Wang Tao: Raising the Deficit Ratio, Further Interest Rate Cuts, and Increasing Policy Support | Analysis of the Central Economic Work Conference (AI Translation)

汪涛：提高赤字率、进一步降息、加大政策支持｜中央经济工作会议解读

The Central Economic Work Conference, which concluded on December 12, set a proactive tone for China's macroeconomic policies, emphasizing stable growth as a top priority amidst challenges like insufficient domestic demand and an evolving external environment. The conference did not specifically address the risk of U.S. tariff hikes but prioritized boosting consumption and outlined the need for proactive fiscal policies to address deflationary pressures and stabilize market expectations. While specific measures will largely be announced during the Two Sessions in March 2025, the meeting set a framework for various policy decisions [para. 1].

The conference expected potential U.S. tariffs on Chinese imports to be announced in early 2025, likely affecting economic growth towards the end of 2025 and into 2026. In anticipation, China's government may further bolster policy support, aiming for around 5% economic growth in 2025, although achieving this will be challenging. Increased policy support is expected to partly offset negative impacts from the real estate sector downturn and tariff impositions, with GDP growth anticipated to slow to about 4% in 2025 [para. 2].

The meeting proposed a "more proactive" fiscal policy to expand fiscal support, akin to measures taken in 2020, including raising the fiscal deficit ratio and issuing ultra-long-term special government bonds. Additionally, the issuance and use of local government special-purpose bonds will be expanded, aiming to improve people's livelihoods and boost consumption. Pro-natal policies may also be introduced, potentially widening the fiscal deficit ratio by several percentage points over the next two years, with government bond issuance significantly increasing in 2025 [para. 3].

A shift to a "moderately accommodative" monetary policy was recommended, marking a transition from the longstanding "prudent" approach. This aligns with past monetary relaxation during the global financial crisis, suggesting further interest rate cuts and reserve requirement reductions in 2025 to maintain liquidity and financial market stability. The central bank is anticipated to reduce interest rates by 30-40 basis points in 2025 and by an additional 20-30 basis points in 2026 [para. 4].

Boosting consumption to expand domestic demand was highlighted, with plans to double government subsidies for consumer goods trade-ins to over 300 billion yuan. Measures to increase pensions and medical insurance subsidies for urban and rural residents, along with potential family childcare subsidies, are expected to gradually enhance consumer confidence. Despite these efforts, however, the increase in social security-related fiscal expenditures in 2025 might not be considerable [para. 5].

The meeting also emphasized stabilizing the real estate market, aiming to accelerate urban village renovations and manage housing supply. A swift implementation of urban village renovations could contribute significantly to reducing real estate inventories. The government is expected to encourage banks to provide credit support for real estate project completions, with policy implementation being crucial to overcoming current market bottlenecks [para. 6].

In support of innovation and the private economy, the meeting outlined structural reforms, such as promoting technological innovation, passing the Private Economy Promotion Law, and regulating enterprise-related law enforcement. Despite potential U.S. tariffs, China remains committed to high-level global integration, although a 5%-8% RMB depreciation to cushion external shocks is anticipated [para. 7].