China’s July Politburo meeting is always a big one, as the leadership takes stock of the economy and signals policy adjustments for the second half of the year.
In this year’s July meeting, officials clearly signaled that more fiscal support is on the way, but only in modest amounts.
Note: This is our second short format episode – tighter, quick-turnaround reactions to the news as it breaks, alongside our regular weekly deep dives.
Let us know what you think about the new format!
On this episode, Andrew Polk sits down with Dinny McMahon (Trivium’s Head of Markets Research) to unpack:
How this July Politburo readout offered surprisingly clear language that more fiscal support is coming, and in what form
What “fiscal-financial cooperation” means in practice, and why it’s really code for interest rate subsidies
Why Beijing is likely to lean on accelerated special-purpose bond issuance – and a probable Q4 top-up, following last year’s playbook – rather than broad interest rate cuts
Why none of this changes the underlying story: Beijing is deliberately riding out a long, painful real estate adjustment – and this is just a slight pick-me-up
Transcript
Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network.
I’m your host, Trivium Co-Founder, Andrew Polk, and today we are trying our second go at our quick turnaround, shorter format pods where we grab one of our analysts and get their unfiltered reaction to something that’s happening in the news.
Today, I’m talking to our Head of Markets Research, Dinny McMahon, about the July Politburo meeting that just took place overnight. So, we are reporting this on July 30th in the afternoon in the U.S. The Politburo meeting happened July 30th in China. The readout was released at the end of the day. So, we’re going to get into that quickly. But first, Danny, how are you doing, man?
Dinny McMahon: Good, mate. I’m all the better for seeing you.
Andrew: Yeah. Well, I appreciate you jumping on for this. We are going to do something that is totally different and skip the vibe check today because Dinny and I are going to do this pod and then immediately record our longer form weekly pod. So, I’ll get his vibe check then. So, we’re going to skip it for now. So, anyway, first of all, tell the people why the July Politburo is particularly important.
Dinny: All right. So, you know, the Politburo meets monthly, but about three times a year when it gets together, it’s all about the economy. And July is one of those meetings. And in some ways, it’s particularly important because we’ve just got the GDP data for the first half of the year. They’re kind of, you know, taking stock of what needs to be done in the back half of the year. And this is kind of their vibe check. You know, what does the Politburo make of the economy?
And what does it think it needs to be done from here on in? So, that’s why July is always… you know, why we’re always particularly interested in the July meeting.
Andrew: Yeah, well, it feels like July is always the stakes are high for the July meeting, almost always, but particularly this time. And why would you say the stakes were particularly high this time, or at least the expectations were raised?
Dinny: Yeah, because the economy is really in the doldrums. I mean, that’s a bit of an exaggeration because the exports sector is still going gangbusters, particularly anything related to energy or AI. But domestic demand is weak. It’s been chronically weak. I think it’s fair to call it chronically weak at this point. The last few weeks, the last few months have been particularly bad. But more broadly, I mean, it’s been three years at this point. It’s been really weak.
So, there’s been a sense of like, okay, given how poor the data has been for the last few months, what is Beijing going to do about it? And so, all eyes were on this meeting just to get a sense of, is Beijing going to roll out some sort of stimulus? And if it is, can we gauge how meaningful it’s going to be?
Andrew: Great. Well, tell us what we got. I think people were looking in particular for more economic support. I think at this stage, everybody realizes the days of big bang stimulus are over. So, that ship has sailed. But businesses, investors, everybody was hoping for a little bit more support, what do we end up getting in terms of, I would say, concrete policy? This isn’t really the place for concrete policy, but what specific sort of formulations do the policymakers use that would make us think they might be tinkering on various policy areas?
Dinny: Yeah, so the Politburo readouts can often be pretty cryptic. I mean, as you said, there are never specific policy measures. It always takes a few weeks or even a few months before the actual government agencies respond to what the Politburo has decided and we get sort of substantive specific policy measures. But even beyond that, sometimes these readouts can be incredibly cryptic. I mean, trying to read between the lines, trying to read the tea leaves of exactly what they mean can be quite the challenge. But this one’s a bit different. I mean, it’s pretty specific. From the moment it starts talking about the economy and fiscal issues, it’s pretty clear that it intends to roll out more support.
So, it has all the key words that you expect from a government that is about to provide additional fiscal support for the economy.
They said, we’re going to pursue a more active fiscal policy.
We will fully leverage the effectiveness of existing policies.
We will introduce incremental policies.
We will increase counter-cyclical adjustments.
We will intensify efforts to expand domestic demand.
It’s increased, intensified, fully leveraged. They even got a bit more specific sort of saying they’ll accelerate the pace of fiscal spending and the utilization of bonds. And they would promote domestic demand by coordinating fiscal and financial policies, and that they will use and adjust monetary policy tools as appropriate.
So, you put all that together and there is no ambiguity there whatsoever. There’s a sense that clearly more needs to be done to support the economy and specifically domestic demand. And that support is going to be fiscal, and probably around the edges is going to be a little bit monetary as well. So, all told, for what can often be a very cryptic meeting, a very cryptic readout, I think the signals here are incredibly clear.
Andrew: Well, you also had some thoughts specifically on monetary tools that they will use. Go through those. I mean, you’re not basically all front-running a little bit here. You’re not expecting interest rate cuts outright, but more structural tools. Talk to us about those. And then you also pointed out this idea of fiscal financial cooperation. You have a pretty good idea of what you think that means. Talk us through that as well.
Dinny: Yeah. So monetary policy, I don’t think we’re talking interest rate cuts or even reserve requirement cuts. I mean, in the past, when the government has signaled or is about to line up an interest rate cut, it will say something like, “We will cut interest rates in a timely manner.” So, if you’re kind of talking more abstractly about monetary policy, I think we’re probably looking more about what Beijing calls structural tools or relending quotas. And this is kind of the approach the PBOC has favored in recent years.
It’s about providing a dedicated quota of cheap funding to some aspect of the economy that they deem to be strategically important. So, they’ll provide a relending quota to innovative companies or to companies that are building aged care homes or something like that. They have had no qualms about upping and re-upping the quotas for those sorts of structural tools. So, I think it’s fair to say we’ll perhaps see more of that rather than kind of cut interest rates or reserve requirement ratios. And then on the cooperation of the sort of the fiscal and the financial world, I think that is really code for interest rate subsidies.
Now, this is something again that they’ve leaned into a fair bit over the last 18 months, whereby the Ministry of Finance provides fiscal support for the central bank to effectively… Actually, I’m not quite sure the degree in which the central bank is involved, but it’s a way to bring down borrowing costs for certain firms by subsidizing their interest payment. So, it’s not explicitly reducing the interest they pay. It’s just the Ministry of Finance stepping in and helping subsidize those interest payments. So, yeah, I think we might see a little bit more of that as well.
Andrew: Okay. Well, what about on the fiscal side? There was some specific language around, let me pull this up, fully leveraging the effectiveness of existing policies when it comes to fiscal policy, introducing incremental policies. So, effectively saying we’re going to ramp things up at least to a degree. Increasing counter-cyclical adjustments and intensifying efforts to expand domestic demand and optimize supply. Final one, accelerate the pace of fiscal spending and the utilization of bonds. That’s the main one I was actually going for. What does that all mean?
Dinny: Yeah, it’s pretty bland language, mate. I can see you, after a 17-mile run, it’s not doing much to get you awake.
Andrew: Yeah.
Dinny: Yeah, I mean, what we think is here, so anyone who’s been listening to the podcast knows we think Beijing is trying to de-leverage, right? So, it is trying to take advantage of this particular moment in time where exports are strong, inflation is rising, credit demand is weak to sort of bring down China’s debt to GDP ratio, which has just been rising so aggressively over the last four years. So, we think Beijing, when it comes to providing some sort of support for the economy, has that at the back of its mind. It has no intention of ramping up, borrowing to provide fiscal support, certainly not any meaningful way.
So, what we think is really going to happen is kind of a replay of what we certainly saw last year, I think we saw it the year before that as well, is when authorities start worrying about the state of the economy, they get local governments to accelerate their issuance of special purpose bonds. Okay, so those are the tools. They are the tool which traditionally has been most responsible for funding infrastructure investment. Now, so firstly, we think they’ll accelerate that. And second, we think the focus of those funds will concentrate far more on infrastructure.
So, as I said, this is the tool for funding infrastructure. But over the last few years, these special purpose bonds have turned into a bit of a Swiss army knife. Every priority Beijing now has that requires some sort of funding, they go, “Oh, okay, we’ll get the special purpose bonds to fund it.” So, these days, they’re used for land buybacks to kind of help support developers and local government finance vehicles. They’re used to sort of pay down hidden debt. So, this quota was used for a whole bunch of other stuff other than infrastructure these days. So, what we expect in the second half of the year is firstly, issuance will accelerate, which, you know, it got off to a very slow start.
So, they’ve got a bit of runway. Certainly, we saw it accelerate in June. So, we think that that pace will remain elevated. And the second thing, we think that the funds raised from these bonds will focus more on infrastructure, less will go back into land buybacks and to paying down hidden debt. So, that’s the first step. It will take what they’ve already promised, that sort of local government debt, central government bonds, whatever, and they’ll accelerate their deployment.
And then when we get to the fourth quarter of this year, Beijing will come out and they’ll make an additional allocation of debt, borrowing that some level of government, whether it be the central government itself or the local governments, they’ll be allowed to borrow more and use that to sort of prop up the economy. We saw that last year. I think it was in October, local governments got an additional allocation of 500 billion worth of special purpose bonds on top of the original quota of 4.4 trillion. So that extra 500 billion, 200 went into infrastructure. The remaining 300 went to support local government budgets and dealing with some hidden debt.
So, we think given Beijing’s focus on deleveraging, we think it’s fair that they’ll do the same thing probably on a similar scale. An extra $500 billion worth of borrowing in the fourth quarter to kind of keep investment elevated and tide the economy through to the end of the year when the funding cycle will start again.
Andrew: All right, man. So that’s a good wrap up of the main themes that we saw in there. But let’s take it home. What do you think this means going forward overall for the economy? I think you explained what it means for policy, but what does that mean for the economy? More of the same or what?
Dinny: I think the short answer is ‘not much’ in the sense that this isn’t the sort of silver bullet that will revive domestic demand. I think Beijing has now got to a point where it realizes that it’s not interested in throwing good money after bad. It’s not interested in ramping up its consumer trading program because it realizes stuff like that only works as a band-aid to tide the economy over until demand recovers of its own volition. It doesn’t want to sort of massively ramp up infrastructure.
In fact, the focus of infrastructure investment under the next five-year plan, what they’re calling the six networks, is a lot more focused on pursuing infrastructure that delivers productivity gains as opposed to infrastructure as sort of ballast for economic growth. So, I think there’s a sense of like, look, if we’re going to borrow money and we’re going to deploy it in the economy, we want to get bang for our buck. We just don’t want to be sort of borrowing more and more just to sort of reach arbitrary targets.
So, I think what this means is we’ll probably see more robust domestic demand in the second half of the year. There’ll be more money going into infrastructure. I think there’ll be more central government spending as well. I mean, what we saw in the first half of the year is that tax revenue was rising, which makes for a nice change from the last few years where it’s been really weak. But government expenditure has been pretty weak. In some months, it’s actually been contracting. So, given that, we think maybe the government’s been sort of keeping its power to dry.
It might have some sort of tax revenue at its back pocket that it can pump into the economy in the second half of the year. We also saw second quarter was particularly weak because state grid, its investment really slowed down really aggressively. If that picks up again in the second half of the year, then we’ll have an extra shot in the arm for investment. So, I think there’s enough here to suggest, okay, the second half will be more robust for the domestic economy. The second half will be more robust than the first half.
But this is not the sort of stimulus package that’s going to get the economy out of the woods, that’s going to sort of radically change or radically fix this chronically weak domestic demand we’ve seen for years now. All those underlying forces are still going to stay in effect. This is just a little bit of a pick-me-up that’ll help the economy get through to the end of the year and help Beijing realize its GDP target of 4.5 to 5% growth.
Andrew: Yeah. I’ll just end on two quick things from my perspective. One is, I always say, you know, we watch these Politburo meetings to understand policymakers’ reaction function, and everyone’s talking about how terrible the Chinese economy is, and it’s true. Well, you know, it’s bifurcated, right? It’s the K-shaped economy that Joe P. has written about, and others have written about. Export’s doing great, high-tech part of the economy, anything linked to AI doing great. Everything else, doing terrible, right? Particularly consumption, the overall domestic demand picture. Part of that domestic demand picture is also weak infrastructure investment.
They’ll try to adjust that piece. But policymakers are not panicking. Maybe this is a bad decision, but they are riding it out. I don’t know why that tells us. To me, it tells us maybe things aren’t as bad as we think from the outside. They obviously aren’t panicking, at least they have not deemed the level of domestic weakness to be bad enough to warrant more aggressive action. That’s something we can say. Now, why that is, I think, is because people forget that we’re still in the process of this massive real estate realignment, and the economy is weaning itself off of real estate. That’s what officials want. It’s painful.
It’s going to take a long time. And they’ve just decided we are going to ride this out. And the real estate adjustment is a lot of what’s driving, not solely, but a lot of what’s driving weak consumption. And so, I think they’re just saying it’s pretty simple diagnosis from their point of view. Like, we’re realigning the property market. That means domestic demand is going to be weak for a while. Doesn’t mean they don’t wish it was stronger and they need to tinker here or there, but they’re riding this puppy out. So, I think what you see is largely what you get. Although I think you’re right. We probably will see a little bit of a fill up to the economy there at the end. So, that’s my two cents. Tell me why I’m wrong or are you okay with that assessment?
Dinny: No, no, that sounds about right to me, mate.
Andrew: And then just finally, quickly for people, there was one other element of the Politburo meeting. I won’t ask Dinny to weigh in on this, but it did also announce the Central Committee’s 5th Plenum will be held in October. There’s an annual plenum for the Party. Sometimes there’s more than one they have to have, I believe, are Party rules at least one each year. But the 5th Plenum is important because it’s going to set the stage for the leadership turnover that will take place in 2027, which is only about nine months away, I believe, because a lot of that will happen in March.
And then there will be further additional moves at the actual, what is it, 21st party Congress in the fall. And so, this plenum is a lot about setting the stage for that. And it is all about internal party governance, improving the party, further rooting out corruption, which again, you’d think would make sense to do ahead of a big turnover at the top leadership. So, we’ll leave any further analysis on that to the nerds in our politics practice at Trivium, but wanted to at least flag that for people who may be interested. All right, that’s going to do it. Dinny, thanks for this quick React pod. This was super helpful. Hope people found it useful. Thanks, man.
Dinny: Cheers, mate.
Andrew: All right. Bye, everybody.
