% year-on-year, narrowing by 4.2 percentage points from 2024; new sales revenue fell by 12.6%, narrowing by 4.5 percentage points.

Currently, the “expectation stabilization” hinges on further smoothing the replacement chain and improving liquidity in the real estate market, which will allow existing policies to play a greater role. Fundamentally, residents’ employment and income expectations are the main constraints on demand-side policy effects. According to the latest quarterly survey data from the People’s Bank of China, in Q4 2025, the urban savers’ income perception index was 46.1%, down 0.4 points from the previous quarter; the employment perception index was 29.2%, up 3.4 points, but 52.8% of residents still believe “the situation is severe, employment is difficult” or “uncertain.” To further release policy effects, firstly, the overall economy needs to pick up significantly to improve real estate expectations through macroeconomic environment; secondly, supply-side efforts should focus on building “good houses” to enhance housing quality and attractiveness. Additionally, increasing affordable housing construction can help reduce inventory, boost purchasing power, and stabilize expectations.

Long-term, building a new development model for real estate requires deep institutional reforms in land supply and fiscal-tax structures, shifting from the past “land-driven development” to a new mechanism of “people-driven housing, housing-driven land, and housing-driven finance.” Local governments should actively explore diversified and sustainable fiscal-tax models to reduce dependence on “land finance.”

Shanghai Securities News: In the context of accelerating the construction of a financial powerhouse, what is the significance of optimizing the financial structure and developing direct financing for activating economic potential? Furthermore, some suggest that the focus of economic growth should shift from “investing in physical assets” to “investing in people.” In your view, what are the core policy implications and key measures of “investing in people”?

Sheng Songcheng: Comparing China and the US in financial composition, China’s banking assets account for about 90%, while the US is 45%; China’s capital market-related institutions hold about 3%, compared to 19.4% in the US; China’s insurance assets are 7.3%, versus 35.4% in the US. This indicates China’s financial system is predominantly indirect financing. In this system, banks are the key conduit for monetary policy transmission and resource allocation, with decisive influence on credit extension. During the earlier investment-driven growth phase, indirect financing provided stable, efficient, and large-scale funding for infrastructure, real estate, and manufacturing, playing a vital role in economic stability.

As the economy shifts toward transformation and upgrading, the marginal returns of traditional “big construction” investments have sharply declined, necessitating support and cultivation of new growth drivers. However, innovative and service enterprises tend to be light-assets, small-scale, and high-uncertainty, which are not fully compatible with the risk-controlled banking system. Building a robust capital market and gradually shifting toward direct financing will better serve technological innovation and new productive forces, easing financing constraints for high-risk, high-reward innovative firms, and promoting sustainable economic transformation.

“Investing in people” means channeling more fiscal funds and social resources into improving livelihoods and public services, vigorously developing education, healthcare, elderly care, and childcare, ensuring employment, and continuously enhancing human capital and residents’ consumption capacity. Theoretically, “investing in people” aligns with the long-term high-quality development driven by human capital accumulation emphasized in endogenous growth theory; it also emphasizes民生关切, especially when consumer vitality needs boosting. The 2024 Central Economic Work Conference proposed “vigorously boosting consumption and improving investment efficiency,” and the 2025 government work report emphasized “creating new growth points through safeguarding and improving livelihoods.” “Investing in people” is a natural extension and concrete embodiment of these policies. Key measures include:

1. Developing income-increasing plans for urban and rural residents, focusing on redistribution mechanisms to boost consumption. In 2023, China’s disposable income share in household income was 61.2%, lower than the US (85.5%) by over 20 percentage points, and also lower than Germany (68.4%) and Japan (65.7%) by about 7 and 5 points respectively. Meanwhile, the share of redistributed income in household income remains below initial income distribution, indicating insufficient income redistribution functions and a need to better share economic growth benefits with low-income groups.

2. Reshaping fiscal expenditure structures to prioritize民生, increasing spending on education, healthcare, elderly care, and childcare. Developed countries’ social security expenditures account for roughly 10-20% of GDP, generally stable. In contrast, China’s民生-related government spending is below 10%, leaving room for growth. Currently, specific measures are being accelerated, such as providing 3,600 yuan annual childcare subsidies for children under three, benefiting about 24 million people; exempting preschool education fees for children in their first year of preschool, benefiting about 12 million. More measures to underpin consumption are expected in the future.

Activating Domestic Consumption Potential

Shanghai Securities News: You have proposed that “redistribution” is key to stimulating domestic demand. In practice, which measures—short-term fiscal transfer payments (like consumption vouchers and targeted subsidies) or long-term tax reforms (like personal tax deductions)—are more urgent and effective at this stage? Additionally, you suggest developing services like housekeeping, elderly care, and childcare. How should policies specifically guide demand toward these sectors?

Sheng Songcheng: In the short term, targeted fiscal transfer payments (such as consumption vouchers and targeted subsidies) are more urgent and effective. The main reasons are:

First, over the past two decades, China’s post-redistribution household income share has remained below the initial distribution (redistribution includes personal taxes, social security, transfer payments, etc.). Directly increasing cash flow for middle- and low-income groups through targeted transfer payments can quickly boost their consumption propensity, providing immediate stimulus.

Second, from countercyclical regulation perspective, the current economic environment requires rapid and precise policy responses. Tools like consumption vouchers and targeted subsidies have strong timeliness and clear targets, capable of quickly boosting demand, especially useful for countering short-term external shocks and insufficient internal demand.

Third, there is still considerable room to improve民生 expenditure. Short-term transfer payments can compensate for shortcomings in social security, healthcare, and public services, boosting consumer confidence and expectations. At this stage, priority should be given to fiscal transfer payments to stabilize consumption quickly, while steadily advancing tax reforms and long-term mechanisms to form a “short-term effect, long-term solution” policy mix. Additionally, lowering personal income tax rates for middle- and low-income groups—such as reducing the tax rate by 5 percentage points for annual incomes between 100,000 and 350,000 yuan—is advisable.

To guide demand toward services like housekeeping, elderly care, and childcare, measures can include:

First, increasing government procurement of services to expand effective demand. By purchasing services, the government can provide stable, large-scale demand support, encouraging enterprises to increase related investments. For example, expanding inclusive childcare facilities, supporting elderly care parks, directly boosting service supply and employment.

Second, implementing targeted tax and fiscal incentives. Expanding VAT credits and refunds for enterprises engaged in elderly care, childcare, and housekeeping services; including household expenditures on these services in personal tax deductions to reduce family costs; and guiding social capital into民生领域 through government investment funds.

Third, linking elderly and health services with individual pension accounts, such as matching care or medical resources according to contribution levels, to enhance account attractiveness and stimulate service market development.

Shanghai Securities News: In your opinion, what other areas can macro regulation policies further strengthen?

Sheng Songcheng: I mainly suggest targeted measures to promote consumption:

First, in implementing the “Two New” policies, consider optimizing consumer goods subsidy policies to further release demand. For example, in conjunction with the Spring Festival, advance and allocate special national bonds for supporting consumption, continue supporting “old for new” upgrades of durable goods, issue tourism and dining vouchers, and coordinate with seasonal demand; adjust support scope for consumption subsidies, focusing on emerging sectors like intelligent driving vehicles and AI devices; and introduce tiered thresholds for “old for new” programs.

Second, increase subsidies for services related to aging and childcare. For example, China’s elderly consumption accounts for about 11% of total household consumption, lower than the 14% share of the elderly population, and much lower than Western developed countries where elderly consumption often exceeds their population share. The “Blue Book of China’s Silver Economy (2024)” estimates the current scale of China’s silver economy at around 7 trillion yuan, about 6% of GDP, and projects it could reach 30 trillion yuan by 2035, accounting for 10% of GDP, with an annual growth rate exceeding 10%. Supporting the育儿经济, such as increasing subsidies for childcare and related services, can complement existing policies. For example, China already provides 3,600 yuan annual childcare subsidies for infants under three and exempts preschool education fees, improving household cash flow. To convert this incremental cash into actual consumption, further subsidies for childcare services and related goods are recommended.

Third, leverage the attractiveness of international消费中心城市 and Hainan Free Trade Port to attract domestic and foreign consumers.