Overview
What happened
Following an underwhelming post-Covid rebound, markets have been anticipating signals of support for the Chinese economy from the country’s leadership. These arrived on 24 July in a statement by the Politburo, China’s top decision-making body. While these high-level statements are often vague, this one included notable changes to policy priorities and key policy stance, signalling a slightly dovish tilt for the country’s policy outlook. Overall, the Politburo remains committed to promoting high quality growth by supporting consumption and upgrading the industrial supply chain. Crucially, the statement acknowledged that the pace of recovery post-pandemic has been volatile, at the same time as it stressed that China has the potential and resilience to meet its annual socio-economic targets. To that end, the Politburo pledged more counter-cyclical policies to stabilise growth this year.
Our interpretation
Policymakers did not signal meaningful shifts to the current fiscal and monetary policy stance. Their focus remains on using existing policy tools. This implies a low likelihood for a repeat of the aggressive unconventional stimulus used in the previous easing cycles during the 2010s. The Politburo is prioritising policies that will boost goods and services consumption as well as household income. We expect more easing policies within the existing framework, such as tax cuts for corporates, an acceleration of local government special bond issuances, targeted and structural monetary policy tools, as well as moderate cuts to benchmark interest rates, and the reserve requirement ratio (RRR).
What is not said in the statement is just as important. The omission of the slogan “property is for living, not for speculation” signals a significant change in policy stance on the property sector. Policymakers’ new assessment that “the supply and demand dynamics in the property sector has seen fundamental changes” means the policy priority in this sector will likely shift from preventing speculation to addressing the supply and demand mismatch in various regions. This points to more autonomy for local governments to adopt different policy tools to stabilise the property markets.
The Politburo also emphasised the need to revitalise capital markets to boost investors’ confidence, alongside other measures to address weak domestic confidence in the private sector and among investors. We think policy initiatives will follow through on this front in the coming months.
Outlook
As we move into the second half of 2023, we expect the pace of China’s recovery to gain momentum as consumption leads the rebound, albeit at a moderate pace. The stabilisation of the property sector remains critical to the sort of recovery that China wants, which focuses on higher quality – rather than quantity – of growth. External demand may slow moderately as the developed economies face the headwinds of high interest rates, but such downside pressures will be partially offset by China’s domestic demand recovery. With more counter-cyclical policy easing on the way, China could still achieve its annual growth target of around 5 per cent.
Asset allocation views
We remain cautiously constructive on Chinese equities as we believe cheap valuations and better prospects for growth will continue to provide fundamental pillars of support for the market. Additionally, we anticipate that as more policy actions that support property and capital markets come through, markets will develop a better understanding of China’s holistic approach to achieve high-quality growth. In time, this will enable sentiment to recover and provide an additional support to equity markets.
