SUMMARY
- A government press conference on boosting consumption on Monday is unlikely to announce major new policy measures; Inner Mongolia’s program to provide childbirth incentives will become a national template, but the scale of such income support at the macro level will remain small
- A surge in government bond issuance drove credit growth in February, which overall was weak; we expect government bond issuance to fade in coming months, with economic growth likely to slow by mid-year
- Talk of a Trump-Xi summit is important to watch but remains premature; Trump’s April trade reviews will set a hawkish tone for the start of more serious exploration of a US-China deal and meeting between the leaders
CONSUMPTION MEASURES
Chinese economic agencies will hold a press briefing on Monday, 3pm local time (3am ET) to discuss Beijing’s efforts to boost consumption, following up on the recently concluded National People’s Congress (NPC). While China’s A-share market gained on the announcement of the press conference, we do not expect it to deliver major news, especially coming so soon after the NPC. The deputy-level officials delivering this briefing will primarily provide details on implementing measures already outlined at the NPC.
As we discussed in our NPC report (link HERE), Beijing has made boosting consumption its top policy priority for the year but devoted only a modest amount of fiscal resources to this task:
- The central government will use 300 billion yuan in special bond issuance to support the consumer trade-in program. This is a scaled-back effort compared to the 150 billion spent just in the last four months of 2024, when the trade-in program was effective in boosting demand for household appliances and autos.
- We estimate that fiscal transfers to households are unlikely to exceed 0.2% of GDP this year.
With the limited support noted above, we expect consumer spending will remain soft this year given the macro headwinds of a weak labor market and declining housing prices.
In some ways more promising news – though not with a large immediate impact – is the announcement that Hohhot, the provincial capital of Inner Mongolia, will introduce subsidies for families with children. We think the program will be implemented nationally later this year. Yet, its size is macro insignificant. Support in the first year will be around 100 billion yuan, and eventually reach around 300 billion yuan per year (~0.2% of GDP). The door to direct income support to households is opening, but gradually.
FEBRUARY CREDIT GROWTH
China’s total social financing for February grew 8.2% year-over-year, a bit below the analyst consensus. Government bond issuance drove most of that growth, reflecting a front-loaded fiscal stimulus push that we see waning by the end of Q2 (more on that below). Credit to the private sector was quite weak, reflecting headwinds on both the supply and demand sides.
On the credit supply side:
- As we expected in our 2025 outlook (link HERE), PBOC has prioritized defending currency at the expense of monetary easing. As a result, broad monetary conditions have tightened since the start of February. The 1-year interbank CD rate increased more than 40 bps in February, and PBOC has withdrawn more than 1 trillion yuan in liquidity from the interbank market.
- Monetary conditions have continued to tighten into March, though the recent weakening of the broad dollar (DXY) provides PBOC some breathing room. We expect a 25bps RRR cut in the coming weeks, and some easing through policy lending. But we expect only a modest 10 bps cut to LPR rate in the first half. In other words, monetary policy will continue to be tight, albeit to a lesser extent.
On the credit demand side:
- Household borrowing contracted in February. This is partly because of the timing of the Lunar New Year holiday. But the weakness is more than seasonal, as household borrowing was also not strong in January.
- Corporate borrowing is harder to assess, due both to the Lunar New Year effect and China’s ongoing local government debt swap program. Local governments are repaying bank loans (originally issued to local government financing vehicles) with bond proceeds, artificially reducing the amount of corporate lending by banks. Still, we estimate that total corporate borrowing year-to-date (including loans, bonds and shadow banking) only grew by the low single digits year-over-year.
Government bond issuance has been 2.39 trillion yuan year-to-date, more than 1.49 trillion yuan higher than same period 2024. However, we expect the pace of issuance – and the support to activity – to wane in coming months. Given the impact of US tariffs on China’s activity, and the restrained stance of monetary policy as noted above, we expect economic growth to slow by the end of Q2. Additional stimulus will be necessary to support growth in H2.
On Sunday evening (10pm ET), China will release activity data for January-February (retail sales, industrial production, etc.). We expect the data to show that China’s economic recovery struggling to build momentum on the back of weak domestic demand and slowing exports. However, the data will not (yet) be so soft as to raise Beijing’s sense of urgency on stimulus.
US-CHINA: EXPECT APRIL SHOWERS
Media reports earlier this week raised the prospect of a meeting between President Trump and Chinese leader Xi Jinping as soon as April (South China Morning Post) or June (Wall Street Journal). We would not be shocked to see a meeting develop around June (April is too early). But we would not bank on it happening, or on discussions for such a meeting preventing additional threats of tariff hikes on imports from China in the meantime.
While President Trump is interested in a trade deal with China – potentially with TikTok and foreign policy issues in the mix – he is under no great urgency. Trump is comfortable operating along parallel tracks: negotiating a potential deal while escalating tariff threats, which he believes enhances his leverage.
We will have a better sense of the tariff risks in April, as Trump’s cabinet completes the many reviews of tariff and trade policy tasked out in the Jan. 20 executive order (link HERE) on an America First Trade Policy. Many of these reports center on trade with China, including reviews of: the Phase One US-China trade deal; Trump’s original section 301 investigation into China’s trade practices; Congressional proposals to revoke China’s Permanent Normal Trade Relationship status; US export control policies; and so on.
One hurdle for a trade deal – and matter of consternation for Beijing – is that a hawkish group of trade and national security officials will have the pen on many of these reports. We expect sweeping criticisms of China’s economic practices. The President of course does not need to listen to those officials, but they will set the tone as more serious discussions between Washington and Beijing begin. Beijing had hoped to preempt a hawkish start by informally circulating proposed elements of a trade deal (including Chinese purchases of US goods) even before Trump took office.
The bottom line is that talk of a Trump-Xi meeting will probably remain superficial until the April trade policy reviews are released. We remain skeptical of a major US-China deal this year, but bilateral dynamics will remain fluid.
