SUMMARY
- China’s leadership has reached an important inflection point in acknowledging the risks of deflation and stepping up policy support; in particular, Beijing is relaxing the constraints on local government debt, an important shift over the medium term but with a modest impact next year
- Beijing’s awareness of deflation dangers and emphasis on boosting domestic demand significantly reduce growth risks in 2025 but does not entail a strong recovery; external and domestic headwinds remain stiff, and Beijing’s pledges to promote consumption and stabilize property may disappoint
- Beijing will only release its specific policies and targets at the National People’s Congress in March 2025, using the time in between to assess the risks for US-China trade tensions
China’s annual Central Economic Work Conference (CEWC) concluded today, with the readout signaling Beijing’s economic priorities in 2025. The messages from the meeting are more supportive for the outlook than our basecase of an “underwhelming” readout. Beijing is not firing a bazooka, but there is an increased urgency to boost domestic demand as – for the first time – the leadership acknowledges the risks of deflation.
Debt fighting is turning to deflation fighting
For the last two years, economists in China have been warning Beijing that the costs of caution – doing too little to fight deflationary pressures – outweigh the dangers of overdoing stimulus. Xi Jinping had thus far resisted those calls, focused on restraining long-term debt risks, particularly for local governments. The irony is that by constraining growth in local government spending, that strategy had worsened deflation and slowed nominal GDP growth, resulting in a faster increase in local government debt as a share of GDP in recent years.
With more warnings in recent months that deflationary pressures are becoming entrenched, and with the risk of US tariffs on the horizon, Xi has shifted his stance. The CEWC readout pledges to “strive for a beneficial combination of stabilizing growth, stabilizing employment and returning goods prices to a reasonable increase.” An explicit goal of positive price increases is new for Beijing.
While the CEWC signaled that monetary policy and central government fiscal policy will be more expansionary, the change in policy stance on local government debt is more subtle but just as important. The readout drops a previous emphasis on ensuring the sustainability of local government debt for the first time since 2020, while pledging to expand local government’s quota for issuance of special bonds. We interpret this as a sign that Beijing’s strategy for local government debt sustainability has shifted from controlling growth in spending to stimulating growth and countering deflation. The change in approach on local debt is positive for the medium term but the impact on 2025 is modest.
Reduced growth risks in 2025, but not a strong recovery
While highlighting the inflection point on deflation, it is also important to note the caveats about the degree of shift in economic policy and the reality of external and domestic headwinds next year:
- A policy placeholder until March: The CEWC provides high-level signaling, but it will not be until the March 2025 National People’s Congress that Beijing will announce the details and specific policy targets such as for GDP growth and the fiscal deficit. China’s leadership will use the time until then to assess the risks from Trump’s policies and state of the economy. There is a risk that Beijing will under-deliver when the actual policies are announced.
- Beijing is not firing the bazooka. The overall policy framework continues to be “high quality growth,” with its emphasis on discipline and focus on tech and advanced manufacturing rather than consumption-focused demand stimulus. The CEWC does not suggest that the leadership is so worried about social stability pressures as to cast off all policy restraint. As noted below, the CEWC contains some new language on supporting consumption and stabilizing property, but these fall short of major turning points. Concerns over exchange rate stability will constrain the extent of monetary easing.
- Headwinds are stiff. A major but not extreme move on tariffs by Trump – such as a 20% increase on the average tariff on imports from China – could lower China’s growth next year by 1 percentage point. In the meantime, property investment will continue to act as a drag on growth, the labor market is in weak condition, households are cautious and business confidence is subdued.
The signals from the CEWC mean that the risk of a major growth slowdown next year, and a worsening deflationary spiral, are significantly reduced relative to our expectations heading into this week. In a tariff scenario such as the one above, real GDP growth next year may slow only moderately, such as to 4.5% from around 4.8% this year. However, this will still not be a robust recovery, and deflationary pressures are likely to persist. For Chinese equities, pledges of policy support since late September – reiterated by the CEWC – are important but a durable rebound will require an improvement in the macro backdrop including deflation.
KEY POLICY DETAILS:
Monetary policy:
- As signaled by the Politburo meeting earlier this week, PBOC’s monetary policy stance has shifted from “prudent” to “moderately accommodative,” marking the first such shift in 14 years. However, this is more of an acknowledgment in the change in stance since September than a new announcement.
- As with last year, PBOC will aim to keep growth in credit (“social financing”) on pace with GDP growth and with the target for price expectations (another reference to deflation).
- PBOC also signaled that it will continue to use “structural monetary policy tools” to direct financing to priority areas, including high tech.
- The statement explicitly pledges to lower rates and reserve requirements in a timely manner, while repeating familiar language about keeping the CNY “basically stable at a reasonable equilibrium.”
Our take: Monetary policy will be loose, with PBOC looking for moments of opportunity (such as Fed cuts) to reduce rates and reserve requirements. However, concerns over exchange rate stability will constrain the extent of monetary easing. Furthermore, while monetary easing is beneficial to Chinese asset prices, it will have a limited impact on broader growth given a climate of weak credit demand. Fiscal policy will matter more.
Fiscal policy:
- Fiscal policy will be “even more proactive” next year. Consistent with signaling since September, Beijing will increase the official budget deficit (we expect it to rise to 4%, from 3% this year).
- Beijing pledged to increase issuance of ultra long-term special bonds by the central government and to have more infrastructure spending come from the central government rather than local budgets. Infrastructure spending thus will continue to shift from areas favored by local governments (such as roads and high speed rail) to strategic central government priorities such as the electricity grid and data centers.
- As noted above, local governments will receive an increased allocation for special bonds. Beijing will broaden the eligible areas for spending, likely to include some consumption support as well as innovation/industrial policy priorities.
Our take: The extent of an increase in the overall fiscal deficit (of which the official deficit is just one part) will only be clear at the March NPC. The most important signal – though one that will play out over the medium term – is the reduced attention to controlling local government debt, as local governments are key source of spending. We expect an increase of local government special bond quota by a relatively modest 0.5 trillion yuan in 2025. This means infrastructure investment next year will remain subdued and (with the central government filling the financing gap) focus more on the high-tech areas favored by Xi than on fast-moving shovel-ready projects favored by local governments.
Consumption
- While a large part of the CEWC readout is devoted to promoting consumption, we believe actual fiscal support to consumption will be limited.
- Beijing has highlighted two broad approaches for supporting consumption: increasing social security expenditure and continuation of trade-in subsidies for items such appliances. Beijing has been restrained on social security expenditures and we expect only modest increases next year. As Beijing has already subsidized consumption durables trade-in this year, there will likely be less pent-up demand for consumer purchases in 2025.
Our take: While the increased emphasis on consumption is welcome, there are thus far few signs that Beijing is gearing up for broad-based consumption stimulus such as through direct income support. The consumption recovery next year will likely be modest given weakness in labor market and the property outlook.
Property sector
- Beijing reiterated its pledge since September to have the real estate market “stabilize and return to recovery,” though property continues to be discussed in the section on “reducing risks.”
- There will be an increased focus on renovating urban villages and dilapidated housing, likely through cash payments that allow households to purchase new properties.
- The readout also repeats pledges since September to control the supply of new land for property development and to clear the inventory of unsold housing.
Our take: The property measures fall short of the kind of comprehensive package necessary to promote a faster recovery in sales and eventually investment – such as through expanding central government financing for inventory clearance and for restoring developers to financial health. Providing cash transfers to households in renovated projects will help housing markets in tier 1 and tier 2 but not in the weaker tier 3 and tier 4 cities. Moreover, as property is primarily the responsibility of local governments, local fiscal capability is key for property outlook. We expect only a modest improvement in the local fiscal situation. This means housing will remain a drag on growth next year but less than in 2024.
Capital markets and regulating private firms
- The CEWC echoes the September Politburo’s pledge to stabilize capital markets but without much additional detail beyond deepening capital market reforms and removing bottlenecks for long-term funds to enter the market.
- Beijing will “promote the healthy development of the platform economy” and “introduce legislation to promote private sector development,” neither of which is new signaling.
Our take: Beijing’s recent signs of support for equity markets since late September is important and does represent something of a policy put, protecting against a slide back to the pre-pivot levels. But Beijing’s overall focus is promoting long-term growth of equities rather than talking up a bull market. Regulation of tech and private firms will be status quo, though the recent public reappearance of Jack Ma may signal that Beijing is preparing to revive the IPO of Ant Financial as an effort to boost confidence in local markets.
Trade and Investment
- In pledging to stabilize foreign trade and investment, the CEWC contains new language pledging “self-initiated” and “unilateral” moves to further open the local economy to foreign investment, along with “orderly systemic opening.”
Our take: These signals, along with a reduced emphasis on promoting “self-reliance” (a key concern of the foreign business community), show Beijing’s increased urgency to revive foreign investment. FDI in China has fallen sharply in recent years due to the impact of geopolitical tensions, Covid, increased domestic competition in China, and the weak economy. Trump and the prospect of further efforts to decouple from China only add to those concerns. However, it remains to be seen whether Beijing will take bold unilateral steps in areas such as lowering tariffs and liberalizing investment restrictions in the service sector.
Industrial policy and innovation
- Industrial policy moved down the second priority this year from the top spot in 2023 but remains an intense focus for Beijing under Xi’s mantra of “new quality productive forces.” The CEWC offers familiar support for basic research and tackling critical technologies (e.g., semiconductors) and AI-focused initiatives.
- There are also signals Beijing may step up efforts to prevent a worsening of overcapacity in industries favored by industrial policy, with a pledge to “regulate ‘involution-style’ competition comprehensively, standardizing the behavior of local governments and enterprises.”
Our take: Industrial policy and innovation, particularly in advanced manufacturing (semiconductors, quantum, AI, biotech, materials) will continue to be a central focus of policymaking as US-China tech competition intensifies. Beijing is wrestling with how to support industries while avoiding over-investment and excess capacity, which is contributing to rising trade tensions, but it is not clear that the central government will take aggressive measures to rein in investment at the local level.
Structural reforms
- The CEWC pledges to implement “landmark reforms,” following the Third Plenum in July. That said, there is little new language. The priorities include advanced state-owned ownership reform, introducing new legislation to promote private sector development (yawn), advance fiscal reforms, and construct a unified national market.
Our take: The structural reform agenda announced at the Third Plenum was unambitious, particularly in terms of reducing Party-state interference in the market. There is little here that will boost confidence in the longer-term reform outlook.
NEAR-TERM WATCHPOINTS
This is the last major economic meeting until the National People’s Congress in early March. In the meantime, there will be some follow-up on the CEWC’s pledges but mostly speculation and a shortage of details until the NPC. It will be important to monitor signals from Beijing but also from Washington, as the outlook for US-China tensions will be a key input into China’s decision-making. Trump’s surprising decision to invite Xi Jinping to his inauguration in January is among the wildcards that Beijing (and investors) will be trying to decipher.
Early next week will update our propriety China Economic Sentiment Series (CHESS) tool, for a sense as to how the CEWC shifted sentiment towards the outlook among analysts commenting in China’s domestic financial media.
