Work meeting lays out clear policy direction

The Central Economic Work Conference, held on Dec 11-12, has outlined China's key economic policy priorities for 2025, emphasizing stability as the guiding principle amid mounting internal and external challenges.

The highly anticipated annual meeting, often seen as a signpost of policy direction, acknowledged that the adverse effects brought about by changes in the external environment have deepened and that the country's economy still faces many difficulties and challenges.

In response, the conference set forth policy goals of stabilizing growth, prices, employment and people's livelihoods. Key areas of focus include a more proactive fiscal policy, moderately loose monetary policy and efforts to expand domestic demand.

Stronger fiscal spending

The conference provided clear guidance on adopting a "more proactive fiscal policy" as a buffer against domestic and external pressures. The government plans to raise the fiscal deficit ratio, issue more ultra-long-term special treasury bonds and expand local government special bond issuances.

Over the past two years, consumption and investment demand in the private sector has been relatively weak, while external demand has faced uncertainties. The spending power of many local governments has been constrained by debt management pressures. To restore the demand-supply balance and escape deflationary risks, the central government must take on more debt.

Therefore, we predict the deficit-to-GDP ratio will rise to around 4 percent in 2025, signaling a stronger commitment to fiscal stimulus as China has historically been cautious about exceeding a 3 percent deficit ratio.

The annual quota of special treasury bonds is projected to reach 3 trillion yuan ($411.8 billion) next year, including 1 trillion yuan to replenish commercial bank capital and 2 trillion yuan for major national projects and consumption subsidies.

New local government special bonds are expected to exceed 4 trillion yuan in 2025, with a shift in focus toward debt risk resolution as well as idle land and housing purchases to address liquidity pressures on real estate developers and local governments.

Additional fiscal resources may come from activating unused national debt quotas, carry-over funds and vitalizing State-owned assets. Our calculations show that, at the end of 2023, unused national debt quotas stood at 828.29 billion yuan, which could be deployed under special circumstances to supplement fiscal spending.

Overall, we anticipate that in 2025, the quotas for various fiscal tools supporting the real economy will be increased significantly, leading to a marked improvement in the government's disposable financial resources.

The government is expected to allocate more of its spending to bolster household consumption, which can improve living standards and amplify policy potency in driving economic growth. Part of the fiscal resources may be directed toward industrial upgrades, including new infrastructure and advanced manufacturing.

Bigger rate cuts

After 14 years of implementing a prudent monetary policy, the conference called for shifting toward a moderately loose stance, making us believe that interest rate cuts in 2025 will come in at a greater margin than this year.

It is anticipated that the seven-day reverse repo rate — a key policy interest rate benchmark — may be reduced by 40-50 basis points, while the loan prime rates — the market-based lending benchmarks — may see a reduction of over 50 basis points, with the first rate cut likely in early 2025.

The People's Bank of China, the country's central bank, is also expected to cut the reserve requirement ratio — the proportion of deposits banks must keep as reserves — further. Following a reduction in September, the average RRR stands at 6.6 percent, compared with a minimum RRR of around 5 percent that we believe is required for stable bank operations. A 50-basis-point reduction may be carried out this month, leaving room for an additional 100 to 125-basis-point cuts in 2025.

To provide long-term liquidity, the PBOC is expected to normalize the use of government bond purchases and sales. This approach will help offset the pressure of increased government debt issuance while maintaining stable liquidity conditions.

As for the projections of major monetary indicators in 2025, we anticipate that aggregate social financing and M2 — the measure of broad money supply — are projected to grow at around 8 percent annually. This is because the conference stated that the growth of social financing and money supply should match the expected targets for economic growth and price levels, which may come in at around 5 percent and 3 percent in 2025, respectively.

In terms of the foreign exchange market, it is worth noting that the yuan could face significant weakening if the incoming US administration imposes a 60 percent tariff on Chinese goods as threatened.

During the 2018-19 trade disputes, the yuan depreciated from 6.3 to 7.0 against the US dollar while the dollar index and the Chinese economy posted a generally steady performance.

Demand in spotlight

The conference placed "expanding domestic demand" at the forefront of its 2025 economic agenda, with a focus on vigorously boosting consumption and improving investment efficiency. We expect relevant policy efforts to be advanced in greater intensity and scope.

Household consumption demand will be stimulated to address the prominent issue of insufficient domestic demand. Key measures will include expanding consumer goods trade-in programs, launching a special campaign dedicated to stimulating consumption, increasing the incomes and alleviating the burdens of low- and middle-income groups, raising pension payouts and increasing subsidies for medical insurance.

The government also plans to innovate consumption scenarios, expand service consumption and promote the development of cultural tourism, debut economy, ice and snow economy and silver economy while ratcheting up work to reverse the downturn and stabilize the real estate market.

Since the incremental countercyclical policies were initiated in September, the expansion of consumer goods trade-in programs has played a very significant role in driving retail sales. Looking at 2025, the ultra-long-term special treasury bonds to support consumption may double from this year to 200-300 billion yuan, with consumer electronics and home furnishing and decoration likely to be added as goods available for subsidies in the trade-in programs.

Meanwhile, we are now still in the period when additional policies are expected to be implemented to realize the clear policy objective of stabilizing the real estate market. The government plans to advance the renovation of 1 million shantytown units in cities and dilapidated houses, which could directly boost real estate investment.

On the demand side, monetized resettlement policies could stimulate sales, in addition to measures such as further easing credit policies of housing provident funds and commercial mortgages and relaxing restrictions on home buying. On the supply side, the government is likely to increase efforts to purchase idle land and commercial housing units to correct oversupply.

As 2025 marks the final year of the 14th Five-Year Plan (2021-25), the Central Economic Work Conference has laid out a clear policy direction, and the success of these measures will hinge on effective implementation.

We expect policymakers to act decisively and proactively to ensure that policy tools are deployed as early as possible and with sufficient force. If executed effectively, these policies will help China navigate a turbulent economic environment and position the economy for steady growth in 2025.

The writer is chief policy analyst at CITIC Securities.

The views do not necessarily reflect those of China Daily.