Politburo Meeting: Cautious Tone, Limited Commitments
China's economic policies and strategies have been under close observation by global investors and analysts. In recent months, the pace of China's economic recovery has slowed down, leading investors to anticipate a more aggressive approach from China to implement stimulus measures. Despite various initiatives from the Chinese authorities aimed at boosting confidence, these efforts have not met investors' expectations.
The readout of the Politburo meeting held on Monday, 24th July 2023, indicates that the Chinese leadership has placed added emphasis on addressing issues such as insufficient domestic aggregate demand and challenging operating environments for certain businesses. This marks a more cautious tone compared to previous expressions by the Politburo. However, although the readout reiterates the importance of boosting macroeconomic policies, domestic aggregate demand, confidence, consumption, the government's role in investment, the healthy and sustainable development of the platform economy, optimizing the operating environment for private enterprises, fine-tuning housing policies on a city-by-city basis, and stabilizing employment, it does not introduce any new specific policy commitments.
Potential Further Easing of Home Purchase Restrictions
The readout of the Politburo meeting on Monday reiterated recent policies concerning the property sector, with one notable omission being the phrase "housing is for living in, not for speculation." This absence could signal a potential easing of some home purchase restrictions. However, the readout maintains the city-by-city approach and does not suggest blanket policies to boost housing demand. Potential relaxations may involve reducing down-payment ratios, which currently stand at 30% for second or additional homes nationwide, but can reach as high as 50% in certain tier-1 and 2 cities.
Regarding the urban village improvement, recently announced by China's State Council, the initiative will be limited in scale and funded by the local government and the private sector, rather than through the People's Bank of China (PBOC) via policy banks and pledged supplementary lending. The goal is to enhance living conditions in shanty areas of the country's 21 largest cities. In contrast to the last shantytown redevelopment, which was financed through money printing by the PBOC using policy banks like China Development Bank, this time, the directive emphasizes financing from multiple sources, including local governments and the private sector. The directive aligns with the policy direction set during the Politburo meeting in April of the same year.
Trend growth limits the potential efficacy of stimuli
The trend growth of China's economy has been on a decline, dropping from over 10% in 2006 to around 5.5% to 6% even before the pandemic in 2019 (Figure 1). This is primarily attributed to China's total factor productivity growth, which has decreased from over 4% to approximately 2.5% (Figure 2). The long-term growth potential of an economy relies on the quantities of factors of production and the productivity of these factors. While fiscal deficits or monetary measures can help bring an economy closer to its potential when operating below it, they cannot inherently raise the economy's potential growth rate.