Key meeting sends message to shore up drivers, focusing on structural issues in H2

China's first-half GDP growth came in at 4.7 percent, within the full-year target range set at between 4.5 and 5 percent. Against this backdrop, the recent meeting of the Political Bureau of the Communist Party of China Central Committee, as widely expected, did not announce fiscal or monetary stimulus measures beyond market expectations. Instead, its intent was seemingly to focus more on the structural end.

On consumption, the meeting called for expanding quality supply to meet the needs of different consumer groups and tapping the potential of services consumption. On fiscal and monetary policy, it urged faster fiscal expenditure and bond-fund use, as well as the comprehensive and timely adjustment of monetary policy tools. This emphasis reflects the main features of China's first-half economic performance.

Total retail sales of consumer goods grew only 1.3 percent year-on-year, while per capita disposable income and consumption expenditure rose 5.2 percent and 3.7 percent, respectively, showing that spending growth lagged behind income growth. Household balance-sheet adjustments may help explain the gap: early mortgage repayments have reduced household borrowing, while excess savings have continued to accumulate. Meanwhile, the multiplier effect of consumer trade-in policies has weakened, contributing to sharp declines in home appliance and automobile purchases.

The 2025 trade-in program benefited more than 360 million person-times, according to official data. Measured by unique participants, coverage may have been below 20 percent of the population, with higher-income households likely accounting for a relatively larger share. This helps explain the meeting's emphasis on expanding quality supply for different consumer groups.

GDP growth slowed from 5 percent in the first quarter to 4.3 percent in the second, partly reflecting slower fiscal expenditure in April and May. Measured by the financing gaps in the general public budget and the government-managed fund budget, about 38.5 percent of the implied full-year broad deficit had been used by midyear, well below the 44.4 percent average for the same period in the previous three years.

This leaves considerable room for fiscal policy to support growth in the second half. In addition to 2.2 trillion yuan ($326 billion) in local government special-purpose bonds yet to be issued and 800 billion yuan in new policy-based financial instruments, historical experience suggests that more than 600 billion yuan in unused special-bond quotas could also be mobilized. Against this backdrop, it is understandable that the meeting did not deliver a clear policy surprise.

The absence of stronger-than-expected measures does not rule out additional support later this year, as uncertainties remain. Compared with the April meeting, the language became more forceful, shifting from optimizing incremental resources and revitalizing existing assets to fully leveraging existing policies and promptly planning practical and effective additional measures. The wording also changed from continuing to expand domestic demand and optimize supply to intensifying efforts in both areas.

The most prominent structural feature of the first-half economy was that investment and consumption both fell short of expectations, while exports exceeded expectations, rising 17.6 percent year-on-year. Technology-related products made a particularly strong contribution. Integrated circuits contributed 4.8 percentage points to export growth, other electronic products 4.78 percentage points and artificial intelligence and server-related exports 2.3 percentage points. The meeting therefore concluded that new growth drivers were gaining momentum and the economic structure was improving.

This suggests that policymakers are likely to tolerate a greater degree of structural divergence and are unlikely to revive large-scale stimulus moves for traditional growth drivers merely to smooth aggregate fluctuations. The sustained outperformance of certain industries may therefore become a medium-term feature rather than a temporary phenomenon.

The meeting called for long-term and stable support for basic research, deeper implementation of the "AI Plus" initiative, the development of new forms of the intelligent economy, improved AI governance, breakthroughs in frontier technologies and future industries, and the cultivation of emerging pillar industries. This points to continued policy and fiscal support for AI-related research, infrastructure and industrial development.

Real estate, by contrast, received only brief mention. The meeting called for stabilizing the property market and placed the issue in the section on risk prevention, alongside risks involving local small and medium-sized financial institutions. This suggests that the approach toward traditional growth drivers is to provide necessary support without restoring large-scale stimulus measures.

The meeting's call to comprehensively use and adjust monetary policy tools while improving fiscal and financial coordination to support domestic demand has led to expectations of cuts in interest rates and banks' reserve requirement ratios. Whether such measures will materialize, however, remains uncertain.

The weighted average reserve requirement ratio currently stands at about 6.2 percent, only around 120 basis points above the 5 percent level commonly regarded as an implicit lower level, leaving limited room for further reductions. The central bank also has other liquidity instruments, including open-market operations, outright reverse repos, government bond transactions, the medium-term lending facility and structural tools. These can meet liquidity needs without further reducing the RRR.

A large trade surplus and greater willingness among exporters to convert foreign-currency receipts into renminbi are also adding liquidity to the banking system. RRR cuts are therefore more likely to be kept in reserve.

Interest rate cuts face even greater constraints. Commercial lenders' net interest margin fell to a historic low of 1.4 percent in the first quarter. Further compression could weaken banks' ability to generate capital internally, reduce their willingness to extend credit and increase operational risks. The China-US interest rate differential and the need to maintain exchange-rate stability also create external constraints.

More fundamentally, the marginal impact of rate cuts is weakening. When insufficient effective demand is driven more by expectations than by financing costs, monetary-policy transmission becomes weaker and more protracted. As year-on-year data may improve in the second half, the market may be overestimating the likelihood of further rate cuts. A broader recovery in credit growth is more likely to occur through structural monetary tools working in coordination with fiscal policy.

Both fiscal revenue and expenditure progressed slowly in the first half, leaving substantial room for fiscal policy to gain momentum later in the year. Revenue from government-managed funds fell 21.6 percent year-on-year. Assuming the same rate of decline for the full year and that general public budget expenditures proceed in line with the budget, combined expenditure growth under the general public budget and government-managed fund budget could rise from minus 2.9 percent in the first half to 5.4 percent in the second.

The Government Work Report also arranged 800 billion yuan in new policy-based financial instruments. These can be used as supplementary project capital to support major projects and sectors associated with new quality productive forces. Faster deployment is expected to help stabilize infrastructure and manufacturing investment.

The call to promptly plan and introduce practical and effective additional policies should therefore be understood mainly in fiscal terms. Local governments, local government financing vehicles and State-owned public institutions continue to face considerable debt burdens. The meeting also called for regular efforts to resolve overdue payments owed to enterprises, indicating that amid accelerated population aging and the continued adjustment of the real estate sector, the revenue-generating capacity of some local governments has weakened. Additional transfers or targeted fiscal support from the central government may therefore still be needed.

Li Xunlei is chief economist at Zhongtai Financial International Limited. Zhang Deli is chief macro analyst at Zhongtai Securities.

The views do not necessarily reflect those of China Daily.