President Xi Jinping says he has “full confidence in achieving this year’s economic growth target” and in China “continuing to play its role as the world’s largest economic growth engine.”
Global markets seem less sure, though. Pledges this week for bold new stimulus steps by China’s Politburo barely got global investors’ attention.
On Monday, Beijing surprised markets with the biggest shift in its monetary stance in 14 years. Xi’s policy team is also pivoting to a “moderately loose” crouch from “prudent,” the first use of the phrasing since the chaos of the 2008 global financial crisis.
It’s the clearest signal yet that the Politburo, the 24-member governing body led by Xi, grasps the magnitude of the headwinds bearing down on China.
With China’s property crisis festering and domestic demand soft, Beijing is bracing for Donald Trump’s imminent trade war – and taking steps to get ahead of the US president-elect’s threatened tariffs.
Team Xi, notes economist Larry Hu at Macquarie Bank, is clearing the way for “a new monetary easing cycle.” This new tone, he adds, “suggests that policymakers are deeply concerned about the economic outlook, given the sluggish domestic demand and the threat of another trade war.”
Bob Elliott, co-founder and CEO of Unlimited Funds, notes that “the change to ‘moderately loose’ fiscal policy is interesting to me – officially confirming the intensity and duration of the real estate financial crisis.”
It suggests, too, that more rate cuts are coming. “We do expect the People’s Bank of China to step up the pace of rate cuts next year,” says Julian Evans-Pritchard, head of China economics at Capital Economics.
Though “it’s unlikely that they will cut rates anywhere near as aggressively” as policymakers did during the Lehman Brothers crisis 16 years ago, he says, the need for more liquidity is clear.
Inflation data released on Tuesday suggest more work remains to be done to contain deflationary pressures. In November, consumer prices rose just 0.2% year on year while dropping 0.6% month on month, the biggest decline since March. Producer prices, meanwhile, fell for the 26th month in November, sliding 2.5% year on year.
Imports fell, too, indicating that stimulus efforts to date aren’t gaining the traction policymakers hoped. In November, imports fell 3.9% year-on-year.
“The contraction of imports is consistent with the weak consumer price data,” says economist Zhiwei Zhang at Pinpoint Asset Management. “The Politburo meeting signaled a boost to domestic demand next year. The market is anxiously waiting for details on what exactly the government will do.”
Additional rate cuts are both welcome and imminent. “The People’s Bank of China has significant room to lower the reserve requirement ratio by at least 100 basis points in 2025,” says Carlos Casanova, economist at Union Bancaire Privée.
Additionally, Casanova says, the PBOC could reduce the seven-day reverse repo rate by another 25 to 50 basis points.
However, he adds, “measures to enhance interbank liquidity are likely to take precedence over outright rate cuts. Given that credit growth and M2 growth are currently significantly below targets for 2024, concerted efforts will be necessary to accelerate these metrics in 2025.”
Deflation pressures “will continue in China,” especially as trade wars heat up again, notes Becky Liu, China strategist at Standard Chartered Bank.
Brian Coulton, chief economist at Fitch Ratings, says that “for 2025 and 2026, we assume that US trade policy towards China will take a sharp protectionist turn.” Though there are “tentative signs of stabilization” in China’s real estate sector, it remains a clear and present danger to Asia’s biggest economy.
Wei He, economist at Gavekal Research, says that China’s growth momentum is therefore likely to remain relatively solid for the remainder of 2024 and into the new year. “Still, the growth outlook for 2025 as a whole remains highly uncertain,” He notes. “Some of the current supports for growth may not last.”
The front-loading of exports in anticipation of Trump’s tariffs will likely pull forward future demand.
“If and when higher US tariffs do arrive, exports will weaken and drag on overall economic growth,” He says. “The nascent stability in the property market is still fragile and could falter if government policies fail to follow through effectively. And stock market trading volumes … trended down in November, so retail investor interest could be cooling off.”
Yet for long-term government bond yields to fall much further, He adds, the PBOC would need to slash borrowing costs. “The probability of large rate cuts is low, as lower rates would put more downward pressure on the currency even as the central bank appears likely to mount a defense of it,” He says. “For now, the divergence between the bond market signals and actual economic conditions looks set to widen.”
This presents PBOC Governor Pan Gongsheng with quite a balancing act. So far, Pan has been reluctant to deploy the massive stimulus “bazooka” the PBOC did amid the 2008 global crisis.
That’s because Beijing is reluctant to reinflate bubbles or reward bad behavior in ways that undo years of progress deleveraging the economy. It also worries a falling yuan might increase the risk that property developers default on offshore debt.
China is loath, too, to provoke the Trump 2.0 White House with a weaker exchange rate. That might increase the risk Trump might go even higher than 60% tariffs on mainland goods – reducing the odds of a “grand bargain” trade deal between Washington and Beijing.
The good news is that China isn’t ramping up the infrastructure machine it used during past crises. Rather, Xi’s team and the PBOC are prioritizing increased consumer demand more directly than previously.
Xinhua news service quoted top officials as saying: “We must vigorously boost consumption, improve investment efficiency, and comprehensively expand domestic demand. Next year we should… implement a more active fiscal policy and an appropriately relaxed monetary policy.”
Xi’s Communist Party is also getting a head start on Trump’s imminent trade war, displaying an arsenal of tools to retaliate against the globe’s biggest economy.
In response to US President Joe Biden’s move to limit Chinese access to components for artificial intelligence chips, Xi’s party launched a monopolistic behavior probe into America’s Nvidia Corp and banned the export of rare materials used for drones and other military applications.
Beijing’s plan to limit sales of key ingredients used to manufacture drones apply to Europe, too. Also this week, China said it’s slapping visa restrictions on some American officials it believes are meddling in Hong Kong’s affairs.
China’s deflation dynamics aren’t all bad. Arguably, China is experiencing disinflation, not outright Japan-like deflation, and there are positives along with negatives to the phenomenon.
Rather than trouble to come, “this indicates China’s economic transformation is accelerating and we’re ushering in a digital economy and high-tech transformation,” argues economist Chen Fengying, the former director of the Institute of World Economic Studies at the China Institutes of Contemporary International Relations.
Yet Team Xi appears determined to maintain a roughly 5% economic growth rate without the excesses of the last 16 years. Xi and Premier Li Qiang have said that any strategy to devise a more productive growth model must incentivize dozens of municipalities around the nation to scrap the debt-fueled infrastructure projects at the root of past boom-bust cycles.
Over the last decade and a half, the means by which local government politicians rose to national prominence was generating above-trend gross domestic product (GDP) rates. This explains why China has too many low-vacancy skyscrapers, six-lane highways, international airports and hotels, white-elephant stadiums and ginormous apartment complexes that developers can’t complete.
This impulse partly explains why municipalities are struggling under the weight of local government financing vehicle (LGFV) debt. Much of this borrowing is of the off-balance-sheet variety. At the start of 2024, the International Monetary Fund estimated that LGFV debt had risen to roughly 47.9% of China’s GDP, or 60.2 trillion yuan (US$8.3 trillion).
If 2024 taught Beijing anything, it’s that certain laws of economic gravity still apply to nations transitioning from state-driven and export-led growth to services, innovation and domestic consumption.
One of those laws states that developing economies must build credible and trusted markets before trillions of dollars of outside capital arrive. Regulators also must methodically increase transparency, prod companies to raise their governance games, devise reliable surveillance mechanisms like credit rating players and strengthen the financial architecture before the world shows up.
On Xi’s watch, China has become less transparent and the media less free. And this is the problem facing Xiconomics: Too often China has believed it can build a world-class financial system after waves of foreign capital arrive.
Xi’s team is stepping up efforts to reverse this approach. But the events of recent months mean Xi’s reform team is under global scrutiny as rarely before. With China’s $18 trillion economy facing turmoil in a variety of sectors, it’s vital for Xi’s technocrats to accelerate the work of building a stabler, more resilient financial system.
And for Beijing to reduce the regulatory volatility of recent years. Earlier this week, Alibaba Group founder Jack Ma made a public appearance at an Ant Group event.
It was his first since the company’s mammoth $37 billion initial public offering (IPO) got pulled in late 2020 amid Beijing’s crackdown on internet platforms. There, Ma said he expects “more miracles” from Chinese fintech companies and opportunities brought on by artificial intelligence.
The underlying economy matters, too. Global investors are paying close attention to whether the grand rhetoric coming from Xi and Li is matched by action on the ground. That’s particularly so for pledges to accelerate efforts to end the property crisis, stabilize local government finances and strengthen China’s capital markets.
Earlier this year, Xi’s team took a big swing for the future with plans to unleash “new productive forces” to create a more stable and productive economy. The PBOC has augmented things by channeling targeted liquidity to distressed sectors.
Stock buying by the “national team” of state-run funds also helped stabilize things. For all China’s challenges, the CSI 300 Index is up nearly 20% over the last 12 months.
But as Trump 2.0 arrives on January 20, 2025, Xi and Li have their work cut out to recalibrate growth engines and deleverage the economy while also ensuring Trump’s tariffs don’t slam top-line GDP rates. As global headwinds intensify, Beijing is under internal pressure to hit the gas anew on fiscal and monetary stimulus.
As former PBOC economist Sheng Songcheng, now a professor at China Europe International Business School, puts it, recent data “are a clear sign of the fact that corporate willingness to invest has yet to be restored. And with the central bank maintaining its stance on a supportive monetary policy, we believe that there is still room for further RRR, or reserve requirement ratio, and interest rate cuts.”
It means that for all the focus on the Federal Reserve in Washington and the Bank of Japan in Tokyo, the biggest interest rate surprises may come from Beijing in the year ahead.
Follow William Pesek on X at @WilliamPesek
