China’s top leadership has indicated a significant shift towards more aggressive economic stimulus measures for 2025, using the most direct language regarding stimulus in recent years. This move comes as Beijing anticipates a potential trade war with the incoming US administration.
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The Politburo, President Xi Jinping’s core decision-making body, pledged to adopt a “moderately loose” monetary policy in 2025, signaling potential interest rate cuts and a departure from the “prudent” strategy maintained for the past 14 years. This shift suggests a more proactive approach to fiscal policy, raising expectations for an increase in the fiscal deficit beyond the current 3% target set for the March parliamentary session. This could pave the way for increased central government borrowing to bolster the struggling economy.
Economists at Morgan Stanley, including Robin Xing, described the Politburo’s December meeting as having “sent the most aggressive stimulus tone in a decade.” They cautioned, however, that “while the tone is very positive, implementation remains uncertain.” The offshore yuan responded positively to the news, strengthening against the dollar on expectations of economic recovery fueled by the anticipated monetary and fiscal stimulus. Regional currencies also benefited, with the Australian dollar appreciating and the New Zealand dollar mitigating losses.
Deciphering the Politburo’s Signals
While Politburo statements typically avoid specific numerical targets, their carefully chosen wording provides crucial insights into future policy direction. The December meeting sets the stage for the upcoming Central Economic Work Conference, which will determine key economic priorities, including the annual growth target.
The leadership addressed a wide range of economic challenges, including explicit commitments to stabilize both the stock market and the struggling property sector. Significantly, officials highlighted “extraordinary” measures for counter-cyclical adjustments, potentially suggesting increased bond issuance or the establishment of a stabilization fund to support the stock market.
Furthermore, policymakers emphasized the importance of boosting consumption, placing it at the forefront of the meeting’s agenda. This suggests that the upcoming work conference may prioritize domestic demand for 2025. This shift in focus comes amid international pressure on China to rebalance its economy towards greater domestic consumption.
A Response to Global and Domestic Pressures
Experts see this policy shift as a response to both rising trade tensions and persistent domestic economic challenges. Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group, described the meeting’s wording as “unprecedented,” reflecting “strong confidence against Trump’s threats.”
China is grappling with its longest period of deflation in decades, with producer prices declining for 26 consecutive months and consumer price growth remaining sluggish. This deflationary environment has hampered economic growth, impacting corporate profits and discouraging investment and wage increases. Despite previous interest rate cuts and liquidity injections by the People’s Bank of China, stimulating borrowing has proven difficult.
The Politburo’s commitment to “forcefully lift consumption” suggests potential measures to stimulate spending, such as expanding existing programs offering consumer vouchers for new product purchases. Premier Li Qiang reinforced this commitment, pledging to use “every means possible” to boost consumption in a meeting with heads of major international economic organizations.
Fiscal Policy Takes Center Stage
The emphasis on a “more proactive” fiscal policy signals a likely increase in government spending. Although the precise details of the budget, including the fiscal deficit and bond issuance plans, will be unveiled in March, the Politburo’s statement suggests a more expansionary fiscal stance. Fiscal spending is considered crucial for stimulating demand, particularly given the current weakness in private sector spending.
The Politburo’s pronouncements indicate a decisive shift towards more aggressive economic intervention. The effectiveness of these measures in addressing China’s economic challenges and navigating potential trade conflicts remains to be seen.
