China: The Politburo Meeting

Markets have been parsing through official announcements and Chinese state-run media outlets for clues as to whether the ruling Politburo will be seeking to further crack down on new sectors, cryptocurrencies, and IPOs, and if and how it will seek to support broader economic growth.

We have learned the following:

The Political Bureau of the Communist Party of China (CPC) Central Committee convened on Friday, July 30, to set a detailed plan for China’s economy for the second half of 2021.

The meeting covered China’s overall economic conditions, the government’s outlook and growth targets, fiscal and debt policy, monetary and credit policy, foreign exchange policy, reserve management and US Treasury holdings, regulatory issues, virtual currencies, and IPOs.

In that order, from macro to micro:

Economic Conditions, Outlook, and Targets 

The objective of the Politburo meeting was “to send a strong signal of full support for economic recovery and development.” It sought to accentuate the positive in stressing the solid major economic indicators so far this year through July, and attendees judged the economy to have a “relatively solid foundation” for long-term development.

More to the point, officials expect domestic demand in the second half of the year to be stronger than in the first half, and for China’s H2 GDP to come in around 5.8-6.0% on a two-year average measurement, smoothed out for the 2020 pandemic year. That is forecast to outpace H1 2021’s 5.3% growth rate.

The meeting stressed the importance of maintaining “consistent, stable and sustainable macro policies, sound coordination to mesh this year’s policies with those for 2022, and [of] keeping China’s economy running between 5.6% and 6.0%.”

That translates into the following policies:

Fiscal Policy and Debt Issuance

The Politburo decided that the proactive fiscal policy “tone” will remain unchanged, with a focus on expanding domestic demand, on stabilizing and boosting consumption, and on driving up investment in the second half of 2021. The phrase “tone” does imply some changes despite the attempt to stress continuity. 

With the risk of high-profile bankruptcies looming on the horizon, the Politburo stressed the importance of risk prevention and risk resolution and urged an adequate issuance of treasuries and local government bonds combined with “timely measures” to tackle any debt risk at the local government level.

Specifically, the meeting tasked the Central Financial and Economic Affairs Commission (CFEAC) to speed up fiscal spending and government bond issuance, and to fully tap the remaining 2.99 trillion-yuan bond net financing quota from the 4.47 trillion yuan of local government bonds authorized to be issued by the end of October.

Monetary and Credit Policy 

The Politburo’s over-arching directive for monetary policy is to ensure a balance of general money supply and social financing, to ensure the supply and price stability of bulk commodities, and to keep the country’s macro leverage ratio “basically stable.”

The meeting stressed the by now familiar, and slightly more dovish imperative that prudent monetary policy should maintain “reasonably ample” liquidity and support the continued recovery of small and medium-sized enterprises as well as stressed industries.

As to targets, sources indicate that new loans in H2 of 2021 will be guided to remain at or slightly above year-ago levels, and the People’s Bank of China will opt to use “low-profile tools” to quietly inject long-term liquidity.

The PBoC is also expected to cut the Reserve Requirement Ratio (RRR) for some financial institutions in a targeted way, but not to adjust (cut) the policy interest rate.

FX Policy and US Treasury Reserves 

For all the rumors that China will now actively seek to weaken its currency, the meeting pledged to maintain the Renminbi exchange rate at “a reasonable level,” to continue promoting the internationalization of the RMB, and to develop the offshore RMB market.

One official suggested the PBoC’s expectations are for the currency to remain stable, and if anything, to appreciate slightly over the second half of 2021. How much this reflects a desired outcome, and how much it reflects expectations for continue pressure on the dollar from aggressively expansive US monetary and fiscal policies, is unclear, but Beijing has had a wary eye for quite some time on the latter.

Indeed, reserve management, China’s US Treasury holdings, and the risk of a boom-bust cycle in the US economy appear to have been subjects for discussion as well at the Politburo meeting.

Our understanding is that the meeting warned that the risk of holding US Treasuries is rising given surging US financial deficit and debt levels, as well as Beijing’s concerns over a potential US recession in the medium, or even long term.

China, it was agreed, should continue to reduce, rather than increase, its holdings of US Treasuries.

In the assessment of one attendee, and with an important caveat for some nationalistic rivalry, “The US economy is facing serious problems. Over-flooding its financial system with fiscal stimulus as well as Fed-printed liquidity has truly buoyed Wall Street, with the stock indexes soaring for many years, but it has failed to fire up the US economy to accelerate consistently. So, China will not take on losses resulting from buying US Treasuries.”

Regulatory Issues and Virtual Currencies

The Politburo meeting directed the State Council to accelerate oversight and to guide “platform companies” to make “comprehensive rectifications” in accordance with regulatory requirements. It also stressed the importance of keeping strong pressure on virtual currency trading.

In an extremely blunt message, a senior official warns that the goal of the PBoC is to ensure that by the end of the year there will be no more virtual currency trading in China.

Instead, the PBoC will vigorously promote the use of the digital RMB. As one highly visible example of its rapid adoption, the digital RMB, this official notes proudly, can be used as of August 1 to ride the Beijing subways.

As to major sectors of social concern in the economy, the meeting stressed that great attention needs to be paid to the stability of the real estate markets.

Without offering specifics, one attendee pointed out that strict supervision of the heated real estate sector will continue, and it will be more targeted. Expectations are for property sales and housing starts to decline slightly in H2 of 2021 from H1.

Markets and IPOs

The Politburo also called for improving the oversight mechanism for Chinese businesses going public overseas.

The meeting reiterated that big high-tech Chinese companies will not be allowed to be listed in the US “in the face of the overall hostility” of the US, and that all big high-tech Chinese companies listed in the US must return to Hong Kong and the Mainland.

Having said that, following the SEC’s announcement of additional reviews for Chinese listings in the US, the China Securities Regulatory Commission (CSRC) was tasked by party leaders to reach out to the US Securities and Exchange Commission (SEC).

This outreach, explains a senior official, is “a gentle or friendly gesture towards the US. We do not want to completely leave the US capital market, just as the US does not want to completely decouple from China in the financial sector.”