Four Things to Know About China’s 2025 Economic Outlook

China is determined to address its economic challenges, which include a stagnant real estate sector, weak domestic demand, and potential external threats such as upcoming U.S. tariffs, as observed at the Central Economic Work Conference (CEWC) and a preceding Politburo meeting chaired by President Xi Jinping. A notable shift was seen as China moved from a "prudent" to a "moderately loose" monetary policy, reflecting a proactive fiscal approach. This was considered a significant move after a 14-year cautious stance and follows the positive impacts of a stimulus package announced in September [para. 1][para. 2][para. 3][para. 4].

Four key themes emerged from these policy discussions: maintaining the GDP growth target, increasing the fiscal deficit, adopting a looser monetary policy, and focusing on consumption. Economists expect China to keep the GDP growth target at around 5% for 2025, as it's essential to counter deflationary pressures and maintain social stability. This target also aligns with China's ambition to reach the per capita GDP level of medium-developed economies by 2035. Economic headwinds such as a potential increase in U.S. tariffs, under Donald Trump's second term, add to these challenges, potentially reducing net exports and affecting China's global trade share [para. 5][para. 6][para. 7][para. 8].

Expectations for a fiscal deficit exceeding 3% of GDP mark a shift from the traditionally maintained cap of 3%, a limit inspired by the Maastricht Treaty. The deficit could rise to between 3.5% and 4% of GDP in 2025. Analysts argue that such an increase is necessary for boosting market expectations and stimulating capital markets, considering recent trends where the deficit reached as high as 3.8% amidst pandemic challenges [para. 9][para. 10][para. 11][para. 12][para. 13].

Monetary policy is set to loosen to address persistent domestic demand weakness and external challenges. The People's Bank of China's recent measures, such as reducing the reserve requirement ratio and key interest rates, aim to invigorate economic activity amid consistent deflationary pressures. Further rate cuts are anticipated to stimulate investment and spending [para. 14][para. 15][para. 16][para. 17].

Boosting consumption remains a primary task, with fiscal measures expected to support citizens directly, particularly through subsidies and enhanced public services for new parents and migrant workers. The establishment of a significant childcare or childbirth subsidy system is on the horizon, as local governments prepare budgets in anticipation. Additionally, large-scale local government debt swaps will aim to ease fiscal burdens and unlock funds for growth and consumer spending [para. 18][para. 19][para. 20].

The CEWC highlighted stabilizing the housing market and supporting the stock market as vital goals. Restoring confidence in real estate is crucial to household wealth and housing demand, tied to future income expectations. Stabilization measures in both housing and stock markets are seen as essential for maintaining and growing household wealth and asset-based income [para. 21][para. 22].