In the meeting held on July 28, China's Politburo of the Central Committee deliberated plans for the economic work for the second half of the year. Judging from the communiqué, the meeting reviewed the economic situation in the first half of the year and made judgments on the economic growth trend in the second half. It also released signals in macro policies, financial markets, real estate, platform economy, and others.
In regard to the macroeconomic trend, the Politburo meeting proposed to "maintain strategic focus ". Researchers at ANBOUND believe that this means in the second half of the year, China's chief concern will still be on focusing on the country itself, as well as on "seeking progress while maintaining stability". In other words, the requirements for the measures against COVID-19 will remain when dealing with the balance between the pandemic and economic stability. The communiqué also pledges to "consolidate the trend of economic recovery, focus on stabilizing employment and prices, keep the economy operating within a reasonable range, and strive to achieve the best results".
Under the premise of rigid COVID-19 measures, the focus of "seeking progress while maintaining stability" is, of course, "stability" itself. In recent times, the phrase "keeping the economy operating within a reasonable range" has been frequently mentioned. If the quarterly economic growth in the third and fourth quarters can be restored to normal, that by itself would already be considered to be a goal achieved. The growth target of 5.5%, accordingly, now becomes the "best result" that the country's policymakers wish to attain.
Changes in opinions from these decision-makers show that, on the one hand, it is acknowledged that the strict COVID-19 policies in the first half of the year have a severe impact on the economy, and the difficulty of economic growth in the second half of the year will be further increased. On the other hand, the 5.5% target is no longer an urgent goal to achieve in the second half of the year, with the focus now being on economic recovery. Therefore, the "steady growth" part of the Chinese economy will see certain "elasticity". According to calculations by researchers at ANBOUND, even if economic growth recovers to 7% and 8% in the third and fourth quarters respectively, at most China will only achieve the yearly 5.2% growth at most. Since 2018, the highest single-quarter growth rate in the third and fourth quarters was only 6.7% (the third quarter of 2018). Obviously, it is rather difficult for the country to achieve its original full-year target this year, and most likely it will be less than 5%. The Politburo meeting is a telling sign that policymakers are ready to accept the economic growth this year will not reach the previously set target.
Judging from China's latest PMI index, the manufacturing and service PMI indexes declined in July, which means that the economic recovery is still weak and lacks sustainability. Therefore, it is not exactly optimistic for the country's endogenous recovery of the economy in the second half of the year, owing to domestic and international factors. Under the circumstance that the economy being unstable, it is even more necessary for China to maintain the stability of its market entities. If it rushes to promote growth, there will be greater risks. At present, the recovery on the supply side of the Chinese economy is relatively good, but problems have arisen on the demand side of the domestic market. Consumption and real estate investment, representative of the domestic demand, are still dragging down the economy. In this context, the meeting highlighted the need for macro policy to manage the expanding domestic demand well. This shows that countercyclical policies are still some of the main components of macro policies.
The Politburo meeting emphasized that fiscal and monetary policies should effectively make up for insufficient social demand. It also gives focuses on "making good use of local government special bond funds and supporting local governments to make full use of the special debt limit". China's monetary policy then, should maintain reasonable and sufficient liquidity, increase credit support for enterprises, and make good use of new credit from policy banks and investment funds for infrastructure construction. With all these, the implementation of fiscal policy in the second half of the year will be strengthened to expand effective investment demand. At the same time, the monetary policy is more inclined to be prudent and focuses on structural monetary policy tools to guide credit supply. Overall, it will not be overly tightened though there is also a lack of room for further relaxation.
When it comes to the rapid development of the online platform economy in recent years, the meeting emphasized "promoting the healthy and sustainable development of the platform economy, completing the special rectification of it, and implementing normalized supervision". It is worth noting that the meeting proposed for the first time to launch a batch of investment portfolios that have been given green light. This is actually a signal of the official "relaxation" of the platform economic regulatory policy. With the previous series of "red light" moves, the "disorderly expansion" of capital is being restrained, but it also restricts the economic growth potential. Now, the development of capital and the internet economy urgently needs clarification on the policy, and the market expects the "green light" to be released. However, even if policy starts to shift, it will take time for the internet economy to recover and start up again.
On the whole, the statement of the tasks and goals of economic work at the Politburo meeting shows that the macro policy in the second half of the year will still be dominated by prudence, and the focus of the macro policy is to continue to exert the effectiveness of the existing stimulus policies. At the same time, in terms of risk prevention, it is expected that some measures will be taken to resolve the risks in the more prominent problems such as small and medium-sized bank risks and real estate market risks. Likewise, resolving risks requires not only time, but also policy space. The challenge of risk prevention shows that the recovery of economic demand will take a long process. Under such circumstances, China's fiscal and monetary policies in the second half of the year will not be contracted, but likely still insist on seeking changes while maintaining stability, aiming for the recovery of endogenous growth momentum.
Final Analysis Conclusion:
With changes in the COVID-19 pandemic and the shift towards high-quality growth, China's overall economic policy tone has been adjusted in the second half of the year. The economic growth target is now being given more flexibility in preparation for the likelihood of the growth to be lower than the previously set goal. Although the policy still adheres to "seeking progress while maintaining stability", under the dual pressure of growth stabilization and risk prevention, it actually emphasizes more on "stability" and does not seek excessive stimulus.
