Pragmatic stimulus need of the hour - 2024-12-12
With US President-elect Donald Trump announcing higher tariffs on Mexico, Canada and China even before his inauguration, it is now unrealistic for China to continue to count on external demand to ride out the housing market correction.
While China's export performance has remained robust in 2024, it is expected that net exports will contribute less to GDP growth in 2025. Therefore, a broader shift toward domestic demand will be essential to maintain economic momentum.
The December Central Economic Work Conference (CEWC) will likely set a pro-growth policy tone. An ambitious growth target is likely to be adopted to anchor market expectations and change the deflationary mindset. The shift from "prudent" to "appropriately loose" monetary policy stance suggests the central bank is prepared to inject sufficient liquidity to absorb the expected surge in government bond supply, and moderately cut policy rates to prevent a rise in real interest rates.
We expect the government to introduce more measures to boost housing demand and contain supply, including deploying additional resources to support "whitelist" projects and curtail housing inventory.
In light of the trade challenges, the Chinese government is expected to implement stronger fiscal policy to bolster domestic demand. China is likely to keep its 2025 GDP growth target at around 5 percent, with an emphasis on sustaining job creation and avoiding social instability. In order to achieve this, the government is likely to widen the fiscal deficit to 3.5 percent of GDP, up from 3.0 percent in 2024, signaling its commitment to supporting growth in a more challenging global environment.
Fiscal policy is expected to be the key lever in 2025. A combination of higher special bond issuance, targeted fiscal spending, and government-backed initiatives will help stimulate the economy. The central government is likely to increase spending on infrastructure projects financed by local government bond issuance, while also focusing on initiatives such as local debt swaps and bank recapitalization. These measures are expected to have a positive impact on growth, potentially boosting GDP by 0.3 to 0.5 percentage points.
Among the most pressing domestic concerns is the ongoing slowdown in the real estate sector, which has been a significant drag on the economy. The housing market has faced significant headwinds, with declines in property sales and investment. However, there are signs that policy measures to stabilize the market are beginning to take effect. The government has already introduced a series of supportive measures, including relaxing home purchase restrictions, lowering mortgage rates and transaction taxes, and ramping up financial support for key property development projects.
Looking ahead, further support for the housing market will likely be a priority in 2025, with expectations of continued intervention to stabilize both supply and demand in order to prevent a further decline in the housing market. Property investment is forecasted to decline at a slower pace, which could help reduce the overall drag on growth by approximately 0.3 percentage points.
Beyond fiscal and monetary measures, there is growing consensus within China's policy circles that consumption must take on a larger role in driving economic growth. Household savings have surged in recent years, driven by the economic uncertainties brought by the COVID-19 pandemic, and consumption has struggled to recover to pre-pandemic levels. To address this, the government is expected to introduce targeted policies to encourage consumption and reduce precautionary savings.
Several measures are being discussed to unlock the potential of Chinese consumers. These include expanding the "trade-in" program for consumer goods, offering subsidies to low-income groups, providing tax benefits to encourage family growth, and broadening the social safety net to reduce the need for precautionary savings. Additionally, further opening up the service sector to private and foreign investment — especially in areas such as telecommunications, healthcare, and education — could foster greater economic dynamism and increase household spending.
The push for consumption-driven growth reflects a broader strategic shift to a more sustainable and balanced growth model in the face of global uncertainties.
In response to the risk of further trade tensions and potential tariff hikes, the Chinese government is unlikely to resort to aggressive currency devaluation. Although the yuan may experience some depreciation under market pressure, a large-scale devaluation is seen as counterproductive. Such a move could trigger capital outflows and exacerbate trade frictions with other countries, particularly in the context of China's strong trade surplus in 2024.
Instead, policymakers will likely focus on using the fiscal and monetary policy tools at their disposal to cushion the impact of external challenges, strengthening "extraordinary countercyclical adjustment" where necessary. With the US expected to maintain its aggressive stance on tariffs, China will likely prioritize domestic growth strategies while managing its exchange rate policy carefully to avoid unnecessary volatility.
Looking ahead to 2025, China's economic trajectory will hinge on its ability to navigate external trade conflicts and domestic imbalances. The government's focus on expanding fiscal space, stimulating domestic demand, and stabilizing key sectors such as housing will be vital for sustainable growth. By adopting a balanced approach to short-term challenges and long-term structural adjustments, China is expected to sustain stability, resilience, and growth in an increasingly complex global environment.
The author is Ding Shuang, the chief economist for Greater China and North Asia, Standard Chartered Bank.
Source: China Daily
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