The agenda-setting meeting comes amid a backdrop of lackluster economic growth and a sequential decline in activity, weak exports, and persistent pain for the property sector.
Markets don’t appear to be pricing in a “big bang” fiscal response. We don’t think this is likely, either. At the same time, we’ve seen a noticeable tone shift in Beijing in the run-up to the Politburo meeting on supporting the private sector, and media reports suggest some easing of mortgage restrictions may be in the works. Bloomberg has also reported that Chinese regulators met with global venture capital and private equity firms on Friday in the government’s latest bid to boost private sector confidence.
We don’t think investor sentiment will shift until we get concrete action. But what might reach this threshold? In our view, material action to support property sales in high-tier cities, steps to ease pressure on local government financing vehicle (LGFV) liabilities, and support to boost consumption are needed.
Going into the Politburo meeting, our base case remains for the policy tone to stay broadly supportive, with another potential 1–2 cuts to the reserve requirement ratio (25–50bps each) and 20bps in cuts to the medium-term lending facility (10bps each in 3Q and 4Q). As the summit approaches, we briefly describe our China asset class views below and what outcomes might act as a surprise or catalyst for each:
Chinese equities: We suggest a barbell strategy favoring recovery and consumption plays, including consumer and internet names, as well as defensive high-yielding sectors that could better navigate through market volatility.
What to watch: Light institutional positioning and cheap valuations suggest investor skepticism on July policy outcomes, but also asymmetric risk to the upside if we get a positive surprise. Effective housing measures and consumption stimulus with specific funding support could create the most bullishness, in our view. Conversely, if we don’t see any policy changes in these two areas, sentiment could remain subdued.
Chinese fixed income: China investment grade credit has been resilient in recent months, thanks to its stable credit profile and positive technicals due to a lack of supply. We think the key driver for its performance in the medium term will be the direction of US interest rates. China high yield sold off recently on weaker-than-expected sales recovery and continuous negative headlines on the property sector.
What to watch: We expect property sector measures to be targeted, benefiting primarily state-owned enterprises and more resilient private developers with strong footprints in high-tier cities. Distressed developers, however, will continue to struggle with weak sales, tight liquidity, and difficult refinancing, in our view.
Chinese yuan (CNY): The USDCNY exchange rate has eased off its recent highs, with coordinated policymaker efforts signaling limited tolerance for more yuan depreciation. Although sluggish Chinese activity data and weak exports remain a near-term drag on the CNY, our medium-term view for a lower USDCNY remains intact, with the pair trading toward 6.9 by end-2023.
What to watch: Strong fiscal measures to support the housing market and boost consumption could inject new confidence in the yuan. Conversely, if the policy mix disappoints, we could see upside pressure build on USDCNY, setting up another near-term test of the 7.3 level.
We remain most preferred on emerging market equities globally and on Chinese equities within our Asia strategy. For a full list of potential policy catalysts at the Politburo meeting, please see our recent blog, “China: All eyes on the Politburo meeting” (published 21 July 2023).
Main contributors - Solita Marcelli, Mark Haefele, Kathy Li, Yifan Hu, Eva Lee, Vincent Heaney
Original report - What we expect from China's Politburo meeting, 24 July 2023.