China’s Politburo, the 24-member senior body of the CCP leadership, just concluded its mid-year meeting to lay out the economic policy agenda for the second half of the year. Below are my initial takeaways, informed as well by my meetings last week with a broad range of contacts in Beijing, Shanghai and Hong Kong.
First the big picture. The statement from the Politburo meeting broadly met my expectations by signaling targeted and incremental increases in policy support in H2 (please see: What to expect when you’re expecting stimulus, 13 July 2023). It did not announce major new stimulus measures, and in most areas stressed overall continuity. Beijing is most definitely not “bringing out the bazooka.”
That said, the statement does signal greater urgency on the part of China’s leadership to boost domestic demand and confidence – the language is stronger than in the Politburo’s meeting in Q1. While the lack of more significant announcements will disappoint the many calls in China’s policy circles for much bolder measures, the shift in tone suggests that Xi Jinping’s economic team has convinced him that stronger support is necessary to secure the 5% GDP growth target this year and avoid a further deterioration of the economy. Individual agencies will follow up on that guidance by announcing additional incremental policies in the weeks ahead.
While those additional details will be important, today’s Politburo statement suggests that China’s policy mix in H2 will be as follows:
- Monetary and fiscal policy will be modestly more supportive. The statement says China will “continue to implement a proactive fiscal policy and a prudent monetary policy,” signaling no major loosening. A later reference to “giving full play to the role of aggregate and structural monetary policy tools” suggests room for modest interest rate cuts and RRR cuts in H2 as well as use of various PBOC lending facilities to support credit growth, which has been slowing. On the fiscal side, the meeting pledges measures to boost consumption, including in specific areas such as autos, electronics goods and household appliances, but these efforts are likely to be fairly small in scale given that the meeting did not suggest an expanded fiscal deficit. It is important to note here that by some measures, both fiscal and monetary policy have been neutral or have even tightened in recent quarters despite flagging growth: real interest rates have increased due to industrial deflation, while local government spending has slowed because of the loss of land sales revenue. Hence, although the meeting pledged to strengthen “counter-cyclical policies,” the actual degree of counter-cyclical support in H2 will probably still be modest. A common refrain I heard in Beijing is that (to use one metaphor) China’s economy risks stalling out as it goes up a hill, but policymakers have been tapping the brakes rather than hitting the gas.
- Infrastructure investment will accelerate within the already planned envelope for this year. The statement appears to meet our expectation that Beijing will direct local governments to accelerate their issuance of special bonds used to fund infrastructure projects, and that it will provide financial support through the PBOC and/or policy banks. As we have stressed, this should help counter a recent slowdown in infrastructure spending but is not a new package. It falls short of speculation in some quarters that Beijing would increase the scale of infrastructure spending this year through rarely used instruments such as “special treasury bonds” issued by the central government.
- Property support is set to increase. Property had the most significant changes in wording in this Politburo statement, reflecting growing urgency to prevent a further slippage in property activity, prices and sentiment. The statement says it is necessary to “adapt to the new situation of major changes in the relationship between supply and demand in our real estate market, adjust and optimize real estate policies in a timely manner, and make good use of the policy toolbox for city-specific policies to better meet residents’ demand” for housing.” The implication as I read it is that the property sector downturn has so radically altered the real estate market as to justify looser measures without policymakers having to worry about reflating the sector and reviving speculative demand – further signaled by the fact that the meeting did not repeat Xi’s refrain of “housing is for living in not for speculating on.” Coming weeks will see local governments lower some restrictions on housing purchases and mortgage financing, along with the possibility of modestly stepped-up financing from the central government to complete stalled developments and build social housing. One shouldn’t exaggerate the degree of loosening signaled here or the impact: Xi is still determined to shift China’s economy and financial sector away from the property sector, and current dynamics in the sector would be difficult to reverse even if policymakers were willing to try aggressively.
- Measures are coming to lower local government debt risks. The statement flags that Beijing is readying policies to address the mounting debt problems faced by local governments, China’s most significant macro-financial risk right now and one that is closely related to property sector woes (please see our report on local debt problems HERE). Modalities of Beijing’s approach are unclear, but the effort will likely aim to alleviate debt repayment pressures through some form of burden sharing between local governments, banks (which will need to extend maturities on loans to local government entities) and the central government. This initiative should lower financial stability risks (particularly the dangers of local government financing vehicles defaulting on bonds) but is unlikely to be expansionary for growth, at least in the near-term. Indeed, banks may have less headroom for lending to the corporate sector depending after extending maturities on loans to local governments.
- Policymakers are intent to boost private sector and investor confidence but face a high burden of proof. The Politburo statement reaffirms recent pledges to boost private sector confidence in the face of very weak private investment (-0.2% y/y through June). Last week, Beijing issued a high-level policy document pledging a range of measures to improve the environment for private firms, and today the National Development and Reform Commission (NDRC) followed up with measures specifically intended to boost private investment. Thus far, Beijing’s pledges have failed to elicit enthusiasm from markets or from my contacts in China. In addition to disappointment in the weak recovery, private sector confidence is hampered by more structural concerns over the security of their property rights, policy and regulatory uncertainty, their ability to compete fairly against SOEs, and geopolitical tensions – all of which are hard to separate from Xi’s fundamental governance style. The statement also says that it is necessary to “necessary to activate the capital market and boost investor confidence,” but here too the proof will be in the pudding.
Implications and watchpoints:
My takeaway from the Politburo meeting is that Beijing will do enough in H2 to secure the 5% growth target – a conservative goal given weak growth last year – but not so much as to greatly accelerate the gradual, services-driven rebound now underway.
Stepped up efforts to support the economy must be measured against the depth of current challenges. Domestic demand and confidence are weak due to a heady brew of economic scarring from three years of pandemic controls, the broad impact of the property downturn, and structural factors such as worsening demographics. In my trip to China last week, sentiment towards the outlook was weaker than I have seen in a very long time; this reflects a sense among interlocutors that current economic conditions are tough, but also pessimism that economic policy will be bold enough to break through this malaise.
However, it will be important to monitor follow-up measures. The Politburo meeting and other recent statements have underscored that Beijing is being careful to preserve policy space and use only as much as necessary, which means that policies will be rolled out incrementally in coming weeks and the rest of the year as officials believe is necessary to achieve their goals.
I will follow up with additional takeaways from my meetings in China in a subsequent note this week but feel free to reach out to discuss at any time.
