[UBS UBS] China Economic Review Politburo meeting releases more positive policy signals The third plenary session of the CPC Central Committee in July is expected to introduce a reform plan

Wang Tao, Head of Asian Economic Research and Chief China Economist at UBS Investment Bank

Wang Tao, Head of Asian Economic Research and Chief China Economist at UBS Investment Bank, issued a more positive policy signal at the Politburo meeting. The July 3 Plenary Session of the Central Committee of the Communist Party of China is expected to issue a reform plan. The Politburo meeting (the \”Meeting\”) held on April 30 issued a more positive policy signal. It provides positive macro policy signals, especially fiscal policy and real estate policy.
The meeting basically continued the policy tone set by the two sessions in March. It also called for the early issuance and good use of ultra-long-term special government bonds to avoid tightening fiscal policy and then easing it (that is, repeating the situation in 2023). It also pointed out that the economy still faces insufficient effective demand and high operating pressure on enterprises. challenge.
The meeting pointed out that it is necessary to effectively coordinate the work of guaranteeing the delivery of housing and study the policies and measures to digest the existing real estate, which means the adjustment of real estate policies.
We expect that various government departments and local governments will introduce more specific measures after the Politburo meeting.
Accelerate the issuance of government bonds and avoid fiscal tightening before easing. The meeting called for the implementation of a proactive fiscal policy, the early issuance and use of ultra-long-term special treasury bonds, the acceleration of the issuance and use of special bonds, and the maintenance of necessary fiscal expenditure intensity.
The meeting clearly called for avoiding fiscal policy tightening and then loosening, that is, avoiding a repeat of the situation in 2023.
Fiscal terms are still tight year-to-date in part because the pace of government bond issuance is slower than in January-April 2023 and 1 trillion yuan of ultra-long-term special government bonds have not been issued so far.
In addition, land revenue fell by 7% year-on-year in the first quarter, further inhibiting local government spending capabilities.
In response to the pressure on local finances, the meeting deleted the language in the December Politburo meeting calling for \”strict financial discipline\” and \”strict control of general expenditures\” and also required ensuring that grassroots \”three guarantees\” spend in full and on time.
We expect that the issuance pace of government bonds (general and special government bonds) will accelerate in the coming months. The central government may also accelerate fiscal transfer payments to support general government spending and infrastructure investment.
In addition, the meeting pointed out that it is necessary to ensure that provinces and cities and counties with high debt risks can truly reduce their debts and develop stably. This may mean that the strict control of hidden debts in the 12 provinces with high debt risks may be slightly loosened.
A more proactive real estate policy is expected to be further relaxed. Although GDP growth in the first quarter was stronger than expected, a further decline in real estate activity remains the biggest risk to economic activity this year.
This meeting set a more positive tone for real estate policies. It did not reiterate the need to increase the construction of affordable housing, but pointed out the need to coordinate research on policies and measures to digest existing real estate and optimize incremental housing.
This subtle change in the formulation of real estate policy may mean that the government will expand the current policy pilot to allow more local governments to directly purchase housing stock to increase the supply of affordable housing or public rental housing, which will help stabilize the housing market.
However, the scope of coverage and funding sources of this policy are still unclear.
We believe that the central government can increase low-cost financial support to local governments (such as issuing another 300-500 billion PSL and/or increasing the rental housing loan support program), can provide certain financial subsidies, and significantly expand the coverage of the whitelist mechanism And policy banks and commercial banks will provide more funds to implement the goal of ensuring the delivery of buildings.
A top-down guidance plan to clarify policy implementation details will also help reduce moral hazard and reduce the hesitation and wait-and-see attitude of local governments.
In addition, some cities have recently further relaxed purchase restriction policies.
We believe more policies and details may be introduced in the coming months.
The tone of monetary policy and consumption support policies remain basically unchanged. The Politburo meeting pointed out the need to reduce comprehensive social financing costs.
However, given the changes in market expectations for the Fed\’s interest rate cut and the strengthening of the US dollar, we do not expect the central bank to cut interest rates (MLF) during the year but expect that the LPR may be lowered by 10-20 basis points at the end of the second quarter.
In addition, we expect the central bank to maintain sufficient liquidity in the banking system to ensure sufficient credit supply and may make another slight RRR cut during the year.
We expect credit growth to accelerate in the second and third quarters.
On the other hand, the meeting called for the implementation of large-scale equipment updates and consumer goods trade-in action plans, which basically continued the policy tone of the two sessions and was in line with expectations.
After the two sessions, some governments successively introduced “replacement of old with new” action plans.
The government recently announced a one-time financial subsidy for eligible car trade-ins in 2024. UBS Automotive Group estimates that the program can cover more than 8 million new car sales (the corresponding financial subsidy is approximately 0.05% of GDP).
The Politburo meeting also pointed out the need to increase the income of low- and middle-income groups. In view of the current weak income expectations, we believe that this policy is necessary.
The Third Plenary Session of the Central Committee of the Communist Party of China in July is expected to introduce more reform measures. The meeting announced that the Third Plenary Session of the 20th Central Committee of the Communist Party of China will be held in July to focus on further comprehensively deepening reforms.
This Politburo meeting emphasized the necessity and importance of further reforms.
While the specific reform package will not be known until July we believe the reform agenda may include reforms to public services and social security systems including household registration and pension system reforms.
The Third Plenary Session of the CPC Central Committee may also discuss the reform of the fiscal relationship between the central and local governments and a long-term and sustainable policy framework to solve local fiscal difficulties.
In addition, reform measures related to education system reform, policy frameworks that are conducive to encouraging innovation and scientific research, further opening up the domestic market, improving the efficiency of state-owned enterprises, and promoting the development of the private economy may also be discussed at the Third Plenary Session of the Central Committee of the Communist Party of China.

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