MNI ANALYSIS: China's Politburo Urges Stability Amid Trade Row

--Further Loosening Policies, Including RRR Cut, Likely in H2

--Fiscal Spending to Play Bigger Role; Infrastructure Inv't to Rebound

--Greater Urgency to Open Up Economy

     BEIJING (MNI) - China Communist Party's politburo, the country's top

decision-making body, increased the urgency of boosting growth and improving

trade prospects by tying it to economic stability. The yuan rebounded as the

market took cues that the government will follow through with additional

stimulus measures.  

     In a quarterly meeting on the economy on Tuesday, the politburo called for

ramping up of easing measures through fiscal policy, moderate loosening of

monetary policy, selected deleveraging, and greater effort towards further

opening up.

     The latest changes in tone from senior policymakers indicated that the

leadership is prepared to be flexible and modify policies to protect growth,

mitigate potential risks while more proactively prepare for the uncertainty and

challenges of souring trade relations that threaten to upend a trade system

China believes it had mastered.

     In a circular released by Xinhua News Agency, "stability" was mentioned

about 20 times. The domestic situation is now "stable with changes", a downgrade

from the "stable with good momentum" that described the state of the country at

the previous meeting.

     The politburo called for the government to keep the "economy operating in a

reasonable range", which is believed to be above 6.5% GDP growth by governmental

sources. (see MNI SOURCES: China Policy Moves Pro-Growth as Economy Sputters on

July 24.)

     --HIGHER STAKES

     The stakes are higher now, with mounting evidence of a slowdown and a risky

trade war with the U.S. Nominal GDP slipped to 9.8% in Q2 from 10.2% in Q1, and

new exports order index in the PMI release was in contraction for a second

month. The yuan has dropped 8.3% from levels seen in March. 

     In describing monetary policy, the circular passed by Xinhua removed the

expression of "neutral" before "prudent monetary policy", which signaled a

loosening stance may be taken to "remain liquidity reasonably ample."

     A full-scale credit "flooding" isn't likely however, as the politburo said

credit "floodgate" should be controlled. Nor is it necessary as in the last 10

years, China conducted three major policy loosening, each with diminishing

impact due to structural limitations of its financial system.

     Policymakers are also wary of high leverage ratios and persistent assets

bubbles, such as the housing sector, which risks losing the hard-won

achievements of the two-year deleveraging campaign. 

     --MORE FISCAL SPENDING

     The politburo demanded fiscal policy play a bigger role in further

expanding domestic demand and restructuring.

     According to China International Capital Corp., a state-owned investment

firm, the potential fiscal deficit in the general public budget and the

government fund budget combined would be RMB3.6 trillion in the second half, 56%

more than the same period last year.

     Infrastructure investment is expected to rise, financed by special

governmental bonds issuance. As Premier Li Keqiang recently stressed, central

and western regions will receive a boost in infrastructure investment.

     Without directly mentioning the trade conflict with the U.S., in which

China has apparently so far failed to make any inroads, the politburo

acknowledged that the "external environment has "changed markedly." The meeting

called for a further opening up, widening market access, boosting imports and

furthering Xi's Belt and Road Initiative. China has probably realized that now

more than ever it needs more friends and less enemies. 

     Perhaps highlighting a potential fallout from the trade row, which some

analysts predict may lead to closures of many small Chinese exporters, the

politburo emphasized employment stabilization, even with the official urban

unemployment rate below the 5% level seen as crucial.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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