Mainland China’s GDP growth rebounded strongly in the January-March quarter, but the recovery is still uneven and its foundation has not yet solidified. Beijing will thus avoid a sharp shift in policy stance. However, there is a window of opportunity to deepen structural reforms to support more sustainable long-term growth.

Mixed signals from policymakers had fuelled speculation that the central bank might tighten credit growth aggressively in the near term, but the latest politburo meeting reiterated that there will be no sharp changes. Policy normalisation will thus continue to be a moderate process for now.

Further, economic policy will be directed towards aiding a better-balanced and broader-based recovery. The meeting said monetary policy will focus on supporting “key areas and weak links” of the real economy, which we interpret as advancing innovation-driven technology and industrial upgrading while supporting small businesses, which were hit hard by the pandemic.

Credit support in these two areas will likely be further strengthened, but the meeting also required fiscal policy to provide more support for these businesses.

Maintaining people’s basic wellbeing, income and public services has been a key fiscal-policy goal since the pandemic, but the politburo’s reiteration of this goal suggests that fiscal policy needs to play a more important role in supporting households to achieve a faster and more balanced recovery in domestic consumption.

Avoiding sending a more hawkish signal supports our view that there is little excess easing for Beijing to unwind. De-leveraging and de-risking efforts will likely be targeted at the property sector and local governments, which will probably lead to a continued gradual downward trend in credit growth - although targeted support may be directed to weak links in the real economy, including smaller businesses, manufacturing investment and household consumption.

However, the policymakers’ stance underscores the risks at the local level. Local party and government leaders are being held responsible for fiscal and financial risks under a lifelong accountability scheme. Although not a magic cure, this scheme should curb excessive borrowing and debt evasion.

Beijing will also continue its enhanced supervision of internet platforms to promote fair competition. Some 34 internet companies were given a month to self-review and rectify their anti-competitive practices. This antitrust drive in the digital arena echoes a global trend but should also benefit consumers as tech firms compete on merit, rather than through market power.

The politburo also has concerns about housing prices, driven up in some areas by demands to be near specific schools. Several cities are exploring ways to deal with ‘school district housing fever’, but the fundamental solution is reforms in urbanisation policies, school enrolments, and housing itself.

A broader overall recovery gives a window for further structural reform. The politiburo meeting emphasised the reforms outlined in the Five Year Plan - strengthening domestic demand while encouraging international engagement.

Industrialisation, technology development and green development will likely remain key themes for longer-term growth, but levelling the playing field and opening up should help increase external engagement and attract higher quality investment into mainland China.

First published 30 April 2021.

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