By Ellen Zhang and Kevin Yao
BEIJING (Reuters) -China will step up support for the economy with prudent monetary and proactive fiscal policies, including interest rates and bank reserve requirement ratios (RRR), the Politburo of the Communist Party was quoted by state media as saying on Tuesday.
The party's top decision-making body said it would be flexible with policies in the world's second-biggest economy, which grew faster than anticipated in the first quarter but is still facing headwinds.
The comments by the Politburo were largely in line with expectations, including modest stimulus steps and some support for the property sector with a focus on dealing with housing inventories.
But analysts said the comments showed increased urgency to deal with structural woes.
"The sustained recovery and improvement of the economy still face many challenges," the Politburo said, according to Xinhua news agency, after a meeting chaired by President Xi Jinping.
The Politburo pointed to problems such as insufficient demand, huge pressures on firms, risks and hidden dangers in key areas of the economy.
"At the same time, it must be noted that China's economic foundation is stable, with many advantages, strong resilience, and great potential," it said.
China has set an economic growth target for 2024 of around 5%, which many analysts say will be a challenge to achieve without much more stimulus.
China's manufacturing and services activity both expanded at a slower pace in April, official surveys showed on Tuesday, suggesting some loss of momentum for the economy.
"We need to flexibly use policy tools such as interest rates and reserve requirement ratios, increase support for the real economy, and reduce the overall cost of social financing," the Politburo said.
The People's Bank of China has in recent months delivered modest cuts in RRR and interest rates to support economic growth.
"The meeting hints that there might be cuts in interest rates and RRR in the second quarter," said Xing Zhaopeng, senior China strategist at ANZ.
Amid tepid domestic demand and a property crisis, Beijing has ramped up infrastructure investment and turned to investing in high-tech manufacturing to lift the economy this year.
China will issue ultra-long term special treasury bonds as soon as possible, and speed up the issuance of local government special bonds to maintain the necessary intensity of fiscal expenditure, the news agency quoted the Politburo as saying.
Beijing plans to issue 1 trillion yuan ($138.14 billion) in special ultra-long term treasury bonds to support some key sectors.
"CATCH UP WITH THE TIMES"
The party's central committee will gather in July for a key meeting known as a plenum, the third since the body of elite decision makers was elected in 2022, focusing on reforms amid "challenges" at home and complexities broad.
"Reform and opening up is an important tool for the party and the people's cause to catch up with the times with great strides," Xinhua quoted the Politburo as saying.
Chinese leaders have signalled their willingness to push reforms, amid growing calls from policy advisers for changes to tackle economic imbalances and return to a path of pro-market policies at the cost of increased state control of the economy.
Proposals include relaxing urban residency permits to boost consumption, creating a level playing field for the struggling private sector and redesigning the tax system to tackle the root cause of surging municipal debt.
"China's senior leadership has today signalled further fiscal and monetary support for the economy and renewed efforts to stabilise the housing market," Capital Economics said in a note.
"There are also some signs that the leadership may be getting more serious about addressing the economy's structural problems that threaten the medium-term outlook."
China will coordinate and improve policies to reduce housing inventories and optimise policy measures for new housing, the Politburo added.
"The meeting proposed to resolve home inventory and optimise new homes, which means China may allow local governments (to) buy commercial houses...and turn them into affordable houses. This could be a significant turning point for the supply side of the property industry," said ANZ's Xing.
Shares of beleaguered Chinese property developers have rallied this week on speculation more stimulus measures will be unveiled soon to clear a glut of unsold homes. New home prices fell at their fastest pace in more than eight years in March as developers' debt woes dragged on demand.
Top leaders also emphasised the need to develop "new productive forces" according to local conditions, Xinhua said.
The term "new productive forces" was coined by President Xi last September, underscoring the need for economic development based on innovation in advanced sectors.
($1 = 7.2392 Chinese yuan renminbi)
(Reporting by Beijing Newsroom, Ellen Zhang and Kevin Yao; Editing by Himani Sarkar, Michael Perry and Raju Gopalakrishnan)
