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Trade war

China's Politburo shifts focus back to growth

Leaders acknowledge trade war with US brings 'new challenges'

Workers cut rail tracks at a subway line construction site in China's Jiangsu Province. China will expand infrastructure investment to prop up the economy.   © Reuters

BEIJING -- China plans to put an emphasis on supporting economic growth as the pains of U.S. tariffs begin to kick in, a development that could push President Xi Jinping's deleveraging campaign and other structural reforms to the rear seat.

The Communist Party's Politburo decided at a Tuesday meeting to take measures to prop up the economy in the second half of 2018.

"The economy still faces some new challenges and the external environment has changed notably," a statement from the meeting said, according to state-run Xinhua News Agency, in a clear reference to the trade war.

The country's purchasing managers' index fell 0.3 point in July from the previous month to 51.2, the National Bureau of Statistics reported the same day, retreating for the second straight month as U.S. President Donald Trump kept his promise to impose 25% duties on $34 billion of Chinese products July 6. With more U.S. tariffs in the pipeline, Xi is now concerned that a drop in exports will weaken the whole economy.

Party leaders at the meeting pledged to continue to implement a "proactive fiscal policy" and intensify infrastructure work. They also called for "prudent" monetary policy, dropping the term "neutral" used until now, as the government shifts toward a more accommodative policy.

"China will maintain control over the floodgates of monetary supply and keep liquidity at a reasonable and ample level," reported Xinhua on the meeting.

The government has already begun to expand infrastructure investment. Premier Li Keqiang visited the Tibet Autonomous Region from Wednesday to Friday, dropping by railway projects to call for quicker construction, Xinhua reported.

"Infrastructure development in the country's central and western regions is relatively weak, and promoting effective investments to improve weak links will not only narrow the gap in regional development but also helpful for the country to cope with economic downturn," he said.

After the global financial crisis a decade ago, China launched a 4 trillion yuan ($586 billion at current rates) stimulus plan that created excessive debt at local governments and state-owned enterprises for road and rail construction.

To get the debt under control, Xi has been careful about large public investments. But Li's statement signals a policy pivot that could shelve Xi's deleveraging campaign while revealing the level of concern among the leadership about the trade war.

China's real gross domestic product grew 6.7% in the April-June quarter, down 0.1 percentage point from the previous quarter as infrastructure spending and consumption dwindled. Infrastructure investment was a particular drag on the economy, rising only 7% in the first half of 2018 compared with 19% all of last year.

The shock to China's economy would be immense should the trade war depress exports, prompting more officials to lobby for greater spending to head off a downturn. Some may even place the blame for a sudden slowdown on Xi's shoulders.

China will not resort to a "deluge" of stimulus policies and will warn local governments against unbridled infrastructure spending, the State Council, or cabinet, chaired by Li, declared at an executive meeting on July 23. But it also ordered financial institutions to meet the needs of local government funding vehicles, which pay for infrastructure projects, to ensure that enough money is available to complete construction. As the flow of money to local governments increases, however, ill-considered projects are more likely to pop up.

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