China’s top leadership meeting sets policy directions for H2 2023

By Weisi Xie, Shanghai director

While the covid-19 pandemic contributed to a boom in retail sales and inflation in many developed markets, China is experiencing the opposite effect. Consumers remain cautious, with frugal spending habits reflecting widespread uncertainty over future wage and employment opportunities. This weak sentiment along with other structural issues have led EIU to downgrade its real growth forecast of the country to 5-5.3%. 

Since mid-June, China’s central bank and State Council have lowered major policy rates and issued administrative documents to promote credit demand and to revitalise the private sector. However, market entities reacted with little excitement as some of these measures were iterations of previous policies while others were considered lacking sufficient strength.

Amid these circumstances, China’s Politburo met on July 24 to discuss current challenges and set economic policy directions for the second half of this year. The document issued following the meeting again prioritised the importance of macro policies relative to addressing structural issues, signalling that the country’s top decision-making body is aware of urgent issues and risks embodied in the economy and is responding to the calls for more substantial stimulus measures. Highlights of the meeting readout include:

  • The meeting document acknowledges that the supply-demand relationship in China’s property sector has changed. While this certainly doesn’t mean that China will take a U-turn from its “houses are for living not for speculation” frame for the sector, it implies that, from the perspective of the policymakers, the process of property market deleveraging has achieved interim results. Accordingly, the document calls for further optimised and region-specific policies to stabilise China’s real estate sector in H2.
  • The meeting document, for the first time in years, indicates that China is to vitalise (instead of stabilise) the capital market, implying a more progressive and supportive attitude towards the development and sentiment of China’s A-shares market. Given that a complete recovery of the property sector is not foreseeable in the near-term, a promising capital market is then expected to cast a significant wealth effect on the recovery of investor and household confidence, with better income prospects. (The Shanghai composite index SSE has maintained an increasing pattern since Friday last week, reaching for a near-term peak of 3300 since the market opened this morning.)
  • The meeting document suggests that more progressive fiscal policies can be expected in H2, such as to accelerate the issuance of local government special bonds, which will help encourage investment in public infrastructure projects and support the urban village transformation campaign in super-large and megacities.
  • Supporting policies will be carried out to boost private consumption, especially of automobile, electronic devices, home appliances and services related to sports, leisure and tourism. Industrial policies will target sectors such as digital economy, high-end manufacturing, AI and platform companies.

While this meeting document is for top-level policy design, more specific implementation measures can be expected. For example, over the past weekend, three out of the four top-tier cities (Beijing, Shenzhen, and Guangzhou) have announced guiding principles to support the demand for first-time homebuyers and the demand for housing improvement, for the first time since the start of the property sector deleveraging. The State Council also issued guidelines on measures to restore and expand private consumption this morning. These recent developments might imply that the central government will act more progressively given the increasing pressure to reach the 5% growth target, and this will add optimism to China’s economy in H2 to some extent.