Jul 29, 2022 08:08 PM

Wang Tao: Politburo Meeting Signals Relaxed Stance on GDP Target

Workers produce protective products at a workshop in Cangzhou, Hebei province, April 18. Photo: VCG
Workers produce protective products at a workshop in Cangzhou, Hebei province, April 18. Photo: VCG

The much-awaited July Politburo meeting recognized the lingering downward pressures on the economy and called for policies to be more supportive to help stabilize the economy. Given the sharp growth slowdown in the second quarter, the July meeting said China should “strive for the best (economic) result,” a sign that the government is de-emphasizing the ambitious GDP growth target set in March. Instead, the meeting emphasized the need to stabilize employment as well as inflation. In its guidelines for policies, the Politburo meeting did not signal any major new stimulus (such as special treasury bonds) that could be on the way. Instead, more supportive fiscal and monetary policy were to stemmed from “fuller and better utilization” of existing measures. The meeting was also more supportive to the property sector than before, though it did not announce any top-down measures. It also indicated an easier stance toward the “platform” economy.

Expanding existing measures

The Politburo meeting called for the expansion of final demand with “fuller and better utilization” of policy stimulus that have been announced. On the fiscal and credit policy front, the meeting called for fuller use of special LG bonds, added policy bank loan quota of 800 billion yuan ($118.5 billion), and the special infrastructure funds. On the former, the government could issue up to 1.47 trillion yuan of additional special LG bonds within the existing debt ceiling, though we expect it to be much smaller due to various constraints. The government may also bring forward some of the 2023 quota as it did in the past four years, while early issuance in the fourth quarter of 2022 seems still possible. On the infrastructure funds, of which 300 billion yuan in policy bank special bonds had been announced as seed money, we think the size could more than double in the second half (additional 300-500 billion yuan), which can help leverage up to four times the initial funding to support infrastructure investment. We expect infrastructure fixed-asset investment to rebound to 10%-12% year-on-year in the second half.

Further property policy easing

The meeting emphasized the need to stabilize the property market and ensure delivery of homes, but did not announce any top-down policy package. It called for “fuller and better” use of property policy easing tools on a differentiated basis at local levels, emphasized local governments’ responsibilities and the priority of delivering homes. It suggests that local governments may have more flexibility than before to use a full range of policy tools to stabilize the property market. These could include further lowering of the down-payment requirements, relaxing home purchase restrictions, and establishing local resolution funds to settle bad or idle property projects by collaborating with commercial banks and policy banks. We expect property sales volume to stabilize gradually in the third quarter and improve slightly in the fourth quarter, while the risk appearing to lean toward the downside given the lingering spillover effect and lack of exceptional strong property easing.

“Zero-Covid” policy reiterated

The Politburo meeting reiterated the senior leadership’s stance on controlling Covid-19. Placing the zero-Covid policy in broad long-term and political perspectives, the meeting emphasized the importance of strict and rapid Covid control measures in protecting lives. At the same time, the meeting also emphasized the orderly operation of key economic functions, possibly including public services, supply chain and logistics, and provision of daily necessities. We continue to expect the zero-Covid policy to stay for most of this year, though restrictions are likely to be much more targeted and less restrictive than in April-May. However, the re-emergence of new Covid waves could lead to increased restrictions and limit the upside of the expected economic recovery in the second half.

Normalization of platform regulations

The Politburo meeting reiterated the support for the healthy development of internet “platform” economies, and called for completing the rectification and restructuring of platform enterprises. What is worth noting from this meeting is that it called for the rolling out of a batch of investment cases that have gotten the “green light” (i.e. explicitly approved and supported by the government). This should be seen as a positive signal and further reduction of regulatory uncertainty, which should help improve market sentiment and investor confidence in related areas. In addition, the meeting also urged to improve the stability of China’s supply chain and global competitiveness, ensure smooth transportation and logistics, and upgrading infrastructure and business environments in central and western China.

2022 GDP growth forecast remains at 3%

The policy implications from the latest Politburo meeting are largely in line with our latest forecasts. While the meeting called for fuller and better use of the already announced policy measures, and placed more focus on stabilizing employment and the property market, it did not signal a “whatever it takes” approach or any major new stimulus. Therefore, we maintain our GDP growth forecast for 2022 at 3%.

Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank.

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