01 August 2018
Politburo meeting prioritized stability and promoted fiscal easing

On July 31, the Political Bureau of the CPC Central Committee held a meeting to analyze the current economic situation and deploy the economic work in 2H18. Specifically, there are six major tasks: stabilizing economic growth, enhancing infrastructural investment, preventing and solving financial risks, promoting reform and opening up, tackling problems in property market, and improving people's welfare and social stability.

The communique mentioned “stability” eighteen times. Among the six major tasks, “growth stabilization” is a first priority, with “expanding domestic demand” as its handle. The meeting pointed out that the current economic operation is stable but faces some new problems and new challenges. External environment has undergone significant changes. The economic work should adhere to the general tone of steady progress, keep the economy operating in a reasonable range, and stabilize employment, finance, foreign trade, foreign investment, investment, and expectations. (See Figure 1 for a comparison of the wording of the latest two Politburo meetings)

Monetary policy is likely to keep “fine-tuning” and the pace of deleveraging will be better managed. The tone of monetary policy changed from “stable and neutral” to “stable”. Deleverage should be managed at an appropriate pace. The timing of various policies should be coordinated. Monetary policy should maintain a reasonably ample liquidity.

Fiscal policy will be more active, and infrastructure investment is expected to rise. The meeting requires fiscal policy to play a better role in expanding domestic demand and restructuring. Meanwhile, it proposed to boost infrastructure investment. According to the annual budget, the potential fiscal deficit in the general public budget and the government fund budget combined will be Rmb3.6trn in 2H18, much higher than the Rmb2.3trn of deficit recorded in 2H17. In addition, the various tax reduction measures will play a greater role in 2H18. If fiscal expenditure accelerates and the tightening in local government financing becomes more “pragmatic”, infrastructure investment will likely rebound after the “free falling” in 1H18. Investment in transportation, energy conservation and environmental protection are likely to rise.

Other major policies include expanding the opening up, adhering to property regulation city by city, decisively curbing housing prices, and prioritizing employment stabilization and improving people's livelihood.

The meeting proposed to expand opening up and substantially relax market access, and to protect the rights and interests of foreign businessmen in China. While the trade friction between China and the US may last for a long time, expanding opening up will help restructure Chinese economy and promote long-term economic growth.

The wording on curbing property prices changed from “rein in excessive housing price increase” to “rein in housing price increase”. Property regulation policy will be implemented city by city; balance between supply and demand will be promoted; and establishment of the long-term mechanism will accelerate.

The work on people’s livelihood and social stability include placing employment stabilization in a prominent position, ensuring basic livelihood expenditures such as wages, education, and social security, strengthening poverty alleviation in poverty-stricken areas. While fiscal spending in these areas may have weaker effect as countercyclical measures than infrastructure investment does, they can promote income distribution and economic restructuring.

The communique of the Politburo meeting indicated that the macroeconomic policies become more "pragmatic". The expansionary fiscal policy can also facilitate the transmission of monetary policy "fine-tuning" to the demand of the real economy. In 1H18, growth of M2 and total social financing fell rapidly under active deleveraging. Going forward, the intensity and pace of deleveraging may be more “moderate and pragmatic” so that M2 and total social financing may bottom out. Fiscal spending and infrastructure projects will facilitate the transmission from “fine-tuning” of monetary policy and regulation to investment demand. We will continue to observe the growth of adjusted total social financing, to find out whether the policy fine-tuning will effectively stabilize the financing demand of the real economy.