China's monetary policy shift
China’s annual Central Economic Work Conference is shaping up to be a critical event as policymakers grapple with faltering economic growth and intensifying external pressures. Expectations are high for significant announcements regarding fiscal and monetary stimulus, marking a departure from the relatively cautious stance seen in recent years. As the Politburo recently signaled a shift to an "appropriately loose" monetary policy—the first such easing in 14 years—market participants anticipate aggressive measures to bolster domestic demand, stabilize the housing market, and mitigate trade-related risks.
At the conference, Beijing is expected to unveil a more proactive fiscal policy, with a likely increase in the fiscal deficit-to-GDP ratio above 3%. Economists speculate the target could rise to 3.5%-4%, allowing for greater central government borrowing to fund infrastructure projects and social programs. Breaking the traditional 3% ceiling would signal a willingness to prioritize economic growth over fiscal discipline, reflecting the urgency of addressing slowing momentum in key sectors such as manufacturing and property. Such a move would provide local governments with much-needed liquidity to manage their debt burdens and invest in economic recovery efforts.
Inflation data released on Friday supports the case for further stimulus. China's consumer price index (CPI) rose only 0.2% year-over-year in November, well below the government's target of around 3%. Factory deflation also persisted, albeit at a slower pace, with the producer price index (PPI) falling 2.5% year-over-year. The subdued inflation environment suggests that China has room to implement expansionary fiscal and monetary policies without triggering significant price pressures. Analysts expect additional measures, such as further interest rate cuts and increased credit support for businesses, to be on the table.
A major external risk comes from potential tariff escalations by the incoming Trump administration, which has threatened to impose tariffs of up to 60% on Chinese imports. These threats could severely impact China's export-driven manufacturing sector, which remains a key pillar of its economy. While the Politburo has indicated confidence in countering these challenges, government advisers are recommending that stimulus efforts focus on boosting domestic consumption to reduce reliance on volatile external demand. Adjustments to retaliatory tariffs on U.S. goods may also be considered to lower import costs and foster trade stability.
Globally, the anticipated stimulus measures could have significant ripple effects. Increased infrastructure spending in China is expected to drive demand for commodities such as steel, copper, and crude oil, benefiting resource-exporting countries like Brazil, Australia, and Canada. However, sustained overcapacity in Chinese manufacturing could keep global inflationary pressures low, complicating monetary policy decisions for central banks in advanced economies. Markets will also be closely watching for signals of improved demand in China’s auto and tech sectors, which have wide-reaching implications for global supply chains.
Domestically, Beijing faces the dual challenge of managing near-term economic stabilization while addressing long-term structural issues. While stimulus measures are expected to focus on boosting domestic demand and stabilizing the property sector, there is growing pressure to implement reforms that promote income redistribution and improve social safety nets. Economists have urged the government to provide stronger financial support for low-income households and push forward tax and welfare reforms to address structural imbalances that have hindered sustainable growth.
In summary, the Central Economic Work Conference is likely to set a bold tone for 2025, with fiscal and monetary policies aligned to counter deflationary pressures, stabilize key sectors, and withstand external headwinds. The outcomes of this meeting will not only determine the trajectory of China’s economy but will also have profound implications for global markets, especially as the world’s second-largest economy navigates a complex mix of internal and external challenges.