China's Growth Boost: Top Policymakers Pledge Proactive Measures

China's top policymakers have signaled a greater resolve to stabilize growth and tackle challenges head-on, pledging to adopt a more proactive fiscal policy and a moderately loose monetary policy for 2025. This shift in stance, the first since 2011, is expected to entail greater strides in rate cuts and reductions in the reserve requirement ratio by the People's Bank of China. The proactive fiscal policy is likely to emphasize consumer spending and the real estate sector, aiming to boost domestic demand and stimulate the vigor of the economy. This policy mix is set to enrich and improve the policy toolkit, strengthen unconventional countercyclical adjustments, and make macro regulation more forward-looking, targeted, and effective.

The meeting, held by the Political Bureau of the Communist Party of China Central Committee, also emphasized the need to expand domestic demand on all fronts and strengthen unconventional counter-cyclical adjustments. This approach is designed to rebalance supply and demand dynamics, which have been skewed towards exports and industrial production. By boosting domestic demand, the government aims to address the current imbalance where supply outpaces demand, and external demand is stronger than domestic demand. The pledge to strengthen unconventional counter-cyclical adjustments suggests a more proactive fiscal policy and a moderately loose monetary policy, which could entail greater strides in rate cuts and reductions in the reserve requirement ratio by the People's Bank of China. This policy mix is designed to stimulate the vigor of the economy, stabilize expectations, and defuse risks in key sectors such as real estate and finance.

The reduction in interest rates and reserve requirement ratio (RRR) by the People's Bank of China (PBOC) will lower borrowing costs for businesses and consumers. According to Pan Gongsheng, PBOC governor, the RRR cut by 0.5 percentage points will provide around 1 trillion yuan (about 141.82 billion U.S. dollars) in long-term liquidity, benefiting the financial market. Additionally, the reduction in the interest rate of seven-day reverse repurchases from 1.7% to 1.5% will guide the loan prime rate and deposit rate downward, further easing borrowing costs. This accommodative monetary policy aims to maintain stability in the net interest margin of commercial banks and create a sound monetary and financial environment for stable economic growth and high-quality development.

The shift in China's monetary policy to a "moderately loose" stance signals a more accommodative environment for both the stock and bond markets. This policy change, the first since 2011, indicates a proactive approach to stimulate economic growth. The People's Bank of China has already implemented measures such as reducing the reserve requirement ratio and interest rates, which are expected to continue in 2025. These moves should lower financing costs for businesses and consumers, boosting investment and consumption. As a result, we anticipate a positive impact on the performance of both the stock and bond markets, with potential increases in market indices and bond yields. However, investors should remain vigilant to potential risks, such as geopolitical tensions and global economic uncertainties.

In conclusion, China's top policymakers have pledged proactive measures to boost growth and tackle challenges in 2025. The shift to a more proactive fiscal policy and a moderately loose monetary policy is expected to lower borrowing costs for businesses and consumers, stimulate domestic demand, and create a more accommodative environment for the stock and bond markets. However, investors should remain aware of potential risks and monitor the evolving economic landscape.