A Politburo meeting this week, chaired by President Xi Jinping, concluded that economic headwinds in China were reining in growth, an admission that drew loud cheers from investors who are now confident authorities will roll out forceful supportive measures in the world’s second-largest economy.
Xi and his 23 colleagues in the Chinese Communist Party’s highest decision-making Politburo acknowledged that the country would need to do more to achieve the growth target of around 5 per cent this year. They pledged to deploy “countercyclical measures” – the first reference to the term by the Party’s elite in a year – as well as adopt more proactive fiscal and monetary policies and spur household consumption.
“Compared with recent top-level economic policy meetings, Beijing acknowledged mixed economic performances and pledged to strengthen countercyclical policy actions, implying they will do more to support growth in the second half,” said Lu Ting, chief China economist at Nomura Holdings in Hong Kong.
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Investors turned their attention to the Politburo meeting after the Party’s third plenary session, which concluded in mid-July, disappointed the market as it provided well-telegraphed, long-term development plans. The clamour for more supportive policies has been growing since stocks on the mainland and Hong Kong resumed their downtrend after a lingering housing crisis and weak consumer spending pressured growth in the second quarter.
The Communist Party’s Politburo typically reviews the economic situation and policies at its April, July and December meetings every year. The July meeting sets the policy tone for the second half, while the December gathering prepares the policy framework for the following year.
The market cheered the readout of the July Politburo meeting. The CSI 300 Index of onshore stock rose 2.1 per cent on Wednesday, halting a two-day decline, and the Hang Seng Index rallied more than 2 per cent.
“This is arguably more worthy of attention than the third-plenum reforms from an investment perspective as the [July] Politburo meetings outlook is much shorter term and consequences are more tangible,” Everbright Securities said in a research note on Tuesday. “The most significant elements of the Politburo speech for us were the pledge for stronger countercyclical measures, as well as plans to expand domestic demand in order to prevent excess capacity.”
China’s central bank may cut the reserve requirement ratio by a quarter of a full percentage point this quarter, reduce the policy rate on the reverse repo by 10 basis points in the fourth quarter and unleash more liquidity via medium-term lending facility or relending, if necessary, according to Goldman Sachs.
On the fiscal front, China will probably increase government-bond sales in the second half to support spending and infrastructure investment. And should any unexpected growth shock occur, Beijing may even consider boosting credit support from policy banks, tapping quotas on local-government debt issuances and raising the budget deficit, Goldman said.
“Compared to the April Politburo meeting, policymakers appeared more concerned about near-term growth headwinds, reiterated their pledge to achieve the full-year growth target, and called for strengthening the countercyclical policy adjustments,” said analysts led by Wang Lisheng at the US investment bank in a report on Tuesday. “On demand-side easing measures, policymakers focused on fiscal, consumption and property policies. We view the signals from the July Politburo meeting as pro-growth.”
While some are still sceptical about the prospect of the policy support because of a lack of details and a meaningful change of the fiscal policy stance from the meeting, UBS Group said that Beijing may have intentionally kept some powder dry preparing for potential economic weakness, in case higher tariffs are imposed by the US after the November presidential election.
A 10 per cent increase in the levy by Washington may reduce China’s growth by between 0.3 and 0.4 percentage points annually in 2025 and 2026, according to the Economist Intelligence Unit.
“A more decisive domestic-focused policy and fiscal expansion could mitigate some of these effects,” said Su Yue, an economist at the research institute.
