Politburo to shed light on Xi Jinping's strategy for trade war stimulus

Chinese leaders are likely to signal a resolve to defend growth at a key economic policy meeting, analysts say, after Beijing defied US President Donald Trump’s pressure to jump into tariff negotiations. 

The Politburo, the ruling Communist Party’s 24-member decision-making body led by President Xi Jinping, is expected to assess the economy’s outlook at a gathering by the end of this month. Many economists anticipate officials will speed up the implementation of support measures announced at a parliamentary session in March, with potential additional aid to bolster jobs, consumption and the property sector.

 

“The external pressure could stay long and broad, and as such, they would try to keep powder dry for as long as they can,” Citigroup Inc. economists including Xiangrong Yu wrote in a note this week. “They are getting incremental measures prepared to hold the bottom line of employment and economic stability.”

 

Chinese property stocks rose on increased speculation that more supportive policies will come out of the upcoming Politburo meeting. A Bloomberg Intelligence gauge of Chinese developers gained as much as 5.5 per cent while the benchmark CSI 300 index increased 0.5 per cent.

 

The Chinese economy had a strong start to the year largely on the back of export front-loading and government subsidies for home appliances and business equipment. But growth is expected to slow sharply from the second quarter as prohibitive US tariffs — at 145 per cent on most Chinese goods — kick in and the consumption program loses steam. 

 

There’s no sign that negotiations between the two countries to de-escalate tensions will take place any time soon. While Trump said his administration was talking with China on trade, Chinese officials denied the existence of dialogues on a deal and demanded the US revoke all unilateral tariffs.

 

A slowdown would give Beijing reason to add stimulus to achieve an ambitious growth target of around 5 per cent this year. Officials have so far been focused on implementing this year’s fiscal budget that billed a record-high deficit. They have repeatedly promised to increase stimulus when necessary, as rounds of tit-for-tat tariff hikes brought trade barriers to levels far above what economists say will decimate bilateral trade.

What Bloomberg Economics Says...

“The meeting may shed more light on how policymakers are planning to pull out the stops to bolster the economy. We expect the readout to stress the need to speed up execution of the planned stimulus while hinting at scaling up support if necessary.”

 

— Chang Shu and Eric Zhu

The Chinese central bank’s head this week reiterated that the government will maintain a “moderately loose” monetary policy to support growth. Governor Pan Gongsheng also said there are no winners in a trade war and major economies should promote cooperation, according to a statement from the central bank.

 

Investors are keenly looking for clues to when additional stimulus will be delivered and what sectors will receive support. But some economists have downplayed expectations on specific measures as the meeting typically only sets the general direction of policies. 

 

Key signals to watch include any mention of the growth target, the overall policy tone regarding urgency, and focus areas like the property market, Macquarie Group economists including Larry Hu wrote in a Thursday note. 

Potential upcoming measures, according to the Citi economists, could include supporting asset prices, calibrated currency depreciation, targeted monetary easing, and supply-side reforms to address excess capacity. Efforts to shore up the property market may include more project and land buybacks and tax incentives for home purchases, they said, adding the Finance Ministry could have allocated 2 trillion yuan ($275 billion) in fiscal funds for buyback this year.

 

They also flagged the possibility of 1.5 trillion yuan in extra fiscal stimulus that could potentially gain swift approval from the top legislature later this month.

 

Economists in a Bloomberg survey forecast the People’s Bank of China to reduce the amount of cash banks must keep in reserve by 50 basis points this quarter and another cut of the same magnitude between October and December. The action would unleash more long-term liquidity in the banking system, paving the way for the issuance of more government bonds that banks are a major buyer of.

 

They also project the central bank to lower the 7-day reverse repurchase rate, a key policy rate, to 1.3 per cent by the end of June from 1.5 per cent currently.