China's Monetary Policy Dilemma: Stock Market Rally vs. Economic Stability

In 2025, China’s monetary policy has sparked a paradox: while the Shanghai Composite index surged by 36% year-to-date, reflecting a dramatic stock market rally, the broader economy remains mired in structural challenges. The People’s Bank of China (PBOC) has deployed a 10-point monetary package, including a 0.5 percentage point RRR cut and a 7-day reverse repo rate reduction to 1.4%, injecting RMB 1 trillion in liquidity [1]. These measures, coupled with direct interventions like ETF purchases, have fueled investor optimism. Yet, beneath the surface, GDP growth in 2024-2025 has averaged 2.4%-2.8%, far below the official 5% target, as deflationary pressures, a collapsing property sector, and local government debt crises persist [3].

The Policy-Driven Rally: A Double-Edged Sword

The PBOC’s aggressive easing has stabilized financial markets, with the China A-share market gaining over $1.2 trillion in a single month [2]. However, this rally raises concerns about speculative excess. Regulators are now considering curbs on short-selling and retail participation to avert a repeat of the 2015 crash [2]. The disconnect between equity valuations and economic fundamentals is stark: while high-tech manufacturing and services sectors grew by 9.5% and 5.5% year-on-year in H1 2025, respectively [1], consumer confidence remains weak due to high youth unemployment and stagnant incomes [2].

The National Financial Regulatory Administration (NFRA) has attempted to bridge this gap by revising risk-weighting rules to support SMEs and private firms, while the China Securities Regulatory Commission (CSRC) has streamlined tech innovation bond issuance [1]. Yet, these efforts face headwinds from a property sector slump, which accounts for 30% of GDP, and a RMB 14.3 trillion local government debt restructuring plan [4].

Investor Caution: Navigating a Fragile Recovery

Investor sentiment reflects this duality. The 2025 China Investor Intentions Survey reveals that 51% of investors plan to sell, an all-time high, while only 41% intend to buy more [2]. This caution is rooted in geopolitical risks, particularly U.S. tariffs that could rise to 60% on Chinese exports, threatening a 4.8% GDP growth forecast [1]. Financial institutions like BNP Paribas warn that redirecting exports to domestic markets risks deepening deflation, as weak consumer demand amplifies downward price pressures [2].

Goldman Sachs highlights another vulnerability: urban unemployment could exceed the 5.5% target in 2025, exacerbated by trade war-driven job losses in export sectors [2]. Meanwhile, the PBOC’s 5.3% GDP growth in H1 2025—driven by industrial output and exports—masks a fragile recovery, with retail sales growth at 5.0% largely attributable to government trade-in programs [1].

The Path Forward: Balancing Stimulus and Stability

China’s policymakers are caught between short-term stabilization and long-term reform. The government’s “around 5%” growth target for 2025 hinges on fiscal easing, including a 4% of GDP budget deficit—the highest in 30 years [1]. However, structural reforms to liberalize the services sector and boost consumption remain underdeveloped. Deloitte notes that while EV sales grew 11.2% in H1 2025, such sector-specific gains cannot offset broader economic headwinds [1].

For investors, the dilemma is clear: the stock market rally offers short-term gains but is decoupled from a real economy struggling with deflation, debt, and geopolitical tensions. As JPMorgan warns, a trade war escalation could force further policy easing, but this risks fueling asset bubbles [4]. The PBOC’s dual mandate—price stability and innovation-driven growth—remains unbalanced, leaving markets vulnerable to policy missteps.

Conclusion

China’s 2025 monetary policy has succeeded in propping up asset prices but has done little to resolve underlying economic fragility. Investors must weigh the allure of a stock market rebound against risks from deflation, trade wars, and structural imbalances. As the PBOC navigates this tightrope, the coming months will test whether its stimulus measures can catalyze a sustainable recovery—or merely delay an inevitable reckoning.

**Source:[1] China Unveils 10-Point Monetary Package to Stabilize ...,
https://www.china-briefing.com/news/china-10-point-monetary-package-market-stabilization/[2] China Outlook: Can China make it in 2025?,
https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/china-outlook-can-china-make-it-in-2025[3] After the Fall: China's Economy in 2025,
https://rhg.com/research/after-the-fall-chinas-economy-in-2025/[4] China | First effects of the trade war,
https://economic-research.bnpparibas.com/html/en-US/China-First-effects-trade-6/26/2025,51674