China July Politburo is no panacea, but shows steps in the right direction
The July Politburo meeting took place on July 24. The outcome was broadly in line with our expectations, with the government admitting to a sequential deceleration in Q2-23 and delivering a slightly more dovish tone. Although there were no major surprises, there were some notable highlights (and some notable absences).?Specifically, the main highlights of the statement include pledges to:?
On housing, the statement dropped the reference that “houses are to live in, not for speculation”. That has been a hallmark policy of President Xi since 2016 (Chart 1), leading to a stabilisation in first-tier cities. More recently, the (now defunct) “three red line” policy, which was designed to nudge real estate developers to deleverage within three years, caused a correction in the sector that persists today.?The statement mentioned that the authorities would calibrate property policies based on the “local property market situation” and consider developments related to “demand and supply imbalances”. That last point is new, suggesting a change in the macroprudential regime, as the government now sees a structural shift, requiring bottom-up measures to better reflect local conditions.?
The points on rural rejuvenation and the reintroduction of shantytown renovation projects are interesting, as they suggest that the People’s Bank of China (PBOC) might consider more aggressive balance sheet expansion. The PBOC expanded its balance sheet in Q4-22. Together with market exuberance after reopening, this helped to fuel a rally in Chinese equities. The PBOC’s balance sheet has contracted since the start of 2023 (Chart 2), exerting pressure on domestic asset prices. But there is ample room for the PBOC to use its balance sheet to support key sectors. Therefore, it has the potential to be disruptive for markets once again. Previous examples of this include the Pledged Supplementary Lending (PSL) Programme of 2016 and Shantytown Renovation programmes of 2018.
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The July Politburo has historically been the platform for the government to take stock of economic performance in the first half of the year, and recalibrate its policy settings vis-à-vis the second half of the year. Most analysts were expecting additional support measures this week, in line with other policy announcements leading up to the July Politburo meeting. However, the meeting is not the platform for the PBOC to announce rate cuts or other changes to its monetary policy settings. We expect that additional measures will be announced in the months ahead. Specifically, we are monitoring the PBOC’s balance sheet and can’t exclude a 25 bp RRR cut in Q3-23.?
There has been a slew of policy announcements over the past weeks, but little substance. On July 24, the National Development and Reform Commission (NDRC) issued a 17-point plan to attract more private capital to participate in the construction of major national projects and key industrial chain supply chain projects. On July 21, the NDRC released a 10-point plan to increase car ownership, particularly for EVs. On July 19, the Central Committee and the State Council issued a guideline on boosting the growth of the private economy. On July 17, China’s Ministry of Commerce issued an 11-point plan to boost the domestic consumption of household consumer goods.
The market reacted favourably to the news. The Hang Seng Index soared 4.07% and breached the 19400 level, while the CSI 300 jumped 2.85% to 3915. The Shanghai Composite Index saw smaller gains, rising 2.12% to 3230. Meanwhile, the yuan appreciated by 0.6% to USDCNY 7.1422; while the Chinese 10-year government bond yield climbed 1.60% to 2.670%. The market reaction reflects mostly positive sentiment surrounding the announcement and is therefore not sustainable by nature. However, we expect that the authorities will follow through with some if not most these objectives, which should result in a broadening of the economic recovery and exert upside pressure on Chinese assets in Q4-23.?