How Politburo’s Proposals to Support China’s Economy Might Play Out

China’s Politburo addressed the nation’s current economic challenges in a recent meeting, attributing them to factors such as changes in the external environment, insufficient effective domestic demand, and risks in key areas [para. 1]. The macro policy for the second half of the year aims to maintain momentum and intensify efforts in facing these issues [para. 2].

The report highlighted the slowing GDP growth, which fell to 4.7% year-on-year in the second quarter, missing the annual target of 5%. To boost the economy, the Politburo proposed a package of incremental measures [para. 3]. The potential escalation of the China-U.S. trade conflict, particularly after a new U.S. president takes office, was identified as the greatest risk for the second half of the year. Increased tariffs and barriers could harm China’s exports, necessitating stronger reliance on domestic demand and advanced preparations for compensatory measures [para. 5].

In terms of fiscal policy, the meeting emphasized the deployment of ultra-long special treasury bonds to fund large-scale equipment upgrades and replace obsolete durable consumer goods, thereby stimulating downstream manufacturing demand and enhancing manufacturing investment resilience [para. 6]. Monetary policy adjustments were also discussed, with the central bank already cutting multiple policy interest rates. Further reserve requirement ratio cuts and possible additional interest rate cuts are anticipated [para. 7].

The Politburo underscored the importance of reform and opening-up, highlighting that ready, tangible, and attainable reform measures should be implemented promptly. This approach aims to instill market confidence through a series of well-prepared actions [para. 8]. Despite lower foreign direct investment in the first half of the year, the Politburo stressed stabilizing and increasing foreign investment by removing restrictions in the manufacturing sector and introducing new pilot measures to open up the services sector [para. 9].

Risk prevention, particularly in the real estate and local government debt sectors, remains a critical policy concern. Although support policies for the real estate sector were announced in May, they did not lead to significant or sustained improvements in property sales, signaling a need for stronger, timely inventory reduction policies to boost market confidence at a lower cost [para. 11].

The meeting also placed a strong emphasis on improving livelihoods and boosting consumption to enhance domestic demand, particularly through consumer spending on services. It was noted that the economic performance in the latter half of the year would largely depend on this area [para. 13]. The development of startups, especially those that qualify for unicorn and “gazelle” status, was prioritized. Gazelles are startups valued at over $500 million that may become unicorns, which have valuations of at least $1 billion. Supportive policies for these companies are expected to aid them in going public or securing financing, giving China a strategic edge in global competition [para. 15].

Finally, the issue of overcapacity, particularly in the solar and auto industries, was addressed. Rapid expansion in manufacturing investment since 2021 has led to overcapacity and price competition, which hampers healthy industry development. The Politburo proposed preventing “vicious competition” and creating better channels for removing outdated and inefficient capacity to help these industries stabilize and improve profitability [para. 18].

Overall, the meeting reflected a comprehensive approach to addressing China's economic challenges through targeted fiscal and monetary policies, reforms, and measures to boost domestic demand and stabilize key sectors [para. 24].