China to support expanding domestic demand

China to support expanding domestic demand

In the face of external uncertainty, fueled by potential shifts in US policy, China is poised to make expanding domestic demand a priority for 2025 [1]. With consumption and services emerging as key areas of focus, China aims to reduce its reliance on external demand and foster a more resilient economy.

The election of Donald Trump as the next US president could lead to a significant change in US policy, with potential implications for China. Trump's inclination to reduce overseas military commitments and cut fiscal expenditures abroad may enhance the growth potential of the US economy, while his advocacy for stricter immigration policies and additional tariffs on imported goods could heighten US inflation [1]. If US inflation expectations rise, the US Federal Reserve may slow down or even halt its interest rate cuts, resulting in a stronger US dollar [1].

The strengthening US dollar could put pressure on the Chinese yuan, potentially leading to a slower pace of interest rate reductions by the People's Bank of China (PBOC) [1]. However, the PBOC faces two significant monetary policy goals: maintaining exchange rate stability and effectuating price level stability [1]. Any pressure on the yuan exchange rate could negatively impact China's real estate market, as external demand is an uncontrollable variable [1].

To mitigate the impact of external uncertainty, China is focusing on expanding domestic demand. This includes investment and consumption, with policy efforts aimed at reducing reliance on investment and promoting consumption growth [1]. The services sector is also expected to play a larger role, with efforts to further its development and absorb more labor forces [1].

China's growth model over the past few decades has been investment-driven. However, with the global economy evolving and external uncertainty on the rise, it is crucial for China to adapt and shift its focus towards domestic demand. By reducing institutional constraints that impede the services sector from further development and fostering a more resilient economy, China is well-positioned to navigate the new global economic landscape.

References:
[1] Ma Xuejing. China Daily. China to support expanding domestic demand. December 9, 2024. https://www.chinadaily.com.cn/a/202412/09/WS67565212a310f1265a1d1db0.html