China’s State Council (cabinet) issued a statement from the meeting of its executive committee on Friday. Investors have been watching closely given the intense focus on potential stimulus measures this week. The meeting did not announce any specific measures of note but pledged that “more forceful measures are forthcoming.”
While we wait for more concrete measures in coming days, my initial take is to read the statement as reaffirming our view that macro policy has tipped into “active response” but not “emergency” mode [see our earlier write-up HERE]. Stimulus measures will broaden in scale and increase in intensity but will be mainly targeted – and probably not the overwhelming show of force to quickly boost confidence that many in the market are hoping for.
Here is the key paragraph from the release (in machine translation) followed by my interpretation:
The meeting pointed out that the overall performance of our country’s economy is improving. With the introduction and implementation of earlier policy measures, market demand is gradually recovering, production supply is continually increasing, and prices and employment are generally stable. High-quality development is steadily advancing. At the same time, the external environment is becoming more complex and severe, global trade and investment are slowing down, which directly affects the recovery process of our country’s economy. In response to the changing economic situation, we must adopt more forceful measures, enhance the momentum of development, optimize the economic structure, and promote the continued improvement of the economy.
The meeting revolved around four aspects: increasing the strength of macro-policy regulation, striving to expand effective demand, strengthening and optimizing the real economy, and preventing and resolving risks in key areas. A series of policy measures were proposed. The meeting emphasized that policy measures that meet conditions should be introduced and implemented in a timely manner, while also strengthening the reserve of policy measures, to maximize the comprehensive effect of the policies.
My two main takeaways are as follows:
- Beijing is clearly acknowledging that policy must loosen, and quickly, in response to a slowing global economy and weak domestic demand. However, the tone is measured (“overall economic performance is improving”). This is consistent with our conclusion [link above and again HERE] that May data released earlier this week, while weak, was not so bad as to force Beijing into bringing out a stimulus “bazooka.”
- Stimulus will increase in intensity but remain disciplined. It seems clear that the State Council will release a package of support measures (not necessarily all at once) soon. But there are some important qualifiers. Stimulus measures should “meet conditions,” which is vague but implies that stimulus should not worsen financial imbalances and that it should ideally serve long-term development/industrial policy goals. The reference to “strengthening the reserve of policy measures” is also notable. It suggests to me that policymakers intend to move with an initial package of measures, and then reach further into their toolkit if (and only if) necessary to provide additional support and secure the 5% GDP growth target.
As far as what this means in specific terms, I continue to think that the basket of likely support measures includes:
- Additional resources for infrastructure financing to aid local governments. As I noted yesterday [link HERE], the Wall Street Journal report yesterday that Beijing is considering issuance of special treasury bonds is very plausible and is consistent with the State Council’s tone. Just to again stress two points I made yesterday. First, central government support is necessary just to avoid a “fiscal cliff” in infrastructure finance, given weakness in local government finances from weak land revenues and mounting debt repayment pressures. Two, infrastructure is already the main form of stimulus this year and will do relatively little to directly boost private sector and household demand and confidence, which are critical to accelerating and broadening the recovery.
- Additional support for property. This will include some local-level easing of property policies and perhaps stepped up support for property developers, all within the confines of the existing (disciplined) framework for the sector.
- Very modest fiscal support, aimed at promoting specific industries. Ministries have recently outlined efforts to boost spending in areas such as EV sales to rural areas but the scale is likely to be modest. Calls for direct stimulus to promote consumption are now very loud in the macro community but Beijing remains reluctant.
- Accomodative monetary policy but not broad aggressive easing. PBOC will aim to maintain ample liquidity and lending, including a potential RRR cut in July, but will be restrained in making additional broad rate cuts.
As a concluding point: Beijing’s policy response has now “bottomed out” (it is on the upswing) but may still be behind the curve. Domestic demand is subdued, exports are slowing, and confidence is weak. Beijing’s current playbook isn’t well suited for quickly addressing this mix of challenges, in part because of the mounting structural constraints that are making familiar tools less effective (demographic headwinds to property, limited benefits to additional infrastructure spending). Unless Beijing unveils a strong and more creative package, the main impact of stimulus will be to secure the 5% growth target but not quickly invigorate this gradual, services-driven recovery.
More analysis to come, of course, as we get more signals as to the specifics of support measures.
