ACCEPT Report: "Smooth the Circulation of the National Economy: Shifting from Traditional Public Finance to Modern Public Finance—Analysis of the Economic Situation in the First Half of 2025 andEconomic Outlook for the Second Half of the Year"

Title: Smooth the Circulation of the National Economy: Shifting from Traditional Public Finance to Modern Public Finance—Analysis of the Economic Situation in the First Half of 2025 and Economic Outlook for the Second Half of the Year

Authors: ACCEPT Macro Forecasting Group (Group Leader: Ke'aobo Li; Deputy Group Leader: David Daokui Li, Peilin Liu; Group Members: Ke'aobo Li, Shuyu Wu, Bing Li, Lin Lu, Meixin Guo, Peilin Liu, Zhangkai Huang, Shaobo Long, Dapeng Chen, Ming Feng, Xingye Jin, Chi Zhang, He Zhang, Kun Lang, Yuntao Hou, Lujia Li, Zihang Wang, Xiang Chen, Yaping Li, Jiabao Song, Junyi Dai, Bowei Xu, Yuchuan Zheng; Main Contributors: Shuyu Wu, Bing Li, Meixin Guo, Lin Lu, Peilin Liu)

Language: Chinese

Publication: Reform, Vol. 6, No. 376, June 2025, 1003-7543: 56-75.

English Abstract: 

In the first half of 2025, there were some encouraging signs of stabilization and improvement in the Chinese economy, but the economic growth rate remained below potential levels. The Chinese economy is running with "qi stagnation and blood stasis," and the high local debt exceeds the fiscal and tax capacity of local governments. Under the pressure of debt reduction, local governments have increased their efforts and distorted their actions in raising fiscal revenue from enterprises and residents, which has suppressed the enthusiasm of enterprises and household departments. At the same time, local government debt repayment funds are concentrated in the financial sector, which is unable to invest these funds in the corporate and household sectors. The key to policy lies in achieving a conceptual shift from traditional public finance to modern public finance. Traditional public finance calculates current accounts, focusing on the short-term fiscal balance, issuing debts when short-term funds are insufficient, and expecting to repay them in the short term. The modern public finance concept believes that the government needs to provide the financial market with the best liquidity and highest credit rating treasury bonds as the base of the financial market pyramid, so as to consider and solve financial and fiscal problems as a whole. The government should consider the issuance of treasury bonds from the balance sheet reflecting the stock, not just from the statement of capital flows of each period. The government should aim for the long-term rather than short-term balance of income and expenditure. China currently has good conditions for the large-scale issuance of treasury bonds. Based on these considerations, we put forward a package of proposals, including issuing 30 trillion in treasury bonds to replace local bonds, accelerating the digestion of real estate inventory, digesting excess production capacity, intensifing the policy of expanding domestic demand, intensifing investment in people and continue to vigorously promote the urbanization of migrant populations. If these policies are implemented, the Chinese economy is expected to emerge from the current state of "qi stagnation and blood stasis" and enter a new cycle of high-quality, medium to high-speed development.