China to Loosen Monetary Policy in 2025 to Spur Growth

In 2025, China is set to loosen its monetary policy to stimulate domestic demand, moving away from the "prudent" stance held for the last 14 years. The Politburo, a significant political body in China, has announced a shift to a "moderately loose" monetary policy coupled with "more proactive" fiscal measures to boost consumption and stabilize the economy against external shocks. This policy change is aimed at supporting economic recovery through stabilization of the property and stock markets, and mitigating external threats [para. 1][para. 2][para. 3][para. 4].

The recent Politburo meeting, which sets the framework for the Central Economic Work Conference, indicates the country’s largest stimulus effort in a decade. It represents the first acknowledgment by the current leadership of the need for a looser monetary policy, setting the stage for a new cycle of monetary easing. The last significant shift in China’s monetary policy occurred in 2010 when the nation shifted from "moderately loose" to "prudent" in response to the global financial crisis [para. 5][para. 6][para. 7].

China's approach to monetary policy has evolved over the years, transitioning through various phases such as "tight," "moderately tight," "prudent," and "loose." The central goal has been maintaining economic stability and achieving counter-cyclical adjustments [para. 8][para. 9]. According to Morgan Stanley economists, the forecast for 2025 includes a 2 trillion yuan fiscal expansion and a 40 basis points policy rate cut, with potential for a 4% official deficit and additional quasi-fiscal measures like special bonds for state-owned enterprises [para. 10].

With Donald Trump potentially re-entering the U.S. presidency, China might turn to more significant policy rate cuts as part of broader economic stabilization measures. Yi Shan from Huatai Securities forecasts a 20-basis point rate cut in early 2025, with room for further reductions if inflation remains low and external shocks persist. Depending on these factors, modifications to the yuan exchange rate may also occur [para. 11][para. 12].

Economist Luo Zhiheng from Yuekai Securities anticipates a 0.5 percentage point cut in the reserve requirement ratio and interest rates, enhanced by structural monetary tools. These include re-lending programs for affordable housing and loans for stock repurchase, emphasizing that such measures aim to counteract external economic shocks [para. 13].

The course of action for 2025 depends on China’s GDP target and tariffs from the U.S. However, GDP and budget targets will likely be clarified at the National People’s Congress in March. It's expected that China will maintain its GDP growth target at "around 5%" [para. 14][para. 15].

Despite an official "prudent" label, China’s monetary policy has been moderately accommodative, alongside the introduction of a five-year, 10 trillion-yuan package to address local government debt, signaling commitment to sustained economic support. The focus on monetary policies since early 2024 has seen broad stimulus measures, transitioning to structural adjustments mid-year, particularly in the property market [para. 16][para. 17][para. 18][para. 19][para. 20].

In June, the PBOC introduced a new monetary framework prioritizing interest rates over quantitative targets, while recent aggressive stimulus measures were announced to address economic challenges, leading to significant gains in stock markets. This shift in policy logic combines immediate demand-boosting measures with long-term reforms for stable and high-quality economic development [para. 21][para. 22][para. 23][para. 24][para. 25].