(Bloomberg) -- China’s top leaders signaled bolder economic support next year using their most direct language on stimulus in years, as Beijing braces for a trade war when Donald Trump takes office.
President Xi Jinping’s decision-making Politburo vowed to embrace a “moderately loose” monetary policy in 2025, according to the official Xinhua News Agency, signaling more rate cuts ahead and shifting from a “prudent” strategy that’s held for nearly 14 years.
The 24-man body also pledged “more proactive” fiscal policy at its monthly huddle, raising expectations for Beijing to widen the fiscal deficit from 3% at the annual parliamentary session in March. That would open the door to more central government borrowing to shore up the faltering economy.
The Politburo’s December meeting “sent the most aggressive stimulus tone in a decade,” Morgan Stanley economists including Robin Xing wrote in a research note, adding that “while the tone is very positive, implementation remains uncertain.”
The benchmark CSI 300 Index rose as much as 3.3% in early trading on Tuesday, and a gauge of Hong Kong-listed Chinese firms also extended gains following a 3.1% increase in the previous session.
While Politburo readouts never reveal numerical economic targets, the vaguely worded statements give important clues on future policy. The December huddle sets the agenda for the larger Central Economic Work Conference that crafts priorities, such as the annual growth goal. That meeting is set to begin Wednesday, Bloomberg News reported earlier.
Top leaders tackled nearly every major problem plaguing the economy at Monday’s meeting, with direct pledges to “stabilize” the stock market as well as the property sector that’s fighting a years-long slump. Cadres for the first time touted “extraordinary” measures for counter-cyclical policy adjustment, language analysts said could hint at greater bond issuance or a stabilization fund for the stock market.
Policymakers also elevated the importance of boosting consumption, making it the top goal — potentially, a sign the work conference will make domestic demand the priority for 2025. Xi’s push for manufacturing to propel the economy has seen the US and European Union complain China is flooding their markets with cheap goods and prompted calls for Beijing to get its own consumers spending.
“The wording in this Politburo meeting statement is unprecedented,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “The policy tone shows strong confidence against Trump’s threats,” he noted, referencing the US president-elect’s vow to impose a 60% tariff on Chinese exports that would decimate bilateral trade.
Policy Shift
The last time China adopted a “moderately loose” monetary policy was in the Global Financial Crisis as part of a bazooka stimulus package to prop up the economy. That’s something Beijing has vowed to avoid repeating, with officials providing just enough support to hit this year’s growth goal of around 5% without loading up debt.
The Politburo readout, however, sent markets a message that Xi is feeling a new urgency to support growth. It’s a reminder “top leaders’ view on economic conditions has shifted substantially compared to last quarter,” said Martin Rasmussen, senior strategist at macro research firm Exante Data.
After second quarter growth fell short, officials in late September started rolling out stimulus. Economists widely expect another cut to the amount of cash banks have to keep in reserve before the year is out, while a rate adjustment is more likely to fall in the first quarter of 2025.
Policymakers will also need to find remedies for China’s longest streak of deflation this century. That problem was on display earlier Monday in data showing producer prices falling in November for a 26th straight month. Consumer prices also rose at their slowest pace in five months, hovering around zero.
Falling prices have undercut the economy’s 4.8% growth so far this year, eating into corporate profits and pushing companies to cut investment as well as wages. While the People’s Bank of China has slashed interest rates and offered more cash for banks several times, authorities have found it hard to spur greater spending.
The Politburo promised to “forcefully lift consumption” and drive domestic demand “in all aspects,” without directly mentioning deflation. That could indicate more rounds of the cash-for-clunkers program that’s operated as a consumption voucher, encouraging people to buy new electronics at a discount in exchange for their old products.
China’s Premier Li Qiang vowed to deploy “every means possible” to boost consumption at a meeting on Monday with heads of major international economic organizations in Beijing, including the International Monetary Fund, which has long called on China to expand domestic demand.
Fiscal Force
While the latest language on fiscal policy doesn’t mark a fundamental shift from the “pro-active” adopted in 2008, the addition of the word “more” signals government spending will be dialed up. A state media commentary Friday said Beijing had ample room to raise its budget deficit next year.
Fiscal spending is widely regarded as the most important element in any stimulus package. While government spending has been weak this year, in November the Finance Ministry launched a $1.4 trillion rescue program for indebted local governments to free up regional officials to boost growth.
The December meeting will likely raise expectations for more support next year, even though it lacked details.
“The Politburo statement is very positive,” said He Wei, China economist at Gavekal Dragonomics. “It has everything that people wanted.”
--With assistance from Fran Wang, James Mayger, Qizi Sun, Rebecca Choong Wilkins, Lucille Liu, Jing Li and Zhu Lin.
(Updates with latest market reaction in fifth paragraph.)
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