Stronger monetary policy underlined for growth

Though showing resilience and signs of recovery, China's economy remains constrained by weak domestic demand and fragile internal growth drivers, prompting economists to call for a stronger, more decisive role for monetary policy alongside steady fiscal support, while accelerating a longer-term shift toward consumption-led and innovation-driven growth.

Zhang Bin, a non-resident senior research fellow at the China Finance 40 Forum and deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said the current rebound lacks solid endogenous momentum.

"The real weakness lies in internal drivers," Zhang said, pointing to subdued private-sector investment appetite and weak household willingness to spend, or buy homes.

Zhang said monetary policy today operates through broader and more powerful channels than in the past, influencing corporate and household balance sheets, asset prices and exchange rates. More importantly, monetary policy can change expectations — convincing firms that investment can be profitable and households that spending or home purchases make economic sense in a non-deflationary environment.

Given that the overall fiscal stance has largely been set following the Central Economic Work Conference and will be formally confirmed at the upcoming annual two sessions, Zhang said he expects further progress to likely come from additional monetary easing this year, rather than larger fiscal moves. Compared with the past, when large-scale public investment could quickly generate demand through urban expansion and infrastructure building, today's fiscal spending is increasingly concentrated on urban renewal and adjustments to existing assets — processes that take time and deliver weaker short-term stimulus.

"These constraints mean countercyclical policy will need to rely more on monetary policy than fiscal policy," he said, calling for clearer policy commitments, fewer and more focused objectives — such as prioritizing a return to moderate inflation — and fuller use of tools such as policy interest rates.

According to the CF40's 2025 fourth quarter macro policy report, the key to sustained improvement in 2026 lies in expanding domestic demand. The report says that while China still has policy space, loosening monetary conditions should take precedence over further government borrowing and spending.

Unlike fiscal stimulus, which boosts demand through government-led expenditure and multiplier effects, the report notes that accommodative monetary policy works by improving expectations and optimizing the budget constraints faced by firms and households. By lowering financing costs and clarifying inflation objectives, monetary policy can mobilize market-driven, self-sustaining demand across microeconomic entities, making it more durable and efficient.

However, Guo Kai, executive president of the CF40 Institute, said fiscal policy is expected to remain supportive this year, while monetary policy can stay measured. In his view, rate cuts of 10 to 20 basis points, combined with adequate medium — and long-term liquidity through tools such as reserve requirement ratio cuts, should be sufficient to keep 2026 economic growth close to 5 percent.

Looking beyond the cyclical recovery, Huang Yiping, a member of the CF40 and dean of Peking University's National School of Development, said the long-standing pattern of relatively strong supply and weak demand has become a binding constraint on China's growth model.

Huang said China's growth transition involves two fundamental shifts: from production factors-driven expansion to innovation-led growth, and from reliance on external markets to greater dependence on the domestic market. Structural factors, including an investment-heavy allocation of resources, prolonged labor surplus that has constrained wage growth, and relatively weak social security systems, have all weighed on consumption.

Addressing still-weak domestic demand, he said, policy should further clarify the boundary between government and market roles, regulate local government behavior and strengthen income and social security systems. Meanwhile, expanding the services sector will be critical, not only to unlock consumption potential but also to support employment.