The Politburo of the Communist Party of China convened its Q2 meeting on 24 July, outlining key themes for economic policymaking in the second half of 2023.
The convening of the Politburo meeting arrives as China’s economy continues to convalesce from the impacts of the Covid pandemic as well as contends with heightened tensions between Beijing and Washington. China’s economy saw first-half GDP growth of 5.5%, as compared to growth of 3.0% for full year 2023.
The Politburo sent a slew of key signals as the future direction of the Chinese economy at the meeting, providing a guide to its policymaking intentions for the remainder of the year.
Key themes include:
- Increasing household incomes to deal with insufficient demand.
- Plans to step up fiscal spending to keep the economy on an even keel.
- Greater support for China’s private economy.
- Efforts to resolve local government debt risk while also stepping up bond issuance.
- The first ever mention by a Politburo meeting of the need to “invigourate capital markets.”
- The removal of restrictions on the property market to expedite its return to health.
Prominent Chinese economist Ren Zeping (任泽平) believes the Politburo has sent ten key signals for economic policymaking in the second half of 2023.
- The Politburo considers China’s current economic situation to remain precarious. “Domestic demand is insufficient”, ” [there are] risks and hidden dangers in key areas,” “the external environment is complex and severe”, while “economic recovery is undergoing wave-like development and a process of convoluted advance.” To deal with these challenges, in the second half of the year Beijing will “increase the intensity of macro-policy regulation and focus on expanding domestic demand”, “achieve effective improvement in quality and reasonable growth in quantity”, and “strengthen counter-cyclical adjustment and policy reserves”.
- Implementing proactive fiscal policy, cut taxes and fees, strengthen spending guarantees in key areas, and formulate and implement a package of debt reduction plans. Beijing will also accelerate the issuance and use of special bonds and is expected to expand fiscal spending to prop up the economy.
- Giving full play to the role of aggregate and structural monetary policy tools to vigorously support areas including tech innovation, the real economy, and the growth of small, medium and micro enterprises. Beijing will also seek to maintain the basic stability of the renminbi exchange rate at a “reasonable and balanced level.” Ren expects subsequent interest rate cuts and reserve ratio cuts to help reduce the debt costs of enterprises, households and the government.
- Invigourating capital markets and boosting investor confidence. Ren points out that this is the first time the Politburo has employed this phrasing in an official statement. He expects Beijing to increase the role of institutional investors, reduce taxes and fees and promote value investment by market players. Beijing may also consider establishing a stabilization fund to support the market in times of distress. According to Ren, the Chinese government views the capital market as being “of great significance to promoting technological innovation and high-quality development.”
- Giving full play to the basic role of consumption in driving economic growth and expand consumption by increasing household income. Ren expects Beijing to “organically combine the implementation of the strategy of expanding domestic demand with deepening supply-side structural reforms.” “The key to boosting consumption is to increase household income and employment…[there will be] a focus on boosting the consumption of automobiles, electronic products, and home furnishings, and promoting the consumption of services such as sports, leisure, and cultural tourism.”
- Better leveraging the leading role of government investment and acceleraing the issuance and use of local government special bonds. The Politburo believes it is necessary to formulate policies and measures to promote private investment, while Ren also expects fiscal and monetary policies to increase support for government investment in the future.
- Optimizing the business environment and boosting the confidence of the private economy. “Only when the private economy has confidence, vitality, and willingness to invest can it stimulate the economy and drive employment…if confidence in the private economy weakens and willingness to investment declines, this will lead to economic downturn and unemployment,” Ren writes. ” Consequently, boosting the private economy is the key to driving employment, promoting innovation, and promoting high-quality development.”
- Adapting to the new conditions and major changes in the relationship between supply and demand on China’s property market. “China will adjust and optimize real estate policies in a timely manner, implement policies on a city-by-city basis, and make effective use of its policy toolkit together satisfy the inelastic and renovation housing demand of households, and promote the stable and healthy development of the real estate market.” Ren also expects Beijing to gradually cancel the property market restrictions introduced during the prior period of overheating, such as purchase restrictions, loan restrictions and price restrictions, in order to restore market normalcy and expedite a soft landing.
- Increase the construction and supply of welfare housing, actively promote the transformation of urban villages and the construction of public infrastructure, and revitalise and transform various forms of idle property. “It is expected that the transformation of urban villages will greatly stimulate investment…the key to implementation is accompanying policies that provide real money, enabling enterprises to be sure of their accounts and become proactive.”
- Effectively preventing and resolving local debt risks, and formulating and implementing a package of debt reduction plans. “It is necessary to strengthen financial supervision and steadily promote the reform of highly vulnerable, small and medium-sized financial institutions subject in order to eliminate risks.”
Ren also addresses the possibility that China could succumb to a “balance sheet recession” of the type that crippled the Japanese economy in the 1990’s, with enterprises and households opting to pay down their debts instead of make expenditures on goods and services.
According to Ren, the best way to prevent a balance sheet recession is to “expand the balance sheet, let the stock market rise, enable the economy to recover, and keep the real estate market stable.”
“In this way, driven by the wealth effect, residents will naturally increase consumption and enterprises will increase investment.”
Ren said that it is still necessary to expand what he calls the “Chinese version of the balance sheet,” which is structurally focused and directed primarily at high-quality “development-related” sectors.
“The shrinking of the balance sheet will form a vicious circle, where assets are changing and liabilities are rigid,” Ren writes.
“Consequently, development is fundamental to solving all problems. If development slows down, various problems such as employment, debt, and financial risks will become more pronounced.
“In financial terms, development entails expanding the balance sheet.”