Singapore - China has indicated a new campaign to revive slowing growth, revealing increasing concern at the highest levels of government about the outlook for the world's second-largest economy.
During a meeting on Tuesday, the Communist Party's elite Politburo hinted at further reducing borrowing costs and providing additional support for the property market. They also announced plans to hold a long-delayed policy meeting, the postponement of which had raised concerns about Beijing's economic management.
The commitment to take further action comes as recent data indicates a softening of growth following a decent, though uneven, start to the year. Surveys suggest weakening activity in manufacturing and services, and there has been a recent sharp drop in industrial profits. Complicating matters are challenges related to trade, foreign investment, and an aging and shrinking workforce, which are clouding the longer-term outlook. Despite a range of small measures aimed at calming the sector last year, China's prolonged real estate downturn continues to weigh heavily.
In announcing the new policy drive, the 24-member Politburo highlighted "significantly rising external uncertainties," likely referring to increasing global geopolitical and economic tensions. Alongside disruptions from conflicts in Ukraine and the Middle East, China is facing a growing backlash against its expanding low-priced exports, as Beijing intensifies investment in manufacturing to boost its economy.
Beijing stated that in July, it would propose comprehensive policies to tackle these challenges when the party's top 370 officials convene a plenary session to discuss economic development and reforms.
A statement released after Tuesday's meeting and carried by the state-run Xinhua News Agency indicated that the Politburo plans to increase government borrowing to support growth and further reduce key interest rates. These fiscal and monetary measures are seen as necessary to achieve Beijing's growth target of around 5% for the year.
Regarding the real estate market, leaders announced that the government would explore new ways to address the backlog of unsold homes and other measures to optimize housing supply. Some economists see this as a positive signal of a potential shift in strategy after years of declining construction, investment, and sales.
The Politburo's statement suggests that the July plenum may propose measures to stimulate domestic demand, a longstanding goal that would require broader changes to China's tax, fiscal, and social security systems. Such reforms could also ensure more equitable growth distribution.
However, some economists interpret the Politburo's statement as indicating that officials are likely to continue with the measured approach to stimulus and economic management seen over the past two years. Beijing has been reluctant to shift the economy decisively away from investment toward greater consumption, viewing it as potentially wasteful and contradictory to its goal of transforming China into a technological and manufacturing powerhouse.
The upcoming Third Plenum of the party's governing Central Committee in July is expected to affirm these policies, with a focus on economic reforms and "Chinese-style modernization," a concept promoted by Chinese leader Xi Jinping to differentiate China's development approach from Western models.
The timing and theme of the upcoming closed-door plenum have been subjects of intense speculation, as business leaders, investors, and analysts seek insights into Beijing's plans for addressing various economic challenges, including sluggish growth, mounting local government debts, and a struggling property market.
The atypical scheduling of the July plenum, which the party last held in 1977, and the lengthy gap between this and the previous plenum in February 2023, one of the longest intervals since the Mao Zedong era, have raised questions about Xi's tendency to diverge from longstanding procedural norms and concerns about policy unpredictability in the world's second-largest economy.
The party's governing rules stipulate that at least one plenum must be held each year. Since the late 1980s, Beijing has typically convened an economy-focused plenum in the fall of the year following the party's national congress. However, this pattern was disrupted in 2018 when the Third Plenum was held in the spring to approve a restructuring of party and state bureaucracies, and no plenum was convened in the fall to discuss economic policy. Last year, Beijing did not hold a Third Plenum at all, the first such occurrence since the early 1980s.
The decision not to hold a plenum has allowed Xi and his inner circle to continue dictating policies without consulting the broader party elite. The delay may indicate policy disagreements within party leadership or the depth of economic challenges facing Beijing.
The July plenum is also expected to formally approve personnel changes to the Central Committee, possibly removing members under investigation for alleged misconduct, such as China's former foreign and defense ministers, Qin Gang and Li Shangfu, respectively.
In its Tuesday statement, the Politburo pledged to issue ultra-long-term special treasury bonds and local government special-purpose bonds more quickly, aiming to provide a fiscal boost to the economy. Both types of bonds are typically used to fund government-led infrastructure projects.
The leaders also called for a "thorough" plan to address local government debt, indicating that Beijing has asked heavily indebted provinces to reduce borrowing and curb infrastructure investment. Economists believe these measures will limit regional governments' ability to stimulate their economies, requiring more direct fiscal support from the central government.
The Politburo's announcement follows new signs of weakness in China's economy in March, with exports, industrial production, and consumption all slowing sharply. While an official gauge released on Tuesday showed that China's factory activity expanded for a second consecutive month in April, it did so at a slower pace, suggesting a potential slowdown in the vast manufacturing sector.
China's prolonged real estate crisis continues unabated, with new home sales from the country's largest real estate developers continuing to decline steeply in April. Economists believe policymakers are focusing on the supply side of the property market rather than the demand side, which would require an expectation of rising home prices—a sentiment that currently does not exist.
Officials have also indicated a desire to shift the market towards state-provided affordable housing, suggesting a continued emphasis on state intervention in the property sector.