On July 30, the Political Bureau of the CPC Central Committee held a meeting to analyze the current economic situation and plan economic work for the second half of the year. This was an important meeting to set the tone for the economic work for this period after the economic data in the first half of the year were released and the central government formed its judgment on the current economic situation. It should be pointed out that the economic policy for the second half of this year should focus on both the short term (the second half of this year) and next year's economy, given the special nature of this year's post-pandemic recovery.
In the first half of this year, China's economy grew 12.7% year-on-year. This seemingly impressive growth rate is the result of the low base effect, and the two-year average growth rate is only 5.3%. In particular, the economy grew by 7.9% in the second quarter of this year, lower than market expectations and a two-year average of 5.5%. Therefore, the economic situation in the first half of the year was actually stable but worrying. From the second half of this year to next year, China's economic growth will slow down significantly as the low base effect gradually disappears.
The meeting of the Political Bureau of the CPC Central Committee clearly had a rational judgment on this situation. In analyzing the basic situation, the meeting pointed out that "the global pandemic is still evolving, the external environment is becoming more complex and severe, and the domestic economic recovery remains unstable and uneven". To this end, this requires good economic work in the second half of the year, adhere to the general principle of seeking progress while maintaining stability, and implement the new development concept in a complete, accurate and comprehensive way.
How will economic policies and trends evolve in the second half of the year? According to researchers at ANBOUND, the following highlights are of interest:
1. Cross-cyclical adjustment: The Politburo meeting pointed out that "we will make cross-cyclical adjustments to macro policies, maintain the continuity, stability, and sustainability of macro policies, and coordinate macro policies this year and next year to keep the economy operating within a reasonable range". Cross-cyclical adjustment is actually not a new policy concept. At the meeting of the Political Bureau of the CPC Central Committee in late July 2020, it was first proposed to "improve the cross-cyclical design and adjustment of macro regulation". The continued mention of "cross-cyclical adjustment" this year emphasizes the implementation of this concept. Cross-cyclical adjustment is different from counter-cyclical adjustment, which the latter is a kind of reverse adjustment -- the implementation of easing policies in the economic downturn, and tightening policies in the economic upturn. However, counter-cyclical adjustment, if the scale is not well grasped, will blow up the bubble during the easing period and burst the bubble during the tightening period, resulting in policy fluctuations and market fluctuations. The cross-cyclical adjustment refers to policy objectives that go beyond cyclical fluctuations, and the policy focus is expanded from the short term to the medium term, and more attention is paid to steady development.
2. Fiscal policy and monetary policy: Under the concept of cross-cyclical adjustment, the keynote and implementation principle of macro policy is to make progress while maintaining stability. The Politburo meeting stressed the need to improve the effectiveness of the proactive fiscal policy, and properly control the progress of budgetary investment and bond issuance by local governments. The prudent monetary policy should maintain reasonably sufficient liquidity and help small and medium-sized enterprises and industries in difficulty to continue recovering. In addition, macro policy autonomy should be enhanced and the RMB exchange rate should be maintained at an appropriate and balanced level.
In terms of policy implementation, there is still a difference in the seemingly unchanged macro policy tone. Last year's proactive fiscal policy was vigorously implemented in terms of the size of the fiscal deficit, the intensity of bond issuance, and tax and fee cuts. However, it is expected that this year's fiscal policy will be less proactive in its implementation and more emphasis will be placed on "policy effectiveness", that is to say, the existing fiscal policy resources would be fully utilized rather than expanded. Finance Minister Liu Kun said on July 30 that fiscal policy should be "aligned with the fiscal policy of the next year" and that "the efficiency of spending and the use of funds should be improved in the second half of the year", revealing that the emphasis is on policy effectiveness rather than policy scale. In terms of monetary policy, it continued the previous policy of "maintaining reasonable and abundant liquidity", and added "helping small and medium-sized enterprises and industries in difficulty to continue to recover". This means that the prudent monetary policy will remain flexible and will be adjusted according to demand. Given that China has already eased policy by cutting the reserve requirement ratio since July, there may not be much change in monetary policy in the second half of the year. Monetary policy support for small and medium-sized enterprises and industries in difficulty will be a structural adjustment under a prudent tone.
3． New energy vehicles development: It is worth noting that the economic work arrangement of the Politburo meeting for the second half of the year put "support and accelerate the development of new energy vehicles" as one of its priorities, which is the only manufacturing sector that the Politburo meeting specified to accelerate development. We believe that new energy vehicles are favored by the Politburo meeting for the following reasons: (1) It has a strong industrial driving force, which helps form the manufacturing ecology; (2) It has the capacity of innovation technology, which can integrate the innovation of new energy, manufacturing, artificial intelligence, network, and other technologies; (3) It can meet the demand of the large domestic market and help form new consumption support; (4) It conforms to the low-carbon needs of green development and represents the future development direction of the automobile industry. It should be pointed out that accelerating the development of new energy vehicles also requires the cooperation of relevant departments in industrial policies. Reducing investment restrictions on the new energy vehicle industry, encouraging market competition in the field of new energy vehicles, and issuing manufacturing licenses to competent new energy vehicle manufacturers are but some of the examples. The National Development and Reform Commission (NDRC) and relevant departments should be more inclusive in the development of the new energy vehicle industry and encourage market competition.
4. Technologically advanced SME development: The concept of "technologically advanced" small and medium-sized enterprises (SMEs) is not new. It has been reflected in the policies supporting the development of SMEs in the past. However, in the new context of encouraging innovation, SME development, and internal circulation, the emphasis of the central government and the State Council on the development of "technologically advanced" SMEs now adds a new layer of significance, i.e. innovation and the development of the real economy. This is actually consistent with the concept of "fine industry" and "fine manufacturing" introduced by ANBOUND more than a decade ago. With the development of a large number of "technologically advanced" SMEs and larger enterprises, high-value industrial products production activities and production systems with continuous innovative design and high-quality control can be formed, which are the basic characteristics of the "fine industry" and "fine manufacturing". In the future, domestic industrial policies, fiscal policies, and financial policies are likely to favor such businesses.
5. "Dual carbon" goals and low carbon development: The Politburo meeting mentioned that action plan should be issued as soon as possible to achieve the peak of carbon emissions by 2030. Achieving the "dual carbon" goals is a practical challenge. In view of the local development reality, the central government aims to stabilize existing industries, make time and room for transition, and encourage enterprises to adopt environmentally friendly technology to reduce carbon footprint. At the same time, this strategy will not easily crowd out polluting enterprises. In general, the core of this strategy is to prevent the imbalance between carbon reduction and economic and industrial development.
6. Platform economy supervision & standardized development: Industry insiders noted that the "strengthening and improving the regulation of platform economy" proposed in late April was not stated at the Politburo meeting. Instead, what was mentioned was "improving the supervision system for the overseas listing of enterprises". According to CICC, this means that the regulation policy of the platform economy will be directed more towards the financial sector, rather than the enterprises themselves. Huatai Securities believes that the reason why the Politburo meeting did not mention "platform regulation" is because the relevant measures are already being implemented, and another reason is that the pace and intensity of the measures need to be controlled in light of the recent volatility in overseas markets. In our view, the Politburo meeting's attitude towards the platform economy does not mean that the strengthening of supervision of platform enterprises has come to an end. Didi and other platforms are still cooperating with the government working group's investigation. The Politburo meeting's short-term focus will be on the regulation of overseas listing.
Final analysis conclusion:
On the whole, the domestic and foreign situations facing the Chinese economy in the second half of the year are still not exactly optimistic. Maintaining steady growth is still the main goal of economic work for this period. With the gradual exposure of domestic economic problems and various risks, it is becoming more difficult for China to maintain economic growth within a reasonable range while achieving various development goals. It is a new challenge for policy departments, local governments, enterprises, and the market to realize progress while maintaining stability and promoting market-oriented reform, as well as opening up in the context of increasing constraints. However, the overall tone of the second half of the year and next year is still to adhere to the development, rather than stagnation.
