The Connotation of 'Timely Adjustment' – Commentary on the July Politburo Meeting

On July 30, the Political Bureau of the Communist Party of China Central Committee held a meeting to deploy economic work for the second half of the year. As a high-specification economic meeting held annually in mid-year to "connect the past and the future," it typically attracts significant market attention. However, prior events such as the Premier's symposium and the central bank's press conference had already released relatively neutral signals, so market expectations for incremental policies were not high. In reality, the meeting mainly focused on strengthening the implementation of existing policies, but there were marginal changes in some wording. Specifically:

First, regarding the macroeconomic tone, the April Politburo meeting characterized the economy as having a "strong start, with main indicators better than expected," while this meeting described it as showing "a development trend of new momentum and optimized structure." The shift from exceeding total volume expectations to structural optimization indicates an adjustment in the overall assessment of the economy, though steady determination remains. The most prominent feature of the economy in the first half was structural divergence. Exports continued to grow rapidly, while investment and consumption remained at low levels. GDP year-on-year growth of 4.7% was within the target range, but the value-added of high-tech manufacturing grew by 13.3%, and equipment manufacturing grew by 9.3%, significantly faster than the overall industrial growth rate. Considering that total growth remains within a reasonable range, the low base effect in the second half, and strong external demand, the urgency for additional policy support is not high. The meeting emphasized "fully leveraging the effectiveness of various existing policies," while the phrasing for incremental policies was "timely planning and introduction of practical and effective incremental policies," suggesting they are still in the reserve stage.

Second, fiscal policy is the main lever for existing policies, and the meeting emphasized "accelerating the progress of fiscal expenditure and the use of bond funds." This aligns with previous widespread market expectations. In the first half of this year, cumulative general budget revenue increased by 4.7% year-on-year, higher than the 2.2% arranged in the annual budget, but cumulative expenditure increased by only 1.5% year-on-year, lower than the 4.4% arranged in the annual budget. The lag in expenditure progress is one of the reasons for the decline in infrastructure investment growth, potentially due to constraints from high oil prices and the emphasis on establishing a correct view of performance achievements. There are clear requirements for accelerating both general public budget expenditure and special bond expenditure in the second half. We estimate that if the annual budget targets set at the beginning of the year are met, the growth rate of general budget expenditure in the second half will rebound to 7.3%. Coupled with accelerated special bond expenditure, fiscal policy is expected to play a certain role in stabilizing domestic demand. In addition, the utilization progress of policy-based financial tools has been relatively slow this year, requiring continued observation.

Third, the general tone of monetary policy remains "moderately loose," with the first mention of "comprehensively utilizing and making timely adjustments to monetary policy tools," without mentioning reserve requirement ratio (RRR) cuts or interest rate cuts. Historically, "comprehensive utilization" and "timely adjustment" are not new terms, but the complete phrase "comprehensively utilizing and making timely adjustments to monetary policy tools" appears for the first time. Logically, "adjustment" is a neutral term, which can mean upward (increasing easing efforts) or downward (marginal tightening). Inferring from the current environment, we believe this is more likely a refinement of the monetary policy description, leaving room for flexible operations in the future. Since mid-2025, monetary policy has clearly shifted towards discretion. The pace of changes in liquidity conditions this year has basically followed flexible adjustments based on fundamentals and exchange rates. In the short term, with weak domestic demand trends, RRR cuts and interest rate cuts remain in the toolbox, but the timing of their implementation may be more cautious. Especially given the possibility of Federal Reserve interest rate hikes in the second half, the central bank needs to observe external balance conditions.

In addition, the central bank carried out framework reforms this year, such as adjusting the interest rate corridor and overnight facilities, which also fall within the scope of "timely adjustment." Secondly, while most important meetings in the past two years directly mentioned RRR cuts and interest rate cuts, these did not necessarily materialize subsequently. The absence of such mentions in this meeting may also be to avoid sending overly strong signals to the market.

Fourth, regarding domestic demand, the wording shifted from "tapping potential" in April to "effectively expanding" and "intensifying expansion," indicating a certain result orientation where tangible results are required. This is a direct response to the decline in domestic demand in the second quarter. However, "adapting to the consumption needs of different groups by expanding high-quality supply and tapping the potential of service consumption" still reflects the thinking of "creating demand through supply." Consumption moving "towards new areas" is also an implicit requirement, with no additional subsidy policies for now. The section on livelihoods mentioned "increasing employment support for key groups," addressing issues related to "the elderly and the young," and "protecting the rights and interests of flexible workers," which are relatively specific but do not constitute incremental information.

On the investment side, the requirement is to "solidly advance the planning and construction of the 'Six Networks,'" with attention to the subsequent speed of implementation. The emphasis on "promoting the continuous development of the economy towards new, optimized, and improved directions" indicates that the focus is mainly on fiscal + financial measures, taking into account both domestic demand and technology. The direction is likely still new infrastructure (computing power networks, communication networks, etc.). The requirement to "establish and practice a correct view of performance achievements" continues to be retained. Combining the base effect and the catch-up of existing policies, there is an opportunity for domestic demand to stabilize in stages, but quarter-on-quarter, it may still be primarily focused on providing a floor.

Fifth, regarding industry, the overall approach continues the formulations of the Government Work Report and the April Politburo meeting, presenting a structure of "one system, two main lines, and three key handles." The one system refers to the construction of a modern industrial system; the two main lines are the "Artificial Intelligence Plus" action and the deepening of new infrastructure construction of the "Six Networks" – the meeting required developing new forms of smart economy, improving the AI governance system, and once again emphasizing the advancement of planning and construction for the "Six Networks" such as computing power networks, new power grids, and logistics networks; the three key handles are long-term investment in basic research, cultivation of frontier technologies and future industries, construction of emerging pillar industries, and transformation and upgrading of traditional industries. It is recommended to pay attention to the AI industry gradually shifting from computing power construction to application promotion, as well as catalysts in thematic directions such as commercial aerospace and embodied intelligence.

Sixth, regarding supply, continue to comprehensively rectify "involutionary" competition and formulate and implement regulations for the construction of a unified national market. Pay attention to the progress of implementing relevant regulations. Currently, there has been some progress in "market-oriented" anti-involution efforts overall, but the pace remains relatively moderate.

Seventh, regarding real estate, the formulation was simplified from "striving to stabilize the real estate market and solidly advancing urban renewal" to "stabilizing the real estate market," with no mention of urban renewal or signals of incremental stimulus. The secondary market shows signs of structural stabilization, while national transmission and the lag in new home investment remain the baseline scenario.

Eighth, regarding the capital market, the core statement is "deepening the comprehensive reform of investment and financing in the capital market, and enhancing the resilience and confidence of the capital market." "Comprehensive reform of investment and financing" was the formulation of the Central Economic Work Conference at the end of last year. With both the investment and financing sides listed in parallel, it may imply that the policy orientation of enhancing investor returns remains. "Resilience" corresponds to the market's ability to withstand shocks. The A-share market experienced significant volatility in the first half, with a notable correction in the technology sector in July. We look forward to subsequent measures to restore confidence in the capital market.

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