What the Chinese Politburo’s Latest Economic Conclave Tells Us?
China's trade surplus could take the pressure off PBOC to loosen
On 30 July, the Politburo of the Communist Party convened its first economy-focused meeting for the second half, sending key signals as to Beijing’s policy intentions for the remainder of the year.
Amidst the market perils created by worsening trade relations with the US and EU, as well as the adverse impact on global energy prices of war in Iran, the Politburo’s July meeting placed heavy emphasis on measures for “stabilising growth.”
The last time that the Politburo put such a heavy stress on the imperative of growth stabilisation was at its meeting held on 26 September 2024 - an event viewed as a turning point for Beijing’s macroeconomic policy towards far more expansive settings, as the possibility of Trump’s second term as president loomed heavily over official decisions.
The July meeting of the Politburo said Beijing is now “highly focused on difficulties and challenges in the economy” after Q2 YoY GDP growth fell to 4.3%, sliding below the annual target of 4.5 - 5% to hit its lowest quarterly level in more than three years.
Even more concerning for Beijing than a trend of easing growth, however, would be the persistence of long-standing structural imbalances in the Chinese economy - chief amongst them inadequate domestic consumer demand- alongside a decline in spending on fixed-asset investment as a result of the property market bust.
Consumption - as represented by total retail sales of consumer goods - came in at 24.9 trillion yuan in the first half, representing a year-on-year (YoY) rise of just 1.3%.
In sharp contrast, the US dollar value of China’s exports leaped 17.6% YoY, with June alone posting a 27% surged, supported by strong overseas demand for high-tech manufactured goods including EVs and semiconductors.
Fixed-asset investment fell 5.7% YoY to 22.637 trillion yuan in the first half, dragged down heavily by the housing slump. When investment in real estate development is excluded, the decline narrows to 2.7%.
Consequently the Politburo continued to stress the need for fiscal and monetary policy to “intensify its efforts and increase in efficiency,” in order to stabilise growth and drive the restructuring of the Chinese economy.
The long-term objective is for China to transition towards a more sustainable development model, with emerging tech sectors characterised by higher value-add serving as the new drivers of growth, and domestic demand - in particular household consumption - assuming a more prominent role.
The latest meeting of the Politburo pointed specifically to the need to “accelerate the drive to switch from old to new [growth] drivers,” while at the same time “expanding the counter-cyclical intensity” of policies, in order to “seek progress amidst stability.”
H1 fiscal spending falls
Despite Beijing’s commitment to expansionary fiscal spending to support the economy during troubled times, China’s broad fiscal expenditures in the first half of 2026 actually declined in YoY terms.
The Chinese government’s expenditures under the national general public budget (全国一般公共预算) came in at 14.3329 trillion yuan in the first half, representing a YoY rise of 1.5%.
However, its expenditures under the category of the government-managed funds budget (政府性基金) plunged 16.4% YoY to 3.8705 trillion yuan.
Some of this decline is attributable to weak land sales dragging down the revenues collected by Chinese local governments - the entities traditionally entrusted with the task of on-the-ground fiscal stimulus.
Government fund revenue dropped 21.6% to 1.5244 trillion yuan in the first half, of which revenue derived from the sale of state-owned land usage rights - a mainstay of income for China’s local governments before the property slump - dropped 31.5% to 977.8 billion yuan.
This means broad fiscal spending (general public budget expenditures + government-managed fund budget expenditures) by the Chinese government posted a decline in the first half of 2026, falling 2.9% in YoY terms to 18.2034 trillion yuan.
H2 government spending set to rise
Given the slide in GDP growth in the second quarter and the contraction in government expenditures in the first half, Beijing is expected to step up the implementation of existing plans for fiscal spending moving.
Li Xunlei (李迅雷), chief economist at Zhongtai Securities, notes that if Beijing wants to satisfy its targeted growth in government expenditures for 2026, then second half spending will need to rise by 5.4% YoY.
The July politburo meeting called specifically for “fully leveraging the effectiveness of various existing policies,” and “promptly planning and releasing pragmatic and effective new policies.”
“We must accelerate the pace of fiscal expenditures and bond fund utilization to vigorously promote the construction of major projects and the development of new infrastructure…we must safeguard the basic needs of the people at the grassroots level.”
Zhang Ao’ping (张奥平), the head of the New Quality Future Research institute (新质未来研究院院长), notes that plans for 800 billion in spending on major projects and 200 billion yuan in spending on capital equipment upgrades - both funded by issues of ultra-long-term special Treasury bonds - have already been fully allocated.
The National Development and Reform Commission (NDRC) has already compiled a list of 1,417 major projects, covering a range of initiatives including environmental restoration of the Yangtze River Basin, key transportation infrastructure along the Yangtze River, improvements to China’s higher education system and the development of various urban network systems.
Beijing has also yet to deploy 800 billion yuan earmarked for new policy financial instruments (新型政策性金融工具) in 2026, which will be spent on “major projects and new quality productive forces.”
“The market needs to pay attention to the long-term opportunities presented by the construction of major projects and the direction of national standards, for the development of new infrastructure driving the elimination of outdated production capacity,” Zhang writes.
A key focus for fiscal policy moving forward will be the “Six Networks” (六张网) - a term used by senior officials with increasing frequency in high-level policy documents.
The Six Networks refers specifically to water networks, new power grids, computing power networks, new-model communications networks, urban underground networks and logistics networks.
During the period of the 15th Five Year Plan (2026 - 2030), spending on the six networks is expected by Chinese analysts to reach around 25 trillion yuan.
Beijing has already announced plans for over 6 trillion yuan in spending on water networks, more than 5 trillion yuan in spending on new-model communications networks, and at least 5 trillion yuan in spending on urban underground pipe networks.
The Six Networks are also expected to comprise a significant volume of the investments funded by the 800 billion yuan in new policy financial instruments that Beijing has scheduled for deployment this year.
Monetary policy gets breathing room from trade surplus
The July meeting of the Politburo called for “comprehensively employing and promptly adjusting monetary policy tools, to optimise the implementation of fiscal and financial policy coordination and expedite domestic demand policies” (“综合运用并适时调整货币政策工具，优化实施财政金融协同促内需政策”).
Faced with the dilemma of weak domestic demand and tepid levels of inflation, Beijing’s current cycle of expansionary macroeconomic policy tends to lean far more heavily on fiscal spending.
Monetary policy plays an ancillary role, given that further cuts to interest rates are seen as unlikely to whet the appetite of households or businesses to borrow, and the short-term policy rate (PBOC’s seven-day reverse repo rate) still sits at just 1.4%.
The constraints on interest rate cuts are further compounded by the anemic profitability of the Chinese banking sector.
In the first quarter of 2026, the net interest margins (NIM) of commercial banks dropped to a historic low of 1.4%, making it risky for PBOC to squeeze them further with another reduction to its policy rate.
PBOC has only made a single 10 basis point cut to its policy rate since the end of 2024, when it committed to “moderately loose” monetary policy at the Central Economic Work Conference in December.
In order to keep the Chinese financial system in a state of “ample liquidity,” however, PBOC still has the option of making cuts to the required reserve ratio (RRR) - which refers to the share of deposits that commercial banks are required to hold as reserves at the central bank.
The weighted average RRR currently sits at 6.2% - a comparatively high level which is the legacy of PBOC’s efforts to sterilise heavy forex inflows following China’s ascension to the World Trade Organization (WTO) at the start of the century.
Leading commentators, such as former PBOC official Sheng Songcheng (盛松成),, have opined that the Chinese central bank should follow the lead of the world’s other major monetary authorities by reducing the RRR further or cutting it to zero, in order to give greater play to price-based monetary policy.
This would in turn give PBOC license to keep trimming the RRR whenever the Chinese financial system needs injections of liquidity.
Other domestic commentators, such as Li Xunlei, argue that the customary floor for China’s RRR should be set at 5%, leaving PBOC with space for only 120 more basis points of cuts.
Li points out, however, that China is unlikely to be in much need of RRR cuts to unleash more liquidity into the financial system, given the current state of its balance of payments.
The reason for this is the same reason that the RRR remains perched at such a high level. The copious forex inflows created by China’s trade surpluses can lead to large volumes of base-money creation, if they are converted into the domestic currency before being absorbed by PBOC in exchange for reserves.
During much of the noughts, under China’s compulsory foreign exchange settlement system, exporters and enterprises sold their foreign exchange receipts to designated commercial banks.
Those transactions ultimately fed into the PBOC’s accumulation of forex reserves, leading to the corresponding creation of reserve money beyond Beijing’s desired liquidity thresholds.
PBOC responded to this dilemma by sterilising the additional reserves with hikes to the RRR - with the benchmark RRR hitting a peak of 21.5% in June 2011, as well as through the issuance of central bank bills.
While Chinese businesses are no longer required to sell their foreign-exchange receipts to commercial banks, they may still choose to convert them into the domestic currency in response, for example, to expectations of exchange rate appreciation.
To the extent that the resulting forex is ultimately absorbed by PBOC, this provides a channel through which foreign-exchange inflows can expand the base money supply, thus reducing the need for the Chinese central bank to loosen monetary policy on its own initiative.