How China will optimize existing resources while seeking new growth

China's economy has moved into a phase dominated by better managing existing resources. On the one hand, the sheer size of the nation's economy means it can no longer operate out of the spotlight. Intensified international economic and trade competition has heightened requirements for optimizing existing resources while striving for new growth drivers. On the other hand, decades of rapid development have left a sizable debt burden, with new borrowing facing diminishing marginal returns and existing debt proving difficult to restructure.

The recently convened Central Economic Work Conference acknowledged that the impact of changes in the external environment has deepened. Unlike last year's meeting, which acknowledged the deepened adverse impacts, this year, there was no mention of such, signaling that China is now more confident in addressing external pressures such as tariffs and high-tech blockades. The country has the capability to turn these challenges into opportunities, actively maneuvering its international space and shaping favorable external conditions.

The conference emphasized the necessity of responding to external challenges by strengthening internal capabilities. For next year's work plan, it outlined the general principle of pursuing progress while ensuring stability and stressed the need for better coordination between domestic economic work and struggles in the international economic and trade arena — as well as ensuring both development and security.

This conference further emphasized the focus of a meeting held by the Political Bureau of the Communist Party of China Central Committee on April 25 on "keeping employment, businesses, markets and expectations stable". This calls for ensuring high-quality development to respond to the uncertainty of a rapidly changing external environment. It also involves reflecting on the struggles faced this year, understanding the ever-changing dynamics of great power competition, and seizing opportunities from crises.

The recommendations for formulating the 15th Five-Year Plan (2026-30) state that relations between major countries have an important bearing on the international landscape, the dynamics of which will in turn exert a profound impact on the domestic development of every country. China is in a period of development where strategic opportunities exist alongside risks and challenges, while uncertainties and unforeseen factors are rising. Therefore, the country's future economic work will also need to consider whether actions are conducive to struggles in the international economic and trade arena.

Expanding domestic demand is a strategic measure to hedge against external shocks, ranking first among key tasks of next year's economic work. The Central Economic Work Conference proposed advancing special initiatives to boost consumption and formulating plans for increasing incomes for both urban and rural households. This approach aims to stimulate consumption from the perspective of purchasing power, aligning with the recommendations for the 15th Five-Year Plan to raise the share of income for households in national income distribution and increase labor compensation in primary distribution.

Expanding the supply of high-quality consumer goods and services is another means to release more potential for consumption growth. This will be achieved through new technologies, products and market scenarios, creating a virtuous cycle of supply and demand.

In terms of investment, the conference has explicitly called for efforts to stabilize and revive investment. This includes increasing the scale of investment within the central government budget, which aligns with the major projects to be launched in the first year of the 15th Five-Year Plan period. Advancing urban renewal in a high-quality manner will also become one of the tools to counter downward pressure on property investment.

China's manufacturing value-added accounts for about 30 percent of the global total, while its population represents only 17.5 percent. In the short term, end-user demand in export markets still accounts for a significant share of China's manufacturing capacity.

Considering Washington's efforts to block Chinese product transshipment — alongside potential trade protectionism in Europe and emerging economies — policy attention to the global layout of China's manufacturing capacity is increasing.

The conference proposed advancing the integration of trade and investment, as well as the coordinated development of domestic and foreign trade. This will help stabilize and enhance external demand resilience by facilitating the orderly cross-border layout of industrial and supply chains, boosting the export of intermediate and capital goods, and promoting the seamless integration of internal and external economic circulation.

Next year's economic work will place greater emphasis on the quality and efficiency of economic growth. Continued implementation of a more proactive fiscal policy and a moderately loose monetary policy will remain the policy impetus for the upcoming year.

Regarding fiscal policy, it will be important to maintain necessary fiscal deficits, total debt levels and overall expenditure. It is expected that the fiscal deficit ratio, the scale of new local government special bonds and the scale of ultra-long-term special treasury bonds will remain broadly consistent with or slightly higher than this year's figures.

For 2026, as China embarks on the 15th Five-Year Plan, the GDP growth rate is expected to show a "low at the beginning and high toward the end" trend, resulting in a slight increase in the fiscal deficit ratio.

The potential optimization directions for the implementation of major national strategies and security capability building projects in key areas include increasing innovation requirements, expanding investments in intangible assets and better combining investment in physical assets with investment in human capital, as well as increasing investment in public welfare initiatives.

The optimization of fiscal expenditure structure may include increasing the proportion of public services spending in total fiscal expenditures and allocating more government funds to protect people's livelihoods, as well as appropriately expanding the scale of central budgetary investment.

In terms of monetary policy, the Central Economic Work Conference emphasized the possibility of deploying various monetary policy tools such as reserve requirement ratio cuts and interest rate reductions in a flexible and efficient manner to maintain ample liquidity. I expect a 25-50 basis point RRR cut and a 10-20 basis point interest rate reduction next year, with specific timing to be flexible and efficient.

This year, the conference added a new requirement for monetary policy goals, making the reasonable recovery of prices an important consideration in China's monetary policy. While last year's conference also mentioned price recovery, this year's focus seems to have shifted more toward the central bank's responsibility in achieving this goal.

Moreover, many previous policy effects have yet to be released. Coordinating existing policies and new ones will enhance their overall effectiveness. New policy-based financial tools were launched by the end of October, supporting over 2,300 projects with a focus on digital economy, artificial intelligence, consumer infrastructure and urban renewal. The total project investment is around 7 trillion yuan ($999 billion), which will support future investment growth.

Local government debt management is also being addressed, with a 500 billion yuan allocation from the local government debt ceiling and an additional 200 billion yuan in special bond quotas for investment in some provinces. Subsidies for child-rearing and free preschool education have been elevated to systemic arrangements, with continuous annual funding. Consumption vouchers for the elderly with disabilities will be rolled out nationwide by end-2025, following pilot programs in certain regions, with the effects expected to last into 2026.

The conference also highlighted the need to increase countercyclical and cross-cyclical adjustments. The proposal to enhance the effectiveness of macroeconomic governance aligns with the recommendations for formulating the 15th Five-Year Plan. Greater emphasis is placed on balancing the relationship between the government and the market, and leveraging the synergistic effects of policies.

The second key task for next year's economic work is to enhance innovation-driven development to accelerate the cultivation of new growth drivers. The importance of transitioning from old to new growth drivers is increasingly emphasized.

The conference outlined plans to develop international technological innovation centers in Beijing (the Beijing-Tianjin-Hebei region), Shanghai (the Yangtze River Delta), and the Guangdong-Hong Kong-Macao Greater Bay Area, and to implement a new round of high-quality development initiatives for key industrial chains. These represent updated requirements and higher goals built upon existing development foundations.

At the same time, the conference reiterated the need to intensify efforts to address involution, highlighting that the fight against involution is an essential part of developing a unified national market.

The writer is chief economist at Zhongtai Financial International Limited. He Zhonghui of Zhongtai Securities' research institute also contributed to this article.

The views do not necessarily reflect those of China Daily.