China's Central Bank: Time for New Policy Tools to Boost Consumption

As China's economy navigates a complex global landscape, invigorating domestic demand has become a critical priority. While the country has made strides in promoting equipment upgrades and consumer goods trade-ins, stabilizing the property market, and addressing local government debt risks, more needs to be done to stimulate consumption and drive economic growth. In this context, the Chinese central bank is urged to add new policy tools to its arsenal to effectively spur consumption.



The Case for New Policy Tools

China's high savings rate, coupled with a relatively low consumption-to-GDP ratio, presents a significant challenge for policymakers. To address this imbalance, the central bank should consider implementing new policy tools that complement existing measures and target specific sectors or activities that support consumption and economic recovery.

Targeted Monetary Policy

One approach is to employ targeted monetary policy tools that channel funds towards specific sectors or activities. For instance, the central bank can:

1. Expand the use of special-purpose bonds to finance infrastructure projects and consumer goods trade-ins. This can help stimulate consumption and investment without directly increasing the money supply.
2. Implement targeted lending facilities, such as the trade-in program for consumer goods, which has been successful in boosting sales of appliances and automobiles. This program has seen significant growth, with retail sales of home appliances and audiovisual equipment surging by 166.4 percent and sales of communication devices skyrocketing by 181.9 percent year on year during the 2025 Spring Festival holiday.

Macroprudential Measures

In addition to targeted monetary policy, the central bank can employ macroprudential measures to manage systemic risks and prevent asset bubbles, particularly in the real estate sector. Some examples include:

1. Adjusting the reserve requirement ratio (RRR) and interest rates in a targeted manner to control credit growth and prevent excessive speculation in the real estate market. The central bank has already initiated RRR cuts and interest rate reductions since September 2024, which have helped lower financing costs for the real economy and stimulate market demand.
2. Strengthening countercyclical adjustments and expanding the macroprudential and financial stability functions of the central bank, as proposed at the Central Economic Work Conference. This can help the central bank better manage risks and maintain financial market stability amidst increasing global uncertainties.

Fiscal Policy Coordination

Coordinating fiscal policy with monetary policy can help address inflation and asset bubble risks. For example, the government can:

1. Increase the size of the fiscal deficit and allocate larger-scale government bonds to support high-tech industries and strategic emerging industries. This can help push for industrial structure optimization and high-quality economic development without relying solely on monetary policy.
2. Expand local government bonds to replace hidden debts and increase investment in education, healthcare, housing, and other people's livelihood sectors. This can enhance public service quality and residents' well-being and consumption capacity, while minimizing the impact on inflation and asset bubbles.

By combining these targeted and macroprudential measures, the central bank can effectively balance the need to boost consumption with the risks of fueling inflation and asset bubbles, particularly in the real estate sector. These measures can help ensure a stable and sustainable economic recovery in China.

In conclusion, the Chinese central bank should consider adding new policy tools to its arsenal to effectively stimulate consumption and drive economic growth. By employing targeted monetary policy, macroprudential measures, and coordinating with fiscal policy, the central bank can create a comprehensive strategy for consumption growth that addresses both immediate and long-term challenges.