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Chinese shares staged their biggest one-day rally since November after China’s leaders called for stronger “countercyclical” measures to support the world’s second-largest economy, despite economists saying Beijing lacked plans for expansion.
President Xi Jinping’s 24-member Politburo, the Communist Party’s leading decision-making body, flagged the highly indebted property sector and local governments as well as a slump in domestic demand at its quarterly meeting on the economy on Monday.
Property stocks, in particular, jumped on Tuesday. But while the overall message was supportive, economists said few details were given and there was no sign of the kind of “big bang” stimulus China has implemented in the past. The pace of China’s post-Covid recovery slowed in the second quarter, with growth coming in below analysts’ expectations.
“This is a statement of intent potentially providing code words for looser policy settings, but it is unclear how much force will be put behind the stimulus measures,” said Frederick Neumann, chief Asia economist at HSBC.
Xi drops slogan against property speculation
Politburo statement: “The government will have to adapt to the new situation in which the dynamics of supply and demand in the property market are changing significantly. , , The meeting also called for increasing the supply of government subsidized housing and renovating urban villages.
At the last Politburo meeting on the economy in April, which followed more robust growth in the first quarter, the stock readout included Xi Jinping’s phrase: “Houses are for living in, not for speculation”.
This policy and the government’s desire to curb leverage in the economy is one of the reasons for the deep recession in the real estate sector in recent years as banks have reduced lending to the industry.
But at Monday’s Politburo meeting, the phrase was replaced with more supportive language, acknowledging that the “relationship between supply and demand” in the region is changing and that policies must be “adapted” in a “timely manner”. It added that “city-specific” measures should be implemented to better meet “the essential housing demand of residents” and urged the expansion of subsidized housing by the government.
This could signal an easing of restrictions on home purchases in “tier-1” cities such as Beijing and Shanghai that were originally put in place to limit speculation. Such a move would “release pent-up demand and stabilize market expectations,” Morgan Stanley economist Robin Xing said in an analyst note.
deal with local government debt
Politburo statement: “It was also urged at the meeting. , , Mitigating local government debt risks with a package of plans.”
The Politburo indicated structural reforms to fix local government debt through “a package of debt resolution plans”. Heavy local government debt – including local government finance vehicles – has been estimated by Goldman Sachs at around Rmb94tn ($13.1tn), and is seen as hindering development.
The guidance, which gave few details, indicated Beijing was keen to stick to the debt-cutting policy outlined at the last meeting in April, despite the economic slowdown.
“This means that local debt resolution has entered a critical period,” said Zhong Zhengsheng, chief economist at Ping An Securities. Zhong said the government is unlikely to offer debt swaps on a large scale like in 2015, as this would only increase leverage. He said instead the problem could be tackled province by province.
“We expect state and policy banks to play a more active role in addressing these credit risks at the local government level,” said Lewis Lu, principal economist at Oxford Economics.
give top priority to employment
Statement of the Politburo: “It is necessary to increase the security of people’s livelihood. , , And raise the issue of stabilizing employment to a strategic height.
With youth unemployment in China reaching 21.3 percent in June – the highest since the data series began in 2018, the Politburo underlined the need to tackle unemployment.
The politburo has not said what it plans to do to reduce unemployment, which economists blame on a lack of suitable jobs for this year’s record number of graduates and damage to the service sector from the pandemic.
But in a move that could help create jobs, Beijing promised to “optimize” the environment for private enterprise and promote foreign investment. “We see this as part of the government’s efforts to restore private confidence and revive animal spirits, which are key to sustaining productivity growth amid secular challenges from demographics, credit and de-risking,” Morgan Stanley said.
get people to spend again
Politburo statement: “The meeting too. , , Called for precise and effective control of macroeconomic measures, including active fiscal and prudent monetary policies.
Party leaders indicated that monetary and fiscal policy would remain accommodative but gave no figures and few details. The government has already eased policy interest rates, cut its bank reserve requirement ratio, and provided some tax breaks to businesses to bring more liquidity into the system.
Economists predict a smaller rate cut before the end of the year and another RRR cut of 25 to 50 basis points. “The language about monetary policy is broadly similar in the July statement compared to April,” said Lu of Oxford Economics. “So we don’t expect a big discount in this area.”
The government is also expected to provide subsidies for consumers to buy more cars, electronics and home appliances, helping industry clear out inventory built up last year and ramp up manufacturing.
Keeping the recovery on track without much stimulus
Politburo statement: “The meeting called for greater precision and strength in macroeconomic regulation, enhanced countercyclical measures, and more policy options.”
Overall, economists believe the government wants to ensure it meets its growth target of 5 per cent for 2023, without unleashing another big wave of debt-fuelled stimulus in the process.
In recent weeks, the government has announced at least four different plans aimed at attracting more private capital to promoting electric vehicle ownership and purchasing consumer goods, according to a note by UBP senior economist Carlos Casanova. “These measures should result in an expansion of the economic recovery”, he added.
This year’s growth has been slowed down by the negative impact of the Covid lockdown on activity in 2022. Economists say the difficult part may be ensuring a reasonable level of growth in 2024, when the economy will no longer benefit from a lower base effect.
Already, economists are looking forward to the third meeting of the 20th Party Congress, which will be a key meeting later this year, for more information on the government’s medium-term plans, economists say. HSBC’s Newman said “the third plenary meeting in the autumn should be an opportunity to think about structural issues.”
GET FREE CHINESE ECONOMY UPDATES
we will send you one myFT Daily Digest Latest Email Rounding chinese economy News every morning.
Chinese shares staged their biggest one-day rally since November after China’s leaders called for stronger “countercyclical” measures to support the world’s second-largest economy, despite economists saying Beijing lacked plans for expansion.
President Xi Jinping’s 24-member Politburo, the Communist Party’s leading decision-making body, flagged the highly indebted property sector and local governments as well as a slump in domestic demand at its quarterly meeting on the economy on Monday.
Property stocks, in particular, jumped on Tuesday. But while the overall message was supportive, economists said few details were given and there was no sign of the kind of “big bang” stimulus China has implemented in the past. The pace of China’s post-Covid recovery slowed in the second quarter, with growth coming in below analysts’ expectations.
“This is a statement of intent potentially providing code words for looser policy settings, but it is unclear how much force will be put behind the stimulus measures,” said Frederick Neumann, chief Asia economist at HSBC.
Xi drops slogan against property speculation
Politburo statement: “The government will have to adapt to the new situation in which the dynamics of supply and demand in the property market are changing significantly. , , The meeting also called for increasing the supply of government subsidized housing and renovating urban villages.
At the last Politburo meeting on the economy in April, which followed more robust growth in the first quarter, the stock readout included Xi Jinping’s phrase: “Houses are for living in, not for speculation”.
This policy and the government’s desire to curb leverage in the economy is one of the reasons for the deep recession in the real estate sector in recent years as banks have reduced lending to the industry.
But at Monday’s Politburo meeting, the phrase was replaced with more supportive language, acknowledging that the “relationship between supply and demand” in the region is changing and that policies must be “adapted” in a “timely manner”. It added that “city-specific” measures should be implemented to better meet “the essential housing demand of residents” and urged the expansion of subsidized housing by the government.
This could signal an easing of restrictions on home purchases in “tier-1” cities such as Beijing and Shanghai that were originally put in place to limit speculation. Such a move would “release pent-up demand and stabilize market expectations,” Morgan Stanley economist Robin Xing said in an analyst note.
deal with local government debt
Politburo statement: “It was also urged at the meeting. , , Mitigating local government debt risks with a package of plans.”
The Politburo indicated structural reforms to fix local government debt through “a package of debt resolution plans”. Heavy local government debt – including local government finance vehicles – has been estimated by Goldman Sachs at around Rmb94tn ($13.1tn), and is seen as hindering development.
The guidance, which gave few details, indicated Beijing was keen to stick to the debt-cutting policy outlined at the last meeting in April, despite the economic slowdown.
“This means that local debt resolution has entered a critical period,” said Zhong Zhengsheng, chief economist at Ping An Securities. Zhong said the government is unlikely to offer debt swaps on a large scale like in 2015, as this would only increase leverage. He said instead the problem could be tackled province by province.
“We expect state and policy banks to play a more active role in addressing these credit risks at the local government level,” said Lewis Lu, principal economist at Oxford Economics.
give top priority to employment
Statement of the Politburo: “It is necessary to increase the security of people’s livelihood. , , And raise the issue of stabilizing employment to a strategic height.
With youth unemployment in China reaching 21.3 percent in June – the highest since the data series began in 2018, the Politburo underlined the need to tackle unemployment.
The politburo has not said what it plans to do to reduce unemployment, which economists blame on a lack of suitable jobs for this year’s record number of graduates and damage to the service sector from the pandemic.
But in a move that could help create jobs, Beijing promised to “optimize” the environment for private enterprise and promote foreign investment. “We see this as part of the government’s efforts to restore private confidence and revive animal spirits, which are key to sustaining productivity growth amid secular challenges from demographics, credit and de-risking,” Morgan Stanley said.
get people to spend again
Politburo statement: “The meeting too. , , Called for precise and effective control of macroeconomic measures, including active fiscal and prudent monetary policies.
Party leaders indicated that monetary and fiscal policy would remain accommodative but gave no figures and few details. The government has already eased policy interest rates, cut its bank reserve requirement ratio, and provided some tax breaks to businesses to bring more liquidity into the system.
Economists predict a smaller rate cut before the end of the year and another RRR cut of 25 to 50 basis points. “The language about monetary policy is broadly similar in the July statement compared to April,” said Lu of Oxford Economics. “So we don’t expect a big discount in this area.”
The government is also expected to provide subsidies for consumers to buy more cars, electronics and home appliances, helping industry clear out inventory built up last year and ramp up manufacturing.
Keeping the recovery on track without much stimulus
Politburo statement: “The meeting called for greater precision and strength in macroeconomic regulation, enhanced countercyclical measures, and more policy options.”
Overall, economists believe the government wants to ensure it meets its growth target of 5 per cent for 2023, without unleashing another big wave of debt-fuelled stimulus in the process.
In recent weeks, the government has announced at least four different plans aimed at attracting more private capital to promoting electric vehicle ownership and purchasing consumer goods, according to a note by UBP senior economist Carlos Casanova. “These measures should result in an expansion of the economic recovery”, he added.
This year’s growth has been slowed down by the negative impact of the Covid lockdown on activity in 2022. Economists say the difficult part may be ensuring a reasonable level of growth in 2024, when the economy will no longer benefit from a lower base effect.
Already, economists are looking forward to the third meeting of the 20th Party Congress, which will be a key meeting later this year, for more information on the government’s medium-term plans, economists say. HSBC’s Newman said “the third plenary meeting in the autumn should be an opportunity to think about structural issues.”
