SUMMARY
- Recent stimulus announcements have been generally underwhelming, consisting of measures that are targeted, incremental, and focused on the supply side rather than boosting demand.
- This overall orientation is unlikely to change given Xi Jinping’s focus on disciplined “high quality” growth and a political environment that discourages officials from taking risks on bolder policies; the result is that Beijing will do just enough to secure the 5% GDP growth target, with China’s recovery remaining subdued.
- Near-term watchpoints include how much financing PBOC will provide to support infrastructure investment and the property sector, and any clues as to shifting policy priorities when the leadership concludes in summer retreat in mid-August.
In the wake of the July 24 Politburo meeting, Chinese agencies are issuing a flood of documents and announcements on measures to support the flagging recovery. The results have thus far been underwhelming. Most measures are targeted, incremental, and focus on the supply side rather than directly addressing anemic domestic demand.
At a press conference on Monday, for example, the National Development and Reform Commission outlined its efforts to promote consumption, which focused on supply-side measures such as relaxing restrictions on car purchases and extending the hours of restaurants. The briefing official emphasized that consumption measures are not about “emptying the wallet or overdrawing demand.” In other words, Beijing wants to make it more convenient for households to consume but not to provide them with increased resources for doing so.
This lack of more forceful demand-side measures is not a surprise and seems unlikely to change. Chinese officials are in a bind. On the one hand, they seek to reassure firms, households and markets that Beijing is intensifying “counter-cyclical” policies as the Politburo pledged. On the other, they are under pressure to adhere to Xi Jinping’s directive to stay focused on “high quality growth,” which means being disciplined against financial risks and not relying on old growth drivers (including the property sector) to chase short-term targets. One feels for the bureaucrats: frugal counter-cyclical policy is, if not an oxymoron, then very hard to pull off.
Xi’s policy preference is not illogical. There is wisdom in ensuring that policies are sustainable and linked to longer-term goals. Beijing is also not foolish in wanting to preserve policy space even for next year, when it may be hard to maintain a reasonably high growth rate (4.5-5%) after the low base effect of the pandemic is gone. All of this is to say that the choices facing policymakers are not simple.
In a more flexible political environment officials would have greater scope to navigate between these conflicting directives. But in today’s tight atmosphere, where officials are worried about making a political mistake that could come back to haunt them, they are mostly playing it safe and acting with restraint. The result is not death-by-a-thousand-cuts but something similar: rescue with a thousand Band-Aids, rather than the major blood transfusion – significantly looser monetary and fiscal policy – that many in China believe is necessary to prevent the weak recovery from slipping into longer-term malaise (see our recent report on meetings in China HERE).
Can the restrained kiss-the-boo-boo treatment save the patient? There are two dangers. First, that narrow measures simply won’t be forceful enough to boost demand and confidence without a broader loosening of macro policy settings. Second, that even if the practical effect is sufficient, the incremental rollout of actions will make it harder to reset expectations than in the case of a more concentrated set of bold actions. Even I am getting headline fatigue from China right now and I get paid to do this.
As of now, the policy signals and latest readings on the economy collectively reaffirm our view that Beijing will do just enough to secure the conservative 5% GDP growth target this year. (We refer here to 5% in terms of what the official statistics will show – actual growth will be somewhat lower). The lack of stronger counter-cyclical policy, particularly fiscal policy, means that the recovery will remain gradual and fairly narrow in scope. Services activity and infrastructure stimulus will remain the main drivers; the critical “missing middle” of private investment (particularly in property) and household spending on goods will be slow to fill in.
This does not mean that one should tune out policy announcements, of course (at least I won’t). It will be important to monitor the cumulative effect of the ongoing stream of measures and any signs of shifting policy emphasis. Key near-term watchpoints include:
- Support for infrastructure finance. One of the tangible measures that should be coming soon is an announcement from PBOC as to how much financing it will provide to support local government infrastructure investment in H2. Local governments are in the process of accelerating the issuance of “special bonds” to finance infrastructure projects after falling behind in Q2. However, their debt constraints and the collapse of the revenue from selling land to property developers means that they need additional support to quickly move projects into construction in Q3 and early Q4. In H2 2022, PBOC provided RMB 740 bn in support to infrastructure through its Pledged Supplementary Lending (PSL) facility and another RMB 800 bn through a quota for lending by policy banks. This year, expectations are that roughly RMB 500 bn will be necessary to sustain infrastructure stimulus, which has recently slowed (see chart), and to secure the 5% GDP growth target.
- Support for property. The most dovish signal at the Politburo meeting was the new formulation on property policies (see our write-up HERE). The leadership implied that conditions in the sector have changed so dramatically after the two-year downturn that there is now ample space to loosen policy without having to worry about speculative pressures. Local governments will heed this call and ease restrictions on purchases, downpayments and mortgage rates in coming weeks, with the specific measures and magnitude depending on conditions in their local markets. However, deeper and broader measures may be necessary to stabilize sentiment in the sector, which continued to worsen in July (sales of the 100 largest developers fell 33.1% y/y, according to China Real Estate Information Corp.). The fragile state of developer financing remains a key obstacle, as it weighs on their ability to complete stalled projects. This week, new PBOC government Pan Gongsheng met with developers and pledged (without details) further financial support. We doubt Beijing is ready to deploy a major financial backstop but such efforts will still be worth watching. Another area we are monitoring is PBOC’s recent pledges to guide banks to lower interest rates on existing household mortgages, which could free up space in household budgets for more consumption. Concern over banks’ narrowing net interest margins limits the scope for major reductions without PBOC financing, however.
- Policy signals once the leadership gets back from the beach. China’s leadership appears to have started its annual summer retreat to the beach resort of Beidaihe, likely to conclude in mid-August. In an era where Xi has fully centralized decision-making, the retreat does not have the same policy importance as it did when senior leaders needed to hash out consensus. Still, it will be important to watch the public messaging once the retreat is over as it can signal Xi’s evolving policy preferences – including the degree of urgency on stimulus and reforms to boost the longer-term confidence of the private sector.
