On July 24, the Political Bureau of the Communist Party of China convened a meeting to analyze and study the current economic situation and set forth economic plans for the second half of the year. The meeting was presided by Chinese President Xi Jinping. Given the highly complex economic situation and the release of China's half-year economic data, researchers at ANBOUND provide the following preliminary interpretations regarding the assessment of the economic situation and the country's measures for the second half of the year.
Firstly, the meeting pointed out that the economy is facing new difficulties and challenges. These mainly include insufficient China’s domestic demand, operational difficulties for some enterprises, multiple risks in key areas, and a complex external environment. After changes in the country’s COVID-19 policy, the economic recovery is characterized by wave-like development and twists and turns. However, China's economy has enormous development resilience and potential, and its fundamental long-term positive trend remains unchanged.
ANBOUND researchers point out that a key focus of the recent meeting of the Political Bureau was the special emphasis on the fundamental judgment of "insufficient domestic demand", while also acknowledging that the economic recovery is characterized by "wave-like development and twists and turns". This implies that a series of economic policies and adjustments in the future will revolve around addressing this demand shortfall in their design and implementation.
Secondly, regarding the economic work for the second half of the year, the meeting emphasized the need to adhere to the general principle of making progress while ensuring stability. The goal is to continuously promote the sustained improvement of economic performance, enhance endogenous growth drivers, improve social expectations, and address hidden risks, ultimately achieving qualitative and efficient improvement, as well as reasonable growth in the economy.
It should be pointed out that the general principle of China’s economic work for the second half of the year continues to focus on "making progress while ensuring stability", though macroeconomic regulation needs to be strengthened, with a particular focus on expanding domestic demand. The goal for this year remains to strive for the achievement of the established annual economic growth target.
Thirdly, in terms of policy formulation and implementation, the meeting highlighted the need to utilize policy space effectively and identify the right areas for action. It highlighted the precise and robust implementation of macroeconomic regulation, strengthening countercyclical adjustments, and policy reserves. The focus is also on the continuation of proactive fiscal policies and prudent monetary policies, along with optimizing, improving, and effectively implementing tax and fee reduction policies. The aim of this is to leverage both aggregate and structural monetary policy tools and provide strong support for technological innovation, the real economy, and the development of small and medium-sized enterprises. It is also crucial to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level and to invigorate the capital market to boost investor confidence.
The tone of proactive fiscal policies and prudent monetary policies remains unchanged, but there are higher requirements in terms of intensity and precision. The establishment of policy reserves focusing on countercyclical adjustments also acknowledges that the recovery of the Chinese economy this year may not be smooth. It is worth noting that the Political Bureau meeting specifically emphasized the need to "invigorate the capital market and boost investor confidence", but how to address the longstanding issue of the capital market (especially the Chinese stock market) differently from the past remains to be seen.
Fourthly, the meeting emphasized the need to actively expand domestic demand, highlighting the fundamental role of consumption in driving economic growth. This includes increasing household income to stimulate consumption and utilizing end-demand to drive effective supply. It also involves integrating the strategy of expanding domestic demand with the deepening of supply-side structural reforms. Efforts are to be made to boost consumption in areas such as automobiles, electronic products, and home furnishings, as well as promote service consumption in sports, leisure, culture, and tourism. Additionally, the government's investment role will be enhanced to accelerate the issuance and use of local government special bonds. Policies and measures to promote private investment will be formulated and implemented. The stability of foreign trade and foreign investment will be ensured, and efforts will be made to increase international flights and maintain the smooth operation of China-Europe freights.
As evident from the emphasis on addressing the insufficient domestic demand, the recent Political Bureau meeting has placed significant focus on this aspect by providing many directional recommendations and setting numerous development goals. While these policy directions for key areas are reasonable, the crucial question is: how can these goals be achieved? In our view, two aspects are crucial to expanding China’s domestic demand: first, building consumer confidence based on income growth, and second, fostering business confidence based on the smooth development of private enterprises. However, downward trends in confidence have already formed in these two areas, and reversing this trend and effectively restoring confidence among consumers and private enterprises may take considerable time. Moreover, during this process, market confidence might fluctuate, depending on whether the government can adhere to established policy adjustments and provide more public services.
Fifthly, regarding deepening reforms, the meeting pointed up the continuous efforts in reform and opening-up, effectively enhancing the core competitiveness of state-owned enterprises, and optimizing the development environment for private enterprises. There is a firm resolve to rectify irregular charges, fines, and levies, and to address the issue of government arrears to businesses. The establishment of a robust and normalized communication mechanism with enterprises is stressed, encouraging them to take risks and actively participate in the market.
These reform efforts primarily revolve around encouraging the development of private enterprises and optimizing the environment for their growth. The determination of the central government has been clearly demonstrated, and the focus now lies in two aspects: first, whether this determination can be sustained in the long term, and second, how specific policies to support the development of private enterprises will be formulated and implemented. Researchers at ANBOUND have previously analyzed that the key to restoring confidence in private enterprises lies not only in specific preferential policies but also in addressing the issue of institutional identity. However, deep-seated problems are unlikely to be resolved in the short term.
Regarding the real estate market, the central government's wording has subtly changed. The meeting emphasized the need to effectively prevent and defuse risks in key areas, adapt to the significant changes in the supply-demand relationship in China's real estate market, and timely adjust and optimize real estate policies. It is also mentioned that policies should be tailored to individual cities and effectively utilize policy tools to better meet the rigid and improved housing needs of residents, as well as promote the stable and healthy development of the real estate market. Efforts should be increased in the construction and supply of affordable housing, actively driving the transformation of urban villages and the construction of public infrastructure for both daily and emergency use, and revitalizing and transforming various idle properties.
In the meeting, it has also been mentioned the necessity to "prevent and defuse risks in key areas, adhere to the positioning that ‘houses are for living, not for speculation’, implement policies based on local conditions, support rigid and improved housing demand, ensure the timely delivery of completed homes, safeguard people's livelihoods, and maintain stability, promote the stable and healthy development of the real estate market, and work towards establishing a new development model for the real estate industry". Analyzing such a statement, ANBOUND researchers believe that there have been subtle changes in the expression regarding the development of the country’s domestic real estate market in this meeting, that there is the highlight on "significant changes in the supply-demand relationship in China's real estate market" and proposal of "timely adjustments and optimization of real estate policies".
The changes in the expression of real estate policies may indicate that there will be adjustments in this sector in the future. However, the current Chinese real estate market is already showing an overall downward trend. In this context, even with significant policy relaxation, the basic trend of shrinking demand in the real estate market is unlikely to change significantly.
Final analysis conclusion:
Overall, facing the complex economic situation, the Political Bureau meeting in China made adjustments to its situation analysis and work arrangements. It explicitly emphasized that insufficient domestic demand is the main issue confronting the current economy. Policy tweaks including those related to the real estate sector. While the general direction has been set, given the numerous unfavorable factors both domestically and internationally, whether the unfavorable economic situation can be reversed and how long it will take to alleviate the pressures on economic development depend on the implementation and execution of future policies.
