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What to Watch for in China's Politburo Meeting, From Property Crisis to Covid Zero

·5 min read

(Bloomberg) -- China’s leaders will have the chance to revisit this year’s ambitious official economic growth target during a meeting of key policy makers expected this week.

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The Politburo -- the country’s top decision-making body -- usually holds its July meeting at the end of the month, when its 25 members assess the economy’s performance during the first half and set priorities for the remainder of the year.

The upcoming meeting is of heightened significance as it offers the leadership an opportunity to recalibrate their strategy and expectations after Covid outbreaks and lockdowns this spring almost pushed the economy into contraction.

Here’s what to look for from the meeting.

Growth Target

Analysts will be looking closely at whether the government modifies or downplays its full-year growth target of “around 5.5%,” which was announced in March before Covid and the lockdowns to contain it began wreaking havoc on the economy. Economists expect China will miss that goal by a wide margin.

“The most important development at this meeting will likely be some form of official walk-back” of the target, wrote analysts at Beijing-based consultancy Trivium China. “This will be a huge deal -- in the past several decades China has never officially missed or revised the growth target in real time.”

There are some signs that authorities could tweak the rhetoric around that goal or downplay its significance, rather than change it outright. Shifting the emphasis to employment instead of headline growth is one option, Citigroup Inc. economists including Yu Xiangrong wrote in a note.

Premier Li Keqiang signaled recently that the government will be flexible on the official target, as long as employment and prices are stable. And Li isn’t the only one to tone down language concerning the government’s goals.

Last month, President Xi Jinping vowed to stick with the country’s Covid Zero policy, and said authorities “would rather temporarily affect a little economic development” than risk the lives and health of people.

Another tactic could be to make “around 5.5%” a goal for the second half of the year, rather than all of 2022, the Citi economists wrote. After expanding only 2.5% in the first half of the year, GDP growth would need to accelerate to over 7% for the rest of the year to come close to the current target, other economists have estimated.

Policy Support

Additional policy support may not be on the table -- at least not yet.

Beijing has repeatedly emphasized that its strategy is not to “flood” the economy with massive amounts of stimulus, and it’s unlikely that stance will change.

There is still a lot of room to better implement existing polices, Premier Li said recently, referring to the package of measures introduced in May to support businesses and stimulate demand. That could mean policy makers want more time to judge how effective that support is before rolling out any new initiatives.

Similarly, the central bank has maintained a cautious stance toward easing, saying that “liquidity has stayed slightly more than reasonably ample.”

The Politburo, though, could hint at an increase in fiscal support. One option the Ministry of Finance is considering would be to allow local governments to sell another 1.5 trillion yuan ($222 billion) of special bonds in the second half of this year, Bloomberg reported earlier this month. That would add to the record sale of local government bonds in the first half of the year and could further boost infrastructure spending.

Property Rescue

The year-long slump in the property market is likely to be a focus for the Politburo, with the recent spate of people not paying their mortgages threatening to drag sales down even further and damage banks and builders.

The Politburo is likely to reiterate that “housing is for living, not for speculation,” a longstanding government principle aimed at curbing speculative buying.

The market will closely watch to see whether phrases like that are kept in the statement, said Liu Peiqian, chief China economist at NatWest Group Plc. She added that “subtle changes in wording could provide clues on any potential breakthroughs” in policies for the rest of the year.

With sales and prices falling for about a year and a number of companies defaulting on their debts and slowing or stopping building, the top leadership may also issue guidance on supporting demand in the housing market and propping up developers.

“Regulators and local governments may be asked to facilitate the financing of unfinished projects or the takeover of unfinished projects” by state-owned developers, Standard Chartered Plc. economists including Ding Shuang wrote in a note. Such measures could “boost confidence in the housing market and prevent systemic risks” ahead of the Communist Party’s congress later this year, at which Xi is expected to be confirmed as leader for another five years.

Covid Zero

China’s Covid Zero approach to containing the virus is expected to continue for now, though the Politburo may shed light on how the government intends to optimize its strategy to minimize economic disruption.

Any adjustment to the wording used to talk about Covid Zero -- including anything that lays the groundwork for an eventual exit from the strategy -- would be significant, as the boom-and-bust cycle of activity in China has been tied to outbreaks and the government’s response.

The meeting “would show the latest thoughts from policy makers on how to strike a balance between Zero-Covid and economic recovery,” Larry Hu, head of China economics at Macquarie Group Ltd. wrote in a note. “At this moment, the task is to further loosen Zero-Covid so that it could become less and less disruptive to the economy.”

China has made some changes to the Covid Zero policy by shortening quarantine times for inbound travelers to less than two weeks and reducing the number of times people must be tested. However, there’s no sign of a fundamental shift away from the policy of attempting to stop infections by quarantining all cases and locking down whole cities.

With the latest variants of the virus even more infectious, that means that it’s likely the rest of the year will see a continuation of the current start-stop situation, where restrictions are reduced to boost economic activity, followed by a likely upswing in infections and then renewed restrictions.

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