Xi Calls for Pivot to Domestic Economy as Recovery Continues

(Bloomberg) --

Chinese President Xi Jinping called for a greater push on reforms to stimulate domestic demand, as the economy continues its steady recovery from the coronavirus slump.

Speaking at a Politburo meeting on economic policy, Xi said China should speed up its “dual circulation” growth model with a focus on boosting local output, while drawing in foreign investment and stabilizing trade, the official Xinhua News Agency reported Thursday.

Data released Friday showed the manufacturing outlook improved for a second month in July.

Xi's remarks come ahead of a series of high-level political meetings that will chart the development path of the world's second-largest economy. While in the short term leaders have expressed satisfaction that growth is recovering, over the long term China faces a host of economic problems including the confrontation with the U.S that could pose bigger challenges.

“Dual circulation is the new strategy from Beijing in coping with the new world: In plain English, it means “domestic market first,” said Larry Hu, head of China economics at Macquarie Bank Ltd in Hong Kong. “The implementation is not that clear to us at this stage, but the idea is to strengthen China's grip on supply chain and reduce the reliance on foreign suppliers.”

The yuan strengthened the most since early July after the manufacturing data. Stocks gained, with the CSI 300 Index rising 1.8%. The nation's 10-year government bond futures slipped to a two week low.

Top current and retired leaders typically spend early August huddled in the resort of Beidaihe to discuss policy direction. The Communist Party's Central Committee will meet in October to outline the next five-year plan and a longer term vision to 2035, Xinhua said.

Policy Stance

While Thursday's Politburo meeting kept the overall stance for fiscal and monetary policy unchanged, it added fresh emphasis for policy to be more targeted. It also called for lower financing costs for the real economy and reasonable credit growth.

“Beijing confirmed that cyclical policy is on cruise control: ongoing rollout of fiscal stimulus, neutral monetary policy,” economists including Robin Xing at Morgan Stanley in Hong Kong wrote in a report. “It emphasized structural initiatives beyond Covid-19 to tackle external challenges: pivoting to the domestic market, speeding up new urbanization, and economic opening.”

China's Economy Accelerated in July as Factory Output Recovered

The official manufacturing purchasing managers' index in July rose to 51.1 from 50.9 a month earlier, according to data released by the National Bureau of Statistics.

The rebound in economic growth is continuing into the second half of the year as government-led investment gains traction and global demand recovers. Economists have revised up their forecasts for full-year growth, and now see China's economy expanding 2% this year.

What Bloomberg's Economists Say..

A subtle but important policy shift is underway in China. The government has highlighted ‘dual circulation' in recent policy statements -- a reference to the domestic economy and external trade. The emphasis, though, has been on the former -- again at Thursday's politburo meeting. This suggests an official shift away from an export-led growth model toward a sharper focus on building an economy with stronger domestic drivers.

Chang Shu, Chief Asia Economist

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Chinese policy makers have been trying to avoid the formation of asset bubbles in the stock and property markets as the economy recovers and also keep a lid on debt, which is more than 2 1/2 times GDP.

Thursday's meeting called for more balanced growth, with efforts to boost consumption, make supply chains more stable and competitive, and help young people and migrants from rural areas find jobs.

Earlier this week, Xi said China would be able to ride out the coronavirus pandemic with stronger growth in the second half of 2020.

“We have strong will, firm determination and solid strength to tackle the challenges, and enough drive, capacity and wisdom to overcome all kinds of risks and tests,” he said, according to state broadcaster CCTV. “No countries or individuals can stand in the way of the country's great rejuvenation.”

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With assistance from Bloomberg