Ten positive signals conveyed by the Politburo meeting in the second quarter

Text: Ren Zeping's team

The Political Bureau of the Central Committee of the Communist Party of China held a meeting on July 24th to analyze and study the current economic situation and deploy economic work for the second half of the year.

Ten positive signals conveyed by the Politburo meeting in the second quarter:

Firstly, the meeting made a clear judgment on the current situation, stating that "domestic demand is insufficient", "there are many risks and hidden dangers in key areas", "the external environment is complex and severe", and "economic recovery is a process of wave like development and tortuous progress".

For the second half of the year, the overall policy tone is to "increase macroeconomic policy regulation and focus on expanding domestic demand", "achieve effective improvement in quality and reasonable growth in quantity", and "strengthen countercyclical regulation and policy reserves".

Secondly, implement proactive fiscal policies, reduce taxes and fees, strengthen expenditure guarantees in key areas, and formulate and implement a package of debt reduction plans. Accelerate the issuance and use of special bonds. It is expected to expand fiscal expenditure and fully compete with the economy.

Thirdly, leverage the role of aggregate and structural monetary policy tools to vigorously support technological innovation, real economy, and the development of small and medium-sized enterprises. Maintain basic stability of the RMB exchange rate at a reasonable and balanced level. It is expected to lower interest rates and reserve requirements in the future, reducing the cost of debt for enterprises, residents, and governments.

Fourthly, activate the capital market and boost investor confidence. This is a new approach, which is expected to increase the allocation of institutional investors, reduce taxes and fees, and promote value investment. It is possible to consider establishing a leveling fund to absorb and support dips. The capital market is of great significance in promoting technological innovation and high-quality development.

Fifthly, we should leverage the fundamental role of consumption in driving economic growth, expand consumption by increasing residents' income, and drive effective supply through terminal demand. We should organically combine the implementation of the strategy of expanding domestic demand with the deepening of supply side structural reform. We need to boost bulk consumption of automobiles, electronic products, and home furnishings, and promote consumption of sports, leisure, cultural tourism, and other services. The key to boosting consumption is to increase residents' income and employment.

Sixth, we need to better leverage the driving role of government investment and accelerate the issuance and use of local government special bonds. We need to formulate and introduce policies and measures to promote private investment. It is expected to increase the support of fiscal and monetary policies for government investment in the future.

Seventh, optimize the business environment and boost confidence in the private economy. The private economy has contributed to "56789". Only when the private economy has confidence, vitality, and willingness to invest can it drive the economy and employment. If the confidence of the private economy is low and the willingness to invest decreases, it will lead to economic decline and unemployment. Therefore, boosting the private economy is the key to driving employment, promoting innovation, and promoting high-quality development.

Eighth, to adapt to the new situation of significant changes in the supply and demand relationship in China's real estate market, adjust and optimize real estate policies in a timely manner, use the policy toolbox well for urban implementation, better meet the rigid and improved housing needs of residents, and promote the stable and healthy development of the real estate market. It is expected to gradually eliminate the restrictive measures introduced during the previous period of market overheating, such as purchase restrictions, loan restrictions, price limits, etc., to restore market normalcy and promote a soft landing.

Ninth, increase the construction and supply of affordable housing, actively promote the transformation of urban villages and the construction of public infrastructure for both emergency and emergency use, and revitalize the transformation of various types of idle properties. It is expected that the renovation of urban villages will significantly stimulate investment, and the key to its implementation is to support policies of real gold and silver, so that enterprises can calculate and have enthusiasm.

Tenth, it is necessary to effectively prevent and resolve local debt risks, and formulate and implement a comprehensive debt restructuring plan. We need to strengthen financial supervision and steadily promote the reform and insurance of high-risk small and medium-sized financial institutions.

The best way to prevent a balance sheet recession is to expand the balance sheet, let the stock market rise, let the economy recover, and let the real estate stabilize. In this way, driven by the wealth effect, residents will naturally expand consumption and businesses will expand investment.

Currently, there is a need for the expansion of the Chinese version of the balance sheet, with a structural focus and a focus on high-quality development related industries. Shrinking the balance sheet will create a vicious cycle, where assets are variable and liabilities are rigid. Therefore, development is the fundamental solution to all problems. If development slows down, various problems such as employment, debt, and financial risks will be exposed, and development in finance is expansion.

China has great economic potential, and I believe that through a series of practical and effective measures, all sectors of society will work together to put development as the top priority and will definitely push towards a path of recovery.

1. Strive for Economy

The view of the meeting on the economic situation is that "the current economic operation is facing new difficulties and challenges, mainly due to insufficient domestic demand, operational difficulties for some enterprises, high risks and hidden dangers in key areas, and a complex and severe external environment. After the smooth transition of epidemic prevention and control, economic recovery is a process of wave like development and tortuous progress. China's economy has enormous development resilience and potential, and the long-term fundamentals for improvement have not changed.

The GDP in the first half of the year was 5.5% year-on-year, higher than the annual growth rate of 3.0% in 2022, reflecting the overall recovery trend of the economy; But there have been twists and turns, with high growth rates in the first quarter and low growth rates in the second quarter, with a two-year compound GDP growth rate of 4.6% and 3.3%, respectively. The pulse like rebound in the second quarter is returning to the mean, exposing the problem of insufficient total demand.

The shortage of short-term domestic demand is mainly due to the "damage to the private sector balance sheet", with the problem occurring on the asset side, where assets shrink while liabilities are rigid; Shrinking the balance sheet will only create a vicious cycle. China needs to expand its balance sheet, introduce targeted structural countercyclical adjustment policies, and activate the capital market and stabilize the real estate market. In this way, under the wealth effect and confidence boost, residents expand consumption, enterprises expand investment, and smooth the virtuous cycle of the economy.

The meeting requested for the work of the second half of the year to "increase macroeconomic policy regulation, focus on expanding domestic demand, boosting confidence, and preventing risks, continuously promote the continuous improvement of economic operation, the continuous enhancement of endogenous driving force, the continuous improvement of social expectations, and the continuous resolution of risks and hidden dangers, and promote effective improvement of economic quality and reasonable growth of quantity".

The overall tone of the policy is to make good use of policy space, identify the direction of development, and solidly promote high-quality economic development. We need to implement precise and effective macroeconomic regulation, strengthen countercyclical regulation and policy reserves.

The current Chinese economic growth rate is lower than the potential growth level, indicating that there is room and necessity for fiscal and monetary policies to expand.

Looking ahead to the second half of the year, the inventory cycle, countercyclical regulation, and reserve policies are expected to resonate and play a supportive role in the economy; However, the weakness of real estate, overseas economic recession, and a decline in external demand still exert pressure on the economy.

2. Actively implementing fiscal policies to expand fiscal expenditures

The meeting called for the continued implementation of proactive fiscal and prudent monetary policies, as well as the continuation, optimization, improvement, and implementation of tax and fee reduction policies.

On June 26th, Minister of Finance Liu Kun pointed out the key points of fiscal policy in the second half of 2023: firstly, implementing proactive fiscal policies. Improve tax preferential policies for small and medium-sized enterprises and individual businesses, and boost the confidence of private enterprises and market entities. Secondly, strengthen the guarantee of expenditure in key areas. Traditional fields should be upgraded, emerging industries should be strengthened, and the cultivation of a modern industrial system should be strengthened. Thirdly, ensure local financial security, prevent and resolve risks, and increase supervision.

In terms of financial funds, the Political Bureau meeting in the second quarter mentioned that "accelerating the issuance and use of local government special bonds". The progress of newly added special bonds from January to June 2023 was 61.4%, lower than 93.3% in the same period last year; It is expected that the remaining amount of special bonds will be concentrated and completed in the third quarter or early fourth quarter.

3. Utilize the role of aggregate and structural monetary policy tools

The meeting called for "leveraging the role of aggregate and structural monetary policy tools, and vigorously supporting technological innovation, the development of the real economy, and small and medium-sized enterprises".

The total amount of monetary policy and structural policies in the second half of the year will work together, and it is expected that policy space will include interest rate and reserve requirement reduction, PSL tools, and special refinancing. Multiple policies will resonate to expand effective demand.

The second quarter monetary policy meeting stated that we should "implement a precise and robust monetary policy, do a good job in cross cycle adjustment, and better leverage the dual functions of the total amount and structure of monetary policy tools", "make every effort to stabilize growth, employment, and prices, effectively support the expansion of domestic demand, improve the consumption environment, and promote a virtuous cycle of the economy", and "increase efforts in countercyclical adjustment, comprehensively use policy tools, and effectively serve the real economy.

4. Activate the capital market and boost investor confidence

The meeting proposed to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. It is necessary to activate the capital market and boost investor confidence.

This is a new approach that is expected to increase the allocation of institutional investors, reduce taxes and fees, and promote value investment. It is possible to consider establishing a leveling fund. The capital market is of great significance in promoting technological innovation and high-quality development.

Prospering the stock market is a good method. Boosting Da A can boost market confidence, enhance residents' wealth effect, and promote technological innovation, which is beneficial both in the current and long-term. We can consider inviting institutional investors to increase the proportion of bottom reading allocation, leverage the role of value investors as a ballast, and cooperate with tax reduction to activate the market. To boost confidence in the stock market and assist in economic recovery, it is recommended to: 1. increase the allocation of institutional investors and leverage the "ballast stone" role of value investors; 2. Reduce or cancel transaction taxes and fees to enhance market vitality; 3. Encourage listed companies to distribute dividends and share development dividends; 4. Through multiple approaches, we will promote supporting reforms in the capital market, including improving the information disclosure system, promoting the normalization of delisting, and protecting investors.

The RMB does not have the basis for a significant depreciation, and is mainly affected by the interest rate difference between China and the United States in the short term. Recently, the depreciation of the RMB exchange rate has slowed down and rebounded from the bottom. Inflation in the United States is rapidly declining, and the labor market has cooled down. The market's judgment that July is the "last" interest rate hike has become more firm. In the future, with the implementation of policy combinations, the Chinese economy will continue to recover, driving the stability and rebound of the RMB exchange rate.

5. Expand consumption

The meeting emphasized the need to actively expand domestic demand, leverage the fundamental role of consumption in driving economic growth, expand consumption by increasing household income, drive effective supply through terminal demand, and organically combine the implementation of the strategy of expanding domestic demand with deepening supply side structural reform. We need to boost bulk consumption of automobiles, electronic products, home furnishings, and other services, and promote consumption of sports, leisure, cultural tourism, and other services.

After the rebound in the first quarter, post epidemic consumption has declined and is on a weak recovery track. In June, the total retail sales of consumer goods increased by 3.1% year-on-year, a decrease of 9.6 percentage points compared to the previous month, and a compound growth of 3.1% in two years, an increase of 0.6 percentage points compared to the previous month; 0.2% month on month, weaker than seasonality.

The Politburo meeting proposed to "increase efforts to ensure people's livelihoods, raise stable employment to a strategic level, comprehensively consider, firmly implement the bottom line of grassroots" three guarantees ", and expand middle-income groups.

The sustainability of subsequent consumption depends on employment, income, and residents' expectations. The current structural issues in employment are prominent. The urban survey unemployment rate in June and the urban survey unemployment rate in 31 major cities were 5.2% and 5.5%, respectively, unchanged from the previous month. By age group, the unemployment rate between the ages of 16 and 24 is 21.3%, an increase of 0.5 percentage points compared to the previous month. In the first half of the year, the actual per capita disposable income of residents in China was 5.8% year-on-year, slightly higher than the unchanged GDP of 5.5% year-on-year; The consumption tendency in the second quarter was 64.8%, 2.8 percentage points higher than that in the first quarter; Residents' preventive savings are still relatively strong.

In the future, promoting consumption will focus on both consumption capacity, consumption scenarios, and willingness. In terms of consumption ability, consumption is a function of income, and residents' income should be increased to reduce unemployment rate; Improve the income distribution pattern, increase the proportion of residents' income, especially the proportion of middle and low-income groups in national income, and the proportion of labor remuneration in initial distribution. In terms of consumption scenarios and intentions, we will focus on promoting bulk consumption and service consumption such as automobiles, home appliances, furniture, and catering, and promote the construction of an international consumption center city. For example, automobiles, as large durable goods, account for about 28% of China's total consumption. The exemption from vehicle purchase tax before the extension of new energy vehicles in 2023 will to some extent drive domestic demand growth; In terms of cultural and tourism services, in the first half of 2023, the total expenditure on domestic tourism was 2.30 trillion yuan, an increase of 1.12 trillion yuan or 95.9% compared to the previous year, indicating significant consumption potential.

6. Promoting Investment

The meeting proposed to "better leverage the driving role of government investment, accelerate the issuance and use of local government special bonds, and formulate and introduce policies and measures to promote private investment.

In recent years, the growth rate of private fixed investment has shown a downward trend, reflecting a lack of market confidence. In 2019, the growth rate of private fixed assets investment was 4.7%, and by 2022 it will have dropped to 0.9%. In June 2023, the cumulative private fixed assets investment continued to decline to -0.2% year on year.

On July 24th, the National Development and Reform Commission issued 17 measures to promote private investment, mainly focusing on four aspects: first, to boost confidence; Secondly, focus on key areas; Thirdly, we need to improve the guarantee mechanism; Fourthly, we need to optimize the business environment. Private investment is an important source of vitality for the economy, playing an important role in stabilizing employment and people's livelihoods. Subsequent policies will continue to follow, and the investment growth rate is expected to rebound.

Optimizing the Business Environment and Boosting Confidence in the Private Economy

The meeting proposed to continuously deepen reform and opening up, adhere to the "two unwavering principles", effectively improve the core competitiveness of state-owned enterprises, and optimize the development environment for private enterprises. We must resolutely crack down on arbitrary fees, fines, and assessments, and solve the problem of government arrears in corporate accounts. We need to establish and improve a regular communication and exchange mechanism with enterprises, encourage them to venture, invest, and take risks, and actively create markets.

The private economy has contributed to "56789". Only when the private economy has confidence, vitality, and willingness to invest can it drive the economy and employment. If the confidence of the private economy is low and the willingness to invest decreases, it will lead to economic decline and unemployment. Therefore, boosting the private economy is the key to driving employment, promoting innovation, and promoting high-quality development.

Recently, a series of policies have been introduced to support the development of the private economy and boost the confidence of private enterprises, in order to help restore the vitality of the market economy and the driving force of economic growth.

Promoting the development of the private economy has always been a policy focus. On July 19th, the State Council issued the "Opinions on Promoting the Development and Growth of Private Economy". Firstly, we need to continuously optimize the environment for the development of private economy. To break down entry barriers and improve restructuring mechanisms; Secondly, we need to increase policy support for the private economy. Improve the financing support system, establish a mechanism for preventing and clearing bad debts, and ensure employment needs; Thirdly, we need to strengthen the guarantee of the rule of law. Governance of corruption, protection of property rights, and improvement of supervision; Fourthly, promote high-quality development of the private economy. Support the digital transformation of enterprises and enhance their technological innovation capabilities.

To boost market confidence, in addition to improving the business environment, support should also be provided from various aspects such as public opinion and self operation. At the level of public opinion, correct the name of the enterprise. The "Qinglang" campaign in 2023 will focus on the rectification of malicious dissemination of so-called "private enterprise selling the country", "private enterprise leaving the scene", "national advance and private retreat" and other theories through methods such as "labeling", "rhythmic", and "magnifying glass", and will portray and incite behavior that contradicts the state-owned economy and private enterprises; In terms of self operation, strengthen training on the management system of private enterprises, and assist local authorities in streamlining business processes.

8. Adjusting and Optimizing Real Estate Policies

The meeting requested that "we should effectively prevent and resolve risks in key areas, adapt to the new situation of significant changes in the supply and demand relationship in China's real estate market, adjust and optimize real estate policies in a timely manner, use the policy toolbox well for urban implementation, better meet the rigid and improved housing needs of residents, and promote the stable and healthy development of the real estate market".

It is expected to gradually eliminate the restrictive measures introduced during the previous period of market overheating, such as purchase restrictions, loan restrictions, price limits, etc., to restore market normalcy and promote a soft landing.

Stabilizing the real estate market, allowing local governments to cancel some restrictive measures for self rescue, and supporting demand for immediate and improved needs. Provide a suitable and stable credit environment for real estate enterprises, enhance the actual implementation effect of the "Three Arrows",