Caixin
Aug 01, 2018 07:22 PM
OPINION

Opinion: What Tuesday’s Politburo Meeting Means for China

Job seekers attend a jobs fair in Huzhou, Zhejiang province, on July 28. Photo: VCG
Job seekers attend a jobs fair in Huzhou, Zhejiang province, on July 28. Photo: VCG

China’s Politburo met on Tuesday to analyze and study the current economic situation, which, together with a July 23 executive meeting of the State Council, the country’s cabinet, aims at setting the direction of China’s monetary and fiscal policy.

The Politburo believes that the Chinese economy currently faces “new problems and new changes,” including “obvious changes in the external environment,” according to a statement issued by the country’s top leadership after the meeting. This probably refers primarily to the U.S.-China trade war, which has escalated over the past six months.

The central authorities’ focus on these external changes should be viewed within the context of the country’s rapidly disappearing current account surplus. China reported a quarterly current account deficit for the first time in years in May. Figures from China’s customs authority tell us that the country’s processing trade surplus is relatively stable. For the past few years, it has remained around $150 billion in the first half. The most noticeable decline this year has been in the country’s general trade surplus. The decline is due in part to domestic supply-side reform, as well as increases in the scale and prices of imported bulk commodities.

Now that the United States is paying close attention to what it sees as unfair trade subsidies in China, and to the technology transfers to foreign businesses, further pressure from the U.S. could impact the main stabilizing force for China’s trade surplus — namely, the processing trade, which is importing raw materials or components for processing and then re-exporting them.

The Politburo’s tone regarding monetary policy still emphasizes stable monetary policy and maintaining a strong grip on the floodgates to the country’s money supply. This signals that monetary policy is unlikely to be relaxed significantly. At the same time, the Politburo called for fiscal policy to play a bigger role in expanding domestic demand and supporting structural adjustment. During the July 23 State Council meeting, the country’s cabinet said fiscal policy should focus on reducing the tax burden for businesses through measures like allowing businesses to deduct 75% more in research and development expenses from their tax bills. At the same time, it recommended accelerating the issuance of 1.35 billion yuan ($198 million) of special local government bonds this year in order to help advance infrastructure projects.

The Politburo also stressed that making up for shortcomings was a key task in China’s effort to deepen supply-side structural reforms. China’s leaders have placed such reforms into the categories of capacity reduction, destocking, deleveraging, cost reduction, and “making up for shortcomings,” focusing on different categories at different times. The current focus has shifted toward “making up for shortcomings,” an area specifically mentioned at the Politburo meeting, especially in terms of infrastructure. Delegates echoed the earlier State Council meeting, which called for financial institutions to ensure that financing platform companies meet their financing needs in accordance with the principle of marketization while avoiding cutting off the funding for necessary projects still in progress. Based on the two recent meetings, we can infer that infrastructure projects will be basically exempt from policy-level culling of projects.

One unexpected conclusion reached by the Politburo meeting was its call for Chinese policymakers to improve the ability and willingness of the financial industry to serve the real economy through innovation. In the current policy environment, financial innovations like “shadow banking” are unpopular, even though such innovations are responding to the needs of the real economy. It remains to be seen how the Politburo’s new stance on financial institutions will translate into actual policy.

In terms of the real estate market, the Politburo meeting shifted from its previous emphasis on curbing the “excessive” rise of home prices to simply curbing any rise in home prices, further strengthening its policy stance. This makes it unlikely that it will return to using the property market to boost growth soon.

China’s future policy focus will be on stabilizing employment, meaning that as long as employment is stable, there will be no major changes at the policy level. Short-term, large-scale stimuli will not solve the deep-rooted problems China currently faces. Instead, long-term measures like strengthening technological research and substantially increasing market access must be implemented. These policies require time to take effect, so maintaining steady employment will buy policymakers time to bolster the country’s growth potential.

Wan Zhao is a senior analyst at China Merchants Bank’s financial markets division. This piece was translated from Chinese and edited for length.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)

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