China Commits to ‘Essential Spending’ to Achieve Economic Growth Target, Says Reuters

By Ellen Zhang and Marius Zaharia

BEIJING/HONG KONG – On Thursday, Chinese leaders committed to implementing "necessary fiscal spending" in order to achieve this year’s economic growth target of approximately 5%. This acknowledgment of emerging challenges has heightened market expectations for additional stimulus beyond the measures reported earlier this week.

The comments were part of an official summary from a monthly meeting of senior Communist Party officials, known as the Politburo. Typically, the September meeting does not focus on macroeconomic issues, indicating rising concerns over slowing economic momentum.

China, the world’s second-largest economy, is grappling with significant deflationary pressures stemming from a sharp downturn in the property market and weakened consumer confidence. These issues have highlighted the country’s heavy dependence on exports amid increasingly strained global trade relations.

Recent economic data has consistently underperformed expectations, raising alarms among economists that the growth target may be at risk and that a potential longer-term structural slowdown could be underway.

State media reported that "new situations and problems" necessitate a sense of "responsibility and urgency," reflecting sentiments from the Politburo meeting.

Additionally, on Tuesday, China’s central bank announced its most aggressive monetary easing since the pandemic, including cuts to a variety of interest rates and a substantial liquidity infusion of 1 trillion yuan into the financial system.

Reports indicate that Beijing is contemplating injecting up to 1 trillion yuan into its largest state banks to enhance their capabilities to support the struggling economy, primarily through the issuance of new special sovereign bonds.

Following the Politburo’s announcement, Chinese real estate stocks surged over 8%, while stocks in Hong Kong climbed 9%, leading to broader market gains. The yuan and Chinese bond yields also experienced increases.

The Politburo emphasized the need to "promote the stabilization of the real estate market," expand financing options for selected housing projects, and revitalize unused land. The officials indicated they would address public concerns by adjusting home purchase restrictions, lowering existing mortgage rates, and improving land, fiscal, tax, and financial policies promptly to advance a new model of property development.

Bruce Pang, chief economist for China at Jones Lang LaSalle, noted that the Politburo’s approval of further stimulus reflects a strategic shift in macro policy, moving from piecemeal approaches to a more coordinated and comprehensive package.

Pang expressed optimism that an increase in government spending could restore business confidence, boost market sentiment, and stimulate economic activity, allowing China to align with its potential growth trajectory.

The Politburo pledged to effectively utilize ultra-long special sovereign bonds and local government special bonds to bolster government investment. Additionally, they committed to increasing income for low- and middle-income groups, fostering consumption, and enhancing childbirth support measures.

On Wednesday, the finance and civil affairs ministries announced plans to provide a one-time allowance to disadvantaged individuals ahead of the national holiday in early October. They underscored their commitment to prioritize employment and promote wage growth as a response to significant pay cuts in certain sectors and rising youth unemployment.

Analyst Julian Evans-Pritchard from Capital Economics remarked that falling inflation and private sector de-leveraging suggest that rate cuts alone won’t substantially increase domestic demand. He emphasized that more significant fiscal support would be necessary, a sentiment echoed in the Politburo’s communications.

As highlighted by central bank Governor Pan Gongsheng on Tuesday, top policymakers reaffirmed intentions to reduce the reserve requirement ratio and implement "forceful" interest rate cuts.

While no specific measures were detailed at the Politburo meeting, officials reiterated their commitment to introducing legislation to support the private sector, although a timeline or content for this legislation has yet to be disclosed.