China's dovish pivot; The CEWC and what it mean's for markets

China's Central Economic Work Conference, held on December 11-12, set the economic agenda for 2025 and outlined strategies to address domestic and international challenges. The conference emphasized a dovish policy shift, pledging to increase fiscal spending, issue more debt, and ease monetary policy to stabilize growth amidst pressures from trade tensions and domestic economic weaknesses. This marked one of the most accommodative stances in years, signaling China’s intent to prioritize growth over financial risks.

Key fiscal measures include hints of raising the fiscal deficit ratio from 3% to an expected 4%, issuing ultra-long-term special treasury bonds, and increasing local government special bond quotas. These moves are designed to boost economic activity by supporting infrastructure projects and grassroots programs. Analysts expect the issuance of up to RMB 1.5 trillion in long-term government debt and RMB 4.5 trillion in local government bonds, reflecting Beijing’s commitment to stimulate growth.

The conference reinforced the need to expand domestic consumption as a cornerstone of economic recovery. Plans include subsidies for “large-scale equipment renewal” and “old-for-new” consumer goods schemes. Measures to raise household incomes and improve social welfare aim to invigorate low household demand, a persistent risk to growth. However, concrete stimulus measures might only be revealed after the U.S. clarifies its stance on tariffs, indicating China’s cautious approach in managing external uncertainties.

Monetary policy will shift to an “appropriately loose” stance, with measures such as reducing bank reserve requirements and timely interest rate cuts. This dovish approach reflects China’s urgency to counter deflationary pressures and support domestic lending. The CEWC also emphasized “unconventional counter-cyclical adjustments,” a first-time acknowledgment of the need for such tools in official statements, highlighting the severity of current economic challenges.

China’s export sector faces significant risks from potential U.S. tariffs. With Donald Trump returning to the White House, his administration’s tariff threats could exacerbate overcapacity and deflationary pressures in China’s industrial complex, where over $400 billion in goods are sold to the U.S. annually. Analysts estimate that tariffs could reduce China’s growth by up to 1 percentage point in 2025. To offset these risks, Beijing plans to expand domestic demand and pursue structural reforms.

The CEWC reiterated China’s 5% growth target for 2024, but achieving this will be challenging given the combination of weak domestic demand, a struggling property market, and external headwinds. Analysts suggest growth could slow to 4.5% if tariffs materialize, though targeted fiscal and monetary measures could prevent a sharper downturn. Strengthened stimulus is expected, reflecting Beijing’s determination to meet its targets and stabilize the economy.

A potential invitation for Xi Jinping to attend Donald Trump’s inauguration could ease tensions and encourage foreign investment in China. While Hong Kong trading desks downplayed the significance of this invitation, improved diplomatic relations might rebuild confidence among institutional investors hesitant to allocate capital to Chinese equities, particularly undervalued tech stocks.

The CEWC also addressed structural reforms in real estate and capital markets. Housing market policies will reduce transaction costs and provide favorable tax treatments to boost liquidity, while new swap facilities for securities aim to stabilize the financial system. These measures, coupled with a dovish fiscal and monetary stance, signal Beijing’s intent to create a more resilient economic environment.

As the guiding event for China’s economic planning, the CEWC’s emphasis on growth and reform underscores the government’s resolve to balance short-term recovery with long-term development. This dual focus aims to stabilize expectations while addressing structural issues like industrial overcapacity and weak consumption. The central government’s clear communication of its policies has bolstered confidence in its ability to navigate complex domestic and global challenges.

China’s ability to implement these measures effectively will determine the success of its growth strategy. By prioritizing domestic consumption, fiscal stimulus, and monetary easing, the government aims to counteract external shocks and maintain its role as a global economic engine. This approach reflects not only China’s resilience but also its commitment to high-quality development and greater integration with the global economy.