Commentary: China Envisages Bigger Deficit, More Rate Cuts and Greater Support in 2025

In December, China concluded its annual Central Economic Work Conference (CEWC), setting the stage for economic objectives and policies for 2025. These plans largely align with the goals discussed in the earlier Politburo meeting. Key initiatives include increasing the deficit, further rate cuts, and enhanced support to stimulate domestic demand [para. 1][para. 2][para. 3]. The specific targets, however, will be publicly announced during the National People’s Congress (NPC) meeting in March. The conference acknowledged challenges such as weak domestic demand and external uncertainties, without directly mentioning U.S. tariffs. The primary goal is to stabilize growth by increasing domestic demand through proactive macroeconomic policies, with a focus on boosting household consumption [para. 3][para. 4].

Furthermore, the conference underscored the importance of stable growth, employment, and achieving a "reasonable rebound" in inflation. These objectives respond to lingering deflationary pressures and aim to guide market expectations and policy settings. It also included measures to balance payments and promote household income growth. Although some details remain undisclosed, a supportive macro policy tone to stabilize growth was established [para. 4][para. 5].

In anticipation of higher U.S. tariffs, it's forecasted that the government will introduce a counter-plan within 2025, implementing it from the third quarter onwards. This response could lead to shocks at the end of 2025 into 2026. Post-March NPC, additional policy support is expected to be rolled out progressively in response to macroeconomic developments and new tariff impacts. Potential policy shifts and revisions may occur if significant economic shocks arise [para. 6][para. 7].

The conference also emphasized the need for stronger expectation management, better policy coordination, and enhanced local incentives. Analysts forecast China to set a 5% growth target for 2025, although achieving it amidst a property downturn and higher U.S. tariffs seems challenging. GDP growth is projected to slow to around 4% [para. 7][para. 8].

A more proactive fiscal policy, akin to the 2020 support expansion, is in the works with increased fiscal deficit plans and bond issuances to support social welfare and consumption [para. 9][para. 10]. It's anticipated that fiscal measures, including subsidies for consumer goods upgrades and potential family support schemes, will be expanded [para. 10][para. 11]. The government's prediction involves a 2-percentage point increase in the fiscal deficit’s GDP share in 2025, followed by another 1 percentage point in 2026. Total government bond issuance is expected to increase by over 3.5 trillion yuan compared to 2024 [para. 11][para. 12].

Monetary policy is shifting towards moderate easing, a departure from the prudent stance of the previous decade. Measures will focus on rate cuts, maintaining liquidity, stabilizing financial and housing markets, and expanding the central bank's macro-prudential role. Significant rate cuts and liquidity measures are anticipated to mitigate the impacts of increased bond issuance [para. 13][para. 15].

Boosting consumption is a priority, with expanded subsidies and potential increases in pension payouts and health insurance subsidies expected to enhance household confidence and spending [para. 16][para. 17]. Stabilizing the housing market remains critical, with ongoing urban village renovations and support for stalled projects [para. 19][para. 20].

The CEWC also aims to push structural reforms to stimulate high-quality growth, promote innovation, and regulate local government and business competition. Despite potential risks from higher U.S. tariffs, China commits to further market opening and global supply chain integration [para. 21][para. 22].

In currency policy, a stable yuan exchange rate is preferred, with potential depreciation against the U.S. dollar to absorb tariff impacts while managing currency changes strategically [para. 23].