China's Policy-Driven Rally: A Self-Reinforcing Cycle for Assets and Growth

China’s recent stock and yuan rally has captured global attention, driven by a meticulously coordinated blend of monetary and fiscal policies. In 2025, the People’s Bank of China (PBOC) and fiscal authorities have engineered a self-reinforcing cycle where liquidity injections, targeted fiscal stimulus, and market interventions are amplifying asset prices, consumer confidence, and economic growth. This analysis examines how these policies are creating a virtuous loop—and the risks that could disrupt it.

Monetary Easing: Liquidity as a Catalyst

The PBOC’s May 2025 10-point monetary package exemplifies this strategy. A 0.5 percentage point cut in the reserve requirement ratio (RRR) injected ¥1 trillion into the financial system, while interest rate reductions and expanded refinancing tools targeted innovation-driven sectors, SMEs, and housing markets [1]. These measures were designed to lower borrowing costs and stabilize asset prices. The immediate impact was striking: the MSCI China index surged 21.3%, and H-shares gained 17.5%, closing valuation gaps with global peers [1].

The PBOC also introduced unconventional tools like the Securities, Fund, and Insurance Swap Facility (SFISF) to directly prop up equity markets. By swapping illiquid assets for high-quality collateral, the central bank signaled its commitment to maintaining investor confidence [4]. Such interventions have not only stabilized stock prices but also reinforced expectations of further support, encouraging risk-taking and capital inflows.

Fiscal Stimulus: Infrastructure and Consumption as Anchors

Complementing monetary easing, fiscal policy has focused on infrastructure and consumption. By mid-2025, local governments had issued ¥2.6 trillion in special-purpose bonds to fund public projects, while the central government prioritized high-impact spending on digital transformation and green energy [1]. This fiscal expansion has injected liquidity into local budgets, enabling provinces to sustain public services and counteract revenue shortfalls from the property sector’s slump [2].

Targeted fiscal measures, such as subsidies for energy-efficient appliances and service-sector incentives, have also aimed to boost domestic demand. For instance, consumption vouchers distributed in Q2 2025 spurred a 5.0% year-on-year rise in retail sales, albeit from a weak base [3]. These policies are designed to create a feedback loop: higher consumer spending drives corporate revenues, which in turn supports employment and further consumption.

The Feedback Loop: From Assets to Growth

The interplay between monetary and fiscal policies has created a self-reinforcing cycle. Lower interest rates and liquidity injections have driven asset prices higher, improving household balance sheets and consumer confidence. For example, the rebound in real estate equity (despite sector-wide declines) has stabilized wealth effects, while stock market gains have encouraged retail investors to participate [4].

This confidence has translated into broader economic activity. Q2 2025 GDP growth hit 5.2%, exceeding the annual target of 5%, as infrastructure spending and manufacturing (particularly in high-tech sectors) offset weak private demand [4]. Meanwhile, the yuan’s recovery against the U.S. dollar—up 6.8% year-to-date—has been bolstered by capital inflows chasing higher asset returns and policy-driven stability [5].

Structural Challenges and Risks

Despite these gains, structural vulnerabilities persist. Regional disparities highlight uneven policy effectiveness: Western China, for instance, showed slower recovery in property prices and output compared to Eastern regions after contractionary monetary shocks [5]. Additionally, local governments face rising debt burdens from bond financing, with some provinces nearing unsustainable leverage ratios [2].

Overcapacity in sectors like electric vehicles and solar panels also threatens long-term growth. While fiscal stimulus has propped up demand, it risks exacerbating supply-side imbalances if not paired with structural reforms [3]. Moreover, the reliance on targeted consumption vouchers rather than broad-based wage growth may limit the sustainability of domestic demand.

Conclusion: Balancing Momentum and Sustainability

China’s 2025 policy coordination has undeniably catalyzed a short-term rally in assets and growth. However, the self-reinforcing cycle depends on careful calibration. If policymakers can address structural bottlenecks—such as overcapacity, local debt, and demographic pressures—while maintaining disciplined fiscal management, the current momentum could translate into a durable recovery. For investors, the key lies in monitoring how these feedback loops evolve against the backdrop of global trade tensions and domestic rebalancing efforts.

Source:
[1] China Unveils 10-Point Monetary Package to Stabilize Markets [https://www.china-briefing.com/news/china-10-point-monetary-package-market-stabilization/]
[2] China's Fiscal Crossroads: Stabilizing Growth While Ensuring Long-Term Stability [https://amro-asia.org/chinas-fiscal-crossroads-stabilizing-growth-while-ensuring-long-term-stability/]
[3] China's Economy in H1 2025: Resilience Amidst Uncertainty [https://behorizon.org/chinas-economy-in-h1-2025-resilience-amidst-uncertainty]
[4] China's Economic and Industry Outlook for 2025 [https://www.deloitte.com/cn/en/services/consulting/perspectives/deloitte-research-issue-95.html]
[5] Regional Effects of Monetary Policy in China [https://link.springer.com/article/10.1007/s00181-025-02809-x]