Following a Politburo meeting in Beijing in late July, Zhouchen Mao, Head of Research and Advisory at Asia House, shares his analysis of the latest thinking on key aspects of economic management within the Chinese government.
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There has been a modest approach to China’s economic stimulus plans in response to underwhelming growth in Q2. However, closer analysis shows that a change in language around the property sector and a number of new initiatives from the Central Committee and State Council may provide a positive boost to investment and private sector growth. That said, weak business and consumer confidence remains a risk.
China’s economy: What’s next after less-than-anticipated growth
Following a string of underwhelming data in Q2, investors have been anticipating signals of economic support from the country’s top leadership. A Politburo meeting on the economy took place on 24 July, setting the direction of China’s macroeconomic policy for the second half of 2023. The Politburo communique, released after the meeting, was transparent on the need to stimulate consumption, boost investment, and further loosen property policy, while reiterating the importance of policy support.
However, with the leadership calling for the use of existing macro policy tools to steer the economy, there is little likelihood of decisive intervention that many investors had hoped for. There are three reasons behind Beijing’s modest approach.
- The communique reflected the optimistic view from the top leadership that consumption will continue to rebound naturally following this volatile period.
- The issuance of substantial economic stimulus is unrealistic due to China’s elevated debt ratio.
- Monetary easing faces the fewest structural hurdles. Unlike the issuance of special-purpose bonds, cuts to interest rates do not require the approval of the Standing Committee of the National People’s Congress, making monetary policy the preferred choice for easing.
On the property sector, the most notable shift since the last Politburo meeting in April is the omission of the mantra “property is for living, not for speculation”, which had justified the restrictions on housing demand in previous years. This was interpreted by many as a change in policy stance, fuelling a broad rally in real estate stocks.
As the government cautiously switches from price control to stimulus, the rhetorical shift means there is more room for local governments to relax property policy, particularly in Tier-2 and lower tier cities given the more rapid structural decline in demand.
The degree of loosening, however, will be determined based on the specific conditions of individual municipality. This approach was further reinforced by the readout from the State Council’s executive meeting on 31 July and the central bank’s announcement on mortgage easing. As for Tier-1 cities, a more targeted approach in the forms of rates, taxes, and downpayment ratio reduction is expected, but the depth and process of relaxation is likely to be less and gradual.
Furthermore, the Politburo meeting continued to caution against the financial risks posed by elevated local government debt and reiterated the need to manage financial stress at the local level. While the communique did not signal a significant change of approach, it did suggest, albeit ambiguously, that the central government is formulating debt restructuring plans to alleviate debt risks. This is in line with Beijing’s stance to offer additional support on economic growth. The debt restructuring plans that the central government will eventually announce are expected to target the strains at local-government financing vehicles to prevent debt default. The plans will likely entail directives toward financial institutions, both centrally and locally controlled banks and state enterprises, to help restructure local debt by extending maturities and lowering interest rates. Also, state-level asset management companies could also play a greater role in support of the restructuring process.
What has received less coverage is a slew of new measures announced by the State Council and the top economic planner, the National Development and Reform Commission (NDRC), to support the economy, with a particular focus on private investment and investor confidence.
Immediately prior to the Politburo meeting on the economy, the Central Committee and State Council issued a 31-point pledge to improve conditions and promote development of the private economy. This was followed by the announcement from the NDRC that identified projects open to new private investments, which include transportation, water, clean energy, new infrastructure, advanced manufacturing, and mechanised agriculture. The top planner also released an additional 20 measures aimed to stabilise growth, although they are supply side focused measures such as discounts and subsidies for high value household purchases. Crucially, there remains no sign of any direct support for consumers or household income.
The new initiatives could positively impact the economy through higher investment and employment in the private sector, which in turn should help mitigate the country’s high youth unemployment rate and increase confidence among businesses and consumers. It is also worth noting that these measures align with the government’s broader objective of rebuilding private and investor confidence amid efforts to provide greater market access, better financing options, and reduce administrative processes.
The main challenge facing investors in China is weak consumer confidence, at least partly influenced by the uncertainties in the property sector. Chinese consumers remain cautious, with more concerns about job security and income now than during the pandemic. While more moderate government support for consumption, private investment and the property sector is expected in the near-term, it remains uncertain whether current measures that largely focus on the supply side are sufficient to bolster consumer confidence.
The success will also depend on the implementation and how the new measures could attract foreign investment despite the measures being domestically oriented. Foreign companies will benefit from transparency and policy clarity as they are often mired in uncertainty and anxiety. Foreign investors could face barriers if the new projects are restricted under the Negative List for Foreign Investment Access.
The rhetorical shift on the property sector represents a tacit acknowledgement from the government that the reality of housing market is starting to change, and supportive measures are needed to increase demand. But there has been precedent where the phrase was absent from readouts of other meetings only to reappear later. The calculus for policymakers will shift should relaxations start to create speculative surge in prices.
Additional measures are expected from the State Council and NDRC to reassure and motivate the private sector that is key to the high-quality growth model, with Beijing specifically targeting sectors that will facilitate this transition to stabilise the economy. However, low business confidence, especially among small and medium-sized enterprises after an extended period of regulatory crackdown and COVID-19 restrictions, will pose additional challenges.
Overall, the policy directive from the central government demonstrated cautious adjustments to regain growth. With no major stimulus measures announced, the leadership remains confident that the GDP growth target of “around 5 per cent” for 2023 is achievable.
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