China’s top leaders signaled more support to economy as recovery is “not solid and uneven”

China’s top policymakers signaled more targeted support to the economy to cushion growth in the face of uneven domestic recovery and more complex global environment.

A meeting of the top decision-making body Politburo on Friday, chaired by President Xi Jinping, said the economy continues to recover from the Covid-19 pandemic but noted that “global environment becomes more complex and domestic economic recovery is not solid and uneven,” according to the official Xinhua News Agency.

The language compares to “China’s economic recovery reached significant achievements and marks a good start in economic operations” in the previous Politburo meeting at the end of April.

Economists noted that Friday’s Politburo statement omitted the phrase that there’ll be “no sharp turn” in policy, which many believe indicates the end of the tightening stance.

The meeting pledged to maintain continuity, stability and sustainability of macro policies to maintain the economic operations with a reasonable range.

The top leadership said a proactive fiscal policy should have a greater effect on boosting the economy, while a prudent monetary policy should maintain ample liquidity to support the recovery of smaller businesses as well as industries under pressure.

The Politburo statement came before data showed factory production came under pressure in July. The official manufacturing purchasing managers’ index (PMI) fell to a weaker-than-expected 50.4, while the Caixin PMI, which mainly tracks smaller private companies, fell to 50.3 from 51.3 in June.

Against the backdrop of marginal adjustment to the policies (cut in banks’ reserve requirement ratio), top leaders omitted the expression of “there will be no sharp turn in policy” and they didn’t only focus on 2021 but put more emphasis on downward economic pressure next year, stressing that the authority should make good cross-cyclical arrangements, according to a note of the China International Capital Corporation (CICC).

It indicates that, in the short term, policy may not be eased significantly and the market should not expect too much monetary easing, but in the medium term, the authority may step up policy support, according to the note.

The use of “cross-cyclical adjustments” and coordinating policies this year and next year contrasts with the “counter-cyclical” policies used in the previous meeting, signaling authorities will avoid using up the easing room in the remainder of 2021 so that it can still handle risks next year, according to a note from Guotai Junan Securities.

“The biggest difference of cross-cyclical adjustment from a counter-cyclical one is that both the tightening and easing of policies will be more moderate in magnitude,” Guotai Junan said.

Chinese economy has largely recovered from disruptions caused by the Covid-19 pandemic, although growth is set to slow for the rest of the year. To bolster a slowing economy, the People’s Bank of China in mid-July cut the reserve requirement ratio for banks, releasing around 1 trillion yuan in long-term liquidity.

“The policy efforts to support the economy will likely step up,” Citigroup’s economists said in a note on Monday. “In particular, we see more targeted measures underway to help small and medium-sized enterprises, as indicated by the mid-year Politburo meeting.”

The recent coronavirus outbreak in the eastern city of Nanjing has spread to other parts of the country, adding further risks to consumption and production as cities like Beijing tighten transportation restrictions. Fourteen provinces have been affected so far with 328 cases nationwide this month, almost equaling the amount of cases reported in the previous five months combined, according to the National Health Commission.

The central bank could cut the RRR again after a surprise reduction earlier this month, UBS Group AG economists led by Wang Tao said in a note Saturday, although a decline in interest rates are unlikely. Credit growth in the second half will probably stabilize, they said.

At a separate meeting to discuss second-half priorities on Friday, the PBOC said it will guide actual lending interest rates to a stable and lower level through reforming the rates market.

Zhang Liqing, chief economist of PwC China and director of the Central University of Finance and Economics’ Center for International Finance Studies, said that China’s fiscal policy will be proactive over the remainder of the year to ensure timely implementation of the debt issuance plan, while more targeted monetary supports will be provided to smaller businesses and stressed industries.

“The Chinese central bank may further cut the reserve requirement ratio in the second half of the year if liquidity conditions become tight due to reasons including any potential capital outflows,” he said.

Considering that local government bond sales were slow in the first half of the year, the pace is expected to pick up in the second half to provide more fiscal support to the economic growth, said Wang Han, chief economist at Industrial Securities.

However, the top leaders’ wording was more moderate than previous meeting, indicating that the government is not too eager to step up stimulus, it said.