China: Gradual Policy Steps Signalled

The July politburo statement today provides some clues to forthcoming policy easing in China. Key points to note.

• Counter cyclical policy. The emphasis on counter cyclical policy and domestic demand being placed ahead of industry suggests that China wants to stimulate domestic demand. However, the statement did not make any changes to the wording on fiscal policy, while on monetary policy just added that the PBOC would rollout targeted liquidity support for favoured sectors. 
• Gradual fiscal and monetary policy. This all suggests that monetary policy easing will remain gradual. The next steps are most likely a 25bps cut in the reserve requirement rate (RRR) and a 10bps cut in the medium-term lending facility (MTF). The RRR cut should arrive in the next couple of weeks and MTF in August or September. The restraining issues remain concerns about overinflating the economy with too much debt and also avoiding undermining the Yuan. Additionally, the prospects remain good of surpassing the 5% GDP growth target for 2023, given the base effects from the weak Q2 2022 and this reduces the political need to take strong measures.
• Property and Local government clean up. The statement omitted the key “housing is for living not for speculation” sentence, which is being read as a sign that some property stimulus measures will likely be forthcoming. Even so, this will likely be incremental rather than abandoning the three red lines policy for property developers. Easing mortgage requirements is one option under consideration, but this will likely only have a modest impact. Developer and potential house buyer’s confidence has been structurally hit by the clampdown and a substantive policy change is required to try and restore confidence in the sector. Since this is unlikely to be forthcoming it suggests that residential property investment will remain a drag on GDP. Additionally, though the politburo statement is right to again emphasize cleaning up local authority financing vehicle (LGFV) debt, this could likely be negative for the economy initially if it involves gradual debt restructuring rather than a more radical swapping of LGFV debt for central government debt as occurred in 2015.
• Less anti-private business.Emphasis was also placed on improving sentiment towards internet platforms and boosting the consumption of cars and electronic products. Rhetoric is certainly becoming less anti-business, but this does not yet represent a swing back to the freewheeling private sector of the 1990-2018 period. The importance of the state and state owned enterprise is a point of difference to that period and this does not appear to be changing. Private sector business investment will likely thus lag the growth rate seen in this previous period.

Overall, we only see gradual policy easing and this is not enough to ensuring sufficient momentum to keep GDP growth above 5% in 2024. We maintain the view of 4.5% growth for 2024.