China’s leadership has announced a shift in monetary policy to a “moderately loose” stance, signaling heightened concern over the country’s entrenched economic challenges. This marks a departure from the “prudent” policy adopted 14 years ago and sets the stage for what experts believe is the beginning of a new monetary easing cycle.
Larry Hu, Chief Economist at Macquarie, noted the significance of this move:
“Such a tone suggests that policymakers are deeply concerned about the economic outlook, given the sluggish domestic demand and the threat of another trade war.”
Despite the pivot, experts anticipate a cautious approach, with “bazooka-style” stimulus measures deemed unlikely.
Economic Headwinds: Deflation and Weak Demand
China’s economy continues to grapple with deflationary pressures, lackluster consumer demand, and a prolonged housing market downturn. While the country unveiled a 10 trillion yuan ($1.37 trillion) five-year stimulus package in October, this amounts to just 2.5% of annual GDP, much smaller than the historic 4 trillion yuan ($586 billion) package announced during the 2008 global financial crisis.
Tao Wang, Chief China Economist at UBS, noted:
“Potential monetary easing leeway is much more limited than 15 years ago.”
Wang forecasts an interest rate cut of over 50 basis points in the next two years, while the People’s Bank of China (PBOC) is expected to reduce the reserve requirement ratio (RRR) soon to inject liquidity.
Market Reaction and Constraints on Monetary Policy
The PBOC has been cutting key interest rates since September but remains cautious about deeper cuts to avoid capital flight amid a widening rate differential with global markets. The recent Politburo meeting reinforced expectations of further rate reductions, with the 10-year Chinese government bond yield falling to record lows.
Bruce Pang, Chief Economist of Greater China at JLL, emphasized the priority of growth over currency stability:
“Securing the [economic] growth momentum would have higher priority than stabilizing the exchange rate.”
Incremental Stimulus Over “Bazooka-Style” Measures
Gabriel Wildau of Teneo suggested that while Beijing’s stronger language signals more stimulus, it will likely be introduced incrementally:
“Top leaders will roll out new stimulus measures in an incremental, data-dependent fashion while keeping some ammunition in reserve.”
Experts anticipate further details on fiscal and monetary policies during the National People’s Congress in March 2025. Immediate measures may focus on targeted incentives to revive household consumption, including a potential doubling of the trade-in program to over 300 billion yuan ($41.5 billion).
Sunny Liu of Oxford Economics stressed that bolstering consumption remains critical:
“China will continue to face deflationary pressures in the near term without stronger measures to boost consumer demand.”
Key Takeaways:
- China’s monetary policy shift reflects growing economic challenges but signals a restrained approach to stimulus.
- Experts predict targeted rate cuts, liquidity injections, and increased fiscal measures, but no large-scale interventions.
- Reviving consumer spending and addressing structural economic issues remain top priorities for policymakers.
Investors and analysts will closely monitor China’s upcoming Economic Work Conference and the National People’s Congress for further guidance on the government’s economic strategy in 2025.
