China’s top leaders signaled bolder economic support next year using their most direct language on stimulus in years, as Beijing braces for a trade war when Donald Trump takes office.
President Xi Jinping’s decision-making Politburo vowed to embrace a “moderately loose” monetary policy in 2025, signaling more rate cuts ahead and shifting from a “prudent” strategy that’s held for 14 years.
The 24-man body also vowed “more proactive” fiscal policy at its monthly huddle, according to the official Xinhua News Agency, raising expectations for Beijing to widen the fiscal deficit from 3% at the annual parliamentary session in March. That would open the door to more central government borrowing to shore up the faltering economy.
The Politburo’s December meeting “sent the most aggressive stimulus tone in a decade,” Morgan Stanley economists including Robin Xing wrote in a research note, adding that “while the tone is very positive, implementation remains uncertain.”
The offshore yuan erased losses to trade 0.1% stronger on bets China’s economy will recover due to monetary and fiscal stimulus. Regional currencies also got a boost from the Monday readout, with Australian dollar rising 0.3% and New Zealand’s currency trimming losses.
While Politburo readouts never reveal new numerical economic targets, the vaguely worded statements give important clues on future policy. The December conclave sets the agenda for the larger Central Economic Work Conference that crafts priorities, such as the annual growth goal. That meeting is set to begin Wednesday, Bloomberg News earlier reported.
Top leaders tackled nearly every major problem plaguing the economy, with direct pledges to “stabilize” the stock market as well as the property sector fighting a years long slump. In a first, cadres touted “extraordinary” measures for counter-cyclical policy adjustment, language analysts said could hint at greater bond issuance or a stabilization fund to support the stock market.
| Other highlights of the Politburo meeting: |
|---|
| Signaled 2024 growth target of “around 5%” will be hit by saying full-year goals will be met “smoothly” Reaffirmed the overall principle of “using progress to promote stability” Pledged to continue push for technology innovation and the construction of a modern supply chain Vowed to implement economic reforms, including some “iconic” measures Repeated a pledge to open up the economy, stabilize foreign investors and trade Vowed to strengthen political supervision as part of Xi’s signature anti-corruption drive, suggesting party cadres will face more close scrutiny of their loyalty to China’s top leader. |
Policymakers also elevated the importance of boosting consumption, making that the top goal of the meeting — potentially, a sign the work conference will make domestic demand the priority for 2025. Xi’s push for manufacturing to propel the economy has seen the US and European Union complain China is flooding their markets with cheap goods and prompted calls for Beijing to get its own consumers spending.
“The wording in this Politburo meeting statement is unprecedented,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “The policy tone shows strong confidence against Trump’s threats,” he noted, referencing the US president-elect’s vow to impose a 60% tariff on Chinese exports that would decimate bilateral trade.
Policy Shift
The last time China adopted a “moderately loose” monetary policy was in the Global Financial Crisis as part of a bazooka stimulus package to prop up the economy. That’s something Beijing has vowed to avoid repeating, with officials providing just enough support to hit this year’s growth goal of around 5% without loading up debt.
The Politburo readout, however, sent markets a message Xi is feeling a new urgency. It’s a reminder “top leaders’ view on economic conditions has shifted substantially compared to last quarter,” said Martin Rasmussen, senior strategist at macro research firm Exante Data.
After second quarter growth fell short, policymakers started rolling out stimulus in late September. Economists widely expect another cut to the amount of cash banks have to keep in reserve before the year is out, while a rate adjustment is more likely to fall in the first quarter of 2025.
As well as rising trade tensions, China is battling its longest streak of deflation this century. That problem was on display earlier Monday in data showing producer prices falling in November for a 26th straight month. Consumer prices also rose at their slowest pace in five months, hovering around zero.
| Language | Latest | Sept. 2024 | Dec. 2023 |
|---|---|---|---|
| Monetary policy | Moderately loose | Imperative to lower the reserve requirement ratio and implement impactful interest rate cuts | Prudent monetary policy to be flexible, appropriate, targeted, and effective |
| Fiscal policy | More proactive | Issue and make good use of ultra-long special treasury bonds and local government special bonds to drive government investment | Proactive fiscal policy to be appropriately strengthened and improved in quality and efficiency |
| Housing policy | Stabilize property market | Stabilize the property market and reverse its downturn | NA |
| Consumption | Vigorously boost consumption | Increase the incomes of middle and low-income groups and improve the consumption structure | Expand domestic demand and form a virtuous cycle of mutual promotion between consumption and investment |
Falling prices have undercut the economy’s 4.8% growth so far this year, eating into corporate profits and pushing companies to cut investment as well as wages. While the People’s Bank of China has slashed interest rates and offered more cash for banks several times, authorities have found it hard to spur greater borrowing.
The Politburo promised to “forcefully lift consumption” and drive domestic demand “in all aspects,” without directly mentioning the problem of deflation. That could indicate more rounds of the cash-for-clunkers program that’s operated as a consumption voucher, encouraging people to buy new electronics at a discount in exchange for their old products.
China’s Premier Li Qiang vowed to deploy “every means possible” to boost consumption at a meeting on Monday with heads of major international economic organizations in Beijing, including the International Monetary Fund, which has long called on China to expand domestic demand.
Fiscal Force
While the latest language on fiscal policy doesn’t mark a fundamental shift from the “pro-active” adopted in 2008, the addition of the word “more” signals government spending will be dialed up. A state media commentary Friday said Beijing had ample room to raise its budget deficit next year.
Fiscal spending is widely regarded as the most important element in any stimulus package, since private demand from households and companies has dwindled. While government spending has been weak this year, in November the Finance Ministry launched a $1.4 trillion rescue program for indebted local governments to free up regional officials to boost growth.
The specifics of the government’s budget, including the fiscal deficit and the amount of bonds it plans to issue, will likely only be revealed in March during the annual legislative session. But the Politburo readout will likely raise expectations for those targets.
“The Politburo statement is very positive,” He Wei, China economist at Gavekal Dragonomics. “It has everything that people wanted.”
