China: Bringing It All Back Home

Published on August 3, 2020

President Xi Jinping presided over a meeting of the Political Bureau of the Communist Party of China’s Central Committee on July 30 in Zhongnanhai. Focused on the drafting of a new 14th Five-Year Plan for Economic and Social Development, attendees included heads of the major economic departments of the State Council.

*** After the meeting, Beijing announced a seismic policy shift towards redirecting China’s development efforts over the next three planning cycles, or 15 years, to “internal circulation” (meaning the domestic economy), rather than exports, a home-grown economic growth that would be merely supplemented by the “external circulation” of export markets. ***

*** The redoubled effort to shift from an export-oriented economy towards a “high-quality, domestically driven” economy was presented not merely as a defensive response to an admittedly deteriorating external political and economic environment, but indeed, as a milestone in China’s economic development that will make the country all that more resilient to risks and challenges down the road. ***

Measured Stimulus Measures

For this year, the goal, according to a planning agency official, is to stimulate and “fully normalize” a domestic consumption for the second half of H2 that has lagged well behind the rebound in industrial production and construction through H1 of this year.  Coming off a brutal -11% collapse in H1, the objective is to lift retail sales of consumer goods to 6-7% in H2 of 2020.

In practice, what that means for one is that “flexible and targeted” monetary policy will be pledged to ensure “reasonable growth” in money supply and social financing. That stimulus, however, will be tempered and lack the urgency of earlier this year given the stronger than expected rebound in overall economic activity to date.

For example, the target for new loans for H2 2020 will be about 7.9-8.0 trillion yuan, an increase of about 800-900 billion yuan over the 7.14 trillion yuan over the same period last year. To put that in perspective, that is a significant deceleration from the year over year boost of 2.42 trillion yuan in new loans in the first half of this year. Heavily frontloaded, new loans this year are expected to be around 20 trillion yuan, an increase of 3.2 trillion yuan over 2019.

On the rate front, monetary policy sources expect further easing through open market operations, as well as further reductions in the Reserve Requirement Ratios (RRR) for banks through the second half of 2020. The possibility of a cut in the deposit rate, however, has been categorically ruled out.

A Fight Over Equity Listings

The Politburo meeting attendees also discussed the rising threat from Washington to Chinese firms listed on the United States exchanges.

The meeting noted that to deal with these rising threats, an increasing number of US-listed Chinese firms had returned, and are “bound to continue” the trend  of returning home, to list on the A-share or Hong Kong markets, suggesting the homecoming trend led by Alibaba and NetEase will only accelerate.

Indeed, the Politburo fully endorsed a State Council plan whereby the China Securities Regulatory Commission (CSRC), and the Securities and Futures Commission of Hong Kong (SFC) are sifting through US-listed Chinese firms, with the aim of identifying ways to support those willing to return to the A-share or Hong Kong markets.

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