China’s Third Plenum concluded on Thursday with a high-level communique that brought few major surprises (see our recap HERE). While the full “Decisions” document that will detail medium-term reform policies has not yet been released, policy signals are trickling out as Chinese agencies brief on the Third Plenum and preview the upcoming end-July Politburo meeting on the economy. The latest signs imply that Beijing will step up incremental stimulus in H2 2024 in order to avoid downside risks to growth and achieve this year’s GDP growth target of “around 5%.” Initial thoughts below on how to interpret the evolving messaging.
I. Bond issuance to support trade-in programs
On Friday, the State Council (Cabinet) announced that the central government will use its issuance of “ultra-long term special treasury bonds” to fund China’s equipment upgrading and consumer trade-in programs – one of the main demand-side stimulus initiatives this year but whose impact has been underwhelming.
While the equipment upgrading program for firms has significant traction (reflected in manufacturing investment data), the consumer program has had little effect boosting sales of appliances and autos – partly because local governments lack the fiscal capacity to offer attractive rebates for consumers. As our review of Q2 GDP earlier this week noted (link HERE), nominal retail sales were up only 2% y/y in June, with appliance sales down -7% y/y and auto sales down -6% y/y. When the trade-in program was announced we noted that the lack of central government fiscal support was a major shortcoming. China’s leadership is now acknowledging that.
As of yet there are no details as to the amount of increased funding for these programs, and whether it will come from the already announced tranche of ultra-long term bonds (CNY 1 trillion) or whether Beijing is planning additional issuance (see further below). Moreover, macro headwinds to consumption remain strong: slow hiring and its impact on household income growth (see our GDP report linked above for more); the property downturn; and high levels of household debt. But at the very least, this is a positive sign that Beijing is gradually coming around to consumption-focused stimulus.
II. Fiscal stimulus to pick up in H2 after falling behind
Our recap yesterday of the Third Plenum communique highlighted language pledging to “actively expand domestic demand” and implying a commitment to meet this year’s growth target of “around 5%.” We noted that coming after disappointing Q2 growth, this implies the Politburo meeting at the end of this month will outline additional efforts to reduce downside risks to growth in H2.
At a press conference on Friday, HAN Wenxiu, executive deputy director of the Office of the Central Financial and Economic Affairs Commission, reaffirmed that message. Han is not a household name but has an influential role in the Party organization that steers China’s macro policy, and he should be regarded as an authoritative voice – especially as his comments came during the official briefing on the Third Plenum results.
Responding to a reporter’s question about the outlook, Han noted that the recovery faces challenges from “insufficient effective demand, difficulties in business operations for some enterprises, and fiscal challenges in some localities.” He then continued:
We must implement macro-control policies more powerfully and effectively. Proactive fiscal policy should be more impactful and efficient, accelerating the issuance and use of special bonds, ensuring timely and adequate expenditure on basic “three guarantees” (basic public services, salaries, and operations). We should leverage fiscal funds to boost economic growth and structural adjustments. The prudent monetary policy should be flexible, moderate, and precise, maintaining reasonable and ample liquidity. We need to actively develop tech finance, green finance, inclusive finance, pension finance, and digital finance to provide a continuous flow of funds for the real economy. We should implement well the decisions on “two new” and “two heavy” (new infrastructure and new urbanization, heavy investment in old equipment replacement and consumer goods). More substantial investments and policy support should be provided to bring tangible benefits to enterprises and consumers. We should combine long-term strengthening with short-term growth stabilization, effectively use ultra-long-term special treasury bond funds, and strengthen the construction of major national strategies and key areas of security capacity. Economic policies and non-economic policies should both be included in the macro policy consistency assessment to form a powerful synergy for promoting high-quality development…
Little of this language is new. But coming ahead of the Politburo meeting, it suggests:
- At the very least, Beijing will look to speed up local government’s issuance of special bonds – which fund infrastructure projects – within the existing quota for the year. Bond issuance lagged during the spring as Beijing imposed borrowing limits on indebted provinces, and under a slow process of transferring proceeds from central government borrowing (special treasury bonds) to local governments for us. Fiscal policy will thus become moderately more powerful in coming months as issuance catches up to its appropriate pace.
- There is also an increased chance that the Politburo will announce a second tranche of central government issuance of special treasury bonds, thus expanding the fiscal deficit this year. Another tranche of bond issuance, to follow a first tranche (CNY 1 trillion, 0.4% of GDP) announced at the March NPC, is likely at some point this year – the main question is whether Beijing announces it soon or (like last year) waits until Q4. The proceeds from those funds roll out to local governments slowly, but an early announcement would give local governments time to prepare projects and avoid a slowdown in their spending towards the end of the year.
III. Implications for the outlook
The signaling above does not imply a stimulus “bazooka” or the aim to boost growth above 5%. Rather, it is an acknowledgement that fiscal policy has been underperforming this year and that, especially after weak Q2 growth, more efforts are necessary to achieve this year’s GDP growth target. Relative to our views earlier this week, the latest signaling makes us more confident that the Politburo will take steps to avoid fully repeating the big mistake of 2023, when policy stayed too restrained and growth slipped sharply over the summer. Monetary policy has a bit more leeway to ease as well in coming quarters, with the Fed’s shift to eventual easing opening up space for China to cut interest rates without adding to depreciation pressure on the CNY.
Again, the Politburo is unlikely to announce measures that super-charge China’s recovery. Domestic demand will remain subdued and that deflationary pressures will persist. A much stronger policy response – aggressive fiscal spending and large rate cuts – would be necessary to decisively break out of deflationary dynamics this year. But we are encouraged that Beijing is acknowledging key points of weakness, and providing more central government fiscal support, including for consumption programs. That evolution in policy matters not only this year but for sustaining growth over the medium term.
We will have more analysis on signals related to the near-term outlook and longer-term reforms as the develop. The Decisions document should be released by mid-next week and could come out any day.
Source: Macrobond
