PRC Macro

China’s New Scheme for Self-Sufficiency

Conference call with Song Gao and William Hess

Song Gao & William Hess gave an overview of policy signals from the Politburo Standing Committee’s recent Q2 announcements. William’s view is that the inclusion of the phrase on targeted policy points towards a more hawkish signal than that of Q1. That performance of Q1 significantly exceeding expectations leads him to believe the CCP have a rationale for tightening monetary policy. As for the stimulus in the second half of the year, the recent announcements from the Politburo Standing Committee are consistent with William’s predictions of creating demand by channeling resources to SMEs manufacturing, while tightening the property market. Monetary policy is going to marginally tighten while fiscal policy is going to accelerate and strengthen.
Song Gao spoke on the two key themes he believes are likely to be discussed when the Senate Committee of the Communist Party hold its fifth plenum this October. The Senate Committee will release its 14th five-year plan and will also discuss its 2035 vision. The main theme circulating internally within the communist party since COVID is that of self-sufficiency and national security. These two themes are likely to dominate the upcoming 14th five-year plan. In Song’s view this is going to drive a complete change in global commodity trading and maybe even have a substantial impact on global currency and currency zones. Song outlined President Xi’s 2035 vision to complete the modernisation of the Chinese economy and society. The aim is to double real income per capita for Chinese households to roughly $20,000 as the economy grows 4.5-4.6% over the next 15 years. The Committee talked about how macro management policy should respond or better prepare for the transition of business cycles. Song believes that as China is currently in a passive destocking cycle, the Chinese government is looking towards the next business cycle. He believes that China will look to transition into restocking within the next 5-6 months. Examining the difference in the Q1 and Q2 Politburo announcements Song remarked on the removal of the term “we have to keep adequate liquidity in the interbank market”. This is confirmation that monetary policy will take a backseat in the second half of 2020 and that there will be no more aggressive monetary easing in the second half of the year. Song pointed to the change in wording, from “Lower loan rates” to “Lower the comprehensive borrowing cost for the real sector” from Q1 to Q2 as the Politburo’s focus on key infrastructure products and a consumer spending upgrade. Song takes this to mean infrastructure and stimulus for consumer durables like home appliances being the top priority for policy makers in the second half of this year. He foresees a major debt restructure and recapitalisation for SOEs and banks, which require financing from equity markets linking Chinese household savings and, of course, institutional investors.