China signaled more targeted aid for the economy

China’s Politburo meeting on Friday signaled more targeted aid for the economy. Remarkably, the country’s top leaders look to cushion growth in the face of resurgent pandemic risks. Furthermore, this is fueling a rally in bonds.

According to Citigroup, UBS AG and Oversea-Chinese Banking analysts, authorities will likely take more steps to help struggling small businesses, increase fiscal spending and possibly reduce the RRR (reserve requirement ratio) for banks again.

Moreover, Citigroup’s economists announced that the policy efforts to support the economy will likely intensify.

Economists also reported that there are more targeted measures underway to help small and medium-sized enterprises, as indicated by the mid-year Politburo meeting.

The 25-member Politburo meeting was chaired by President Xi Jinping. The meeting preceded data showing factory production, underpinning the economy’s recovery, coming under pressure in July. Additionally, the official manufacturing purchasing managers’ index dropped to a weaker-than-anticipated 50.4. Meanwhile, the Caixin index, which captures sentiment of smaller private companies, fell to 50.3 from 51.3 in June.

The yield on 10-year sovereign notes declined to the lowest level unseen since June 2020

Besides, bonds in China strengthened Monday on signs of the slowdown. The yield on 10-year sovereign notes declined five basis points to 2.8%, the lowest level unseen since June 2020.

The recent COVID-19 outbreak in the eastern city of Nanjing has spread to other parts of the country. Notably, this is adding further risks to consumption and production as cities like Beijing strengthened transportation restrictions.

Moreover, 14 provinces have been affected so far, with 328 infections nationwide this month. According to the National Health Commission, it almost equals the number of cases reported in the previous five months combined.

Remarkably, the Communist Party’s top leadership signaled that fiscal spending through the issuance of local government special bonds will quicken in the second half to strengthen the economy.

Economists also reported that Politburo’s statement ignored the phrase that there’ll be no sharp turn in policy, meaning the end of the tightening stance. Economists added that a slump in interest rates is unlikely. Meanwhile, credit growth in the second half will probably stabilize.

Additionally, at a separate meeting to discuss second-half priorities, the People’s Bank of China (PBOC) announced it will guide actual lending interest rates to a stable and lower level through reforming the rates market.