By Yu Yongding | China Daily | Updated: 2025-02-17 09:16
The Chinese government made a series of adjustments to its macroeconomic policies recently (in the absolutely right direction as far as I'm concerned), the results of which are expected to support the recovery of confidence in China's economy in 2025.
This is the final year of China's 14th Five-Year Plan (2021-25) period, and if the nation is aiming at a much higher quality of economic growth, there are three things internally it must do well — a GDP growth target of 5 percent; a stable real estate market with systemic risks caused by debt problems being well contained; and sound management of government debt risks.
At the external level, it is necessary to pay attention to issues related to Sino-US trade tensions and the exchange rate.
Initial steps
First, China should maintain a GDP growth target of 5 percent and achieve it. How? Consumption could be a good start. Sluggish consumption was the biggest drag on China's economic growth in 2024. In 2023, the contribution of consumption in its GDP growth of 5.2 percent stood at a high 82.5 percent, or at 4.3 percentage points.
However, from January to November 2024, the growth rate of social retail goods sales slowed to 3.5 percent, from 7.2 percent in the previous year.
There should indeed be a significant increase in consumption growth — at least for it to equal that of GDP growth.
But how? In this case, three main approaches can be taken — issuance of money or consumption vouchers, reducing personal income tax and reforming the social security system.
Among these, the issuance of money or consumption vouchers can indeed increase income, albeit temporarily. But there is no guarantee in this case on whether it can stimulate consumption as expected.
Taking Hong Kong as an example, a total of HK$15,000 ($1,926) per person subsidy was distributed in 2021 and 2022, which did help low-income earners to a certain extent, but the stimulus effect on consumption overall does not seem to be obvious.
On spurring demand, government-led infrastructure investment has been the main tool for countercyclical adjustments traditionally. Infrastructure investment has played a key role in the recovery of economic growth in successive instances where effective demand has been insufficient.
But there are some voices of concern over increasing infrastructure investment, with the three main reasons being — a saturation of infrastructure projects nationwide; inefficiency in terms of generating economic momentum and large concentration of public resources; and a likely boost that may lead to overcapacity.
To this end, in the future, the government should further promote the efficiency of investment, with more attention being paid to the socioeconomic benefits of infrastructure investment rather than commercial returns.
Additionally, the range of infrastructure projects could be expanded to cover all basic, public welfare and long-term projects, such as education, healthcare and elder care. The government should be clear about what to expect from such lighthouses, which may not bring much direct commercial returns, but result in immeasurable socioeconomic benefits to the nation and its people.
In terms of monetary policy, the People's Bank of China, the central bank, has said that it will implement a "moderately loose" monetary policy this year, increase money supply and reduce interest rate, which will certainly be good for economic growth, as it can cut the financial costs of enterprises and the debt burden of residents.
The central bank also made some moves in this regard last year. However, under a scenario where household consumption and enterprises' willingness to invest are not strong, it is difficult to effectively stimulate loan demand from consumers and investors.
In addition, a further easing of monetary policy in China is also constrained due to some specific reasons.
For example, if the loan-deposit spread is too low, small and medium-sized banks may lose money, and to avoid such losses, the lenders may need to lower their deposit rates. The social consequences resulting from lowering the interest rate on ordinary deposits are a serious matter that need to be taken into account.
Meanwhile, the effect of a widening interest rate gap between China and the United States on the RMB exchange rate and capital flows should also be closely watched.
In this case, it requires better synergy between fiscal and monetary policies. For example, the country could start with launching more proactive fiscal policies, such as raising the deficit ratio, and expanding the issuance of government bonds, which is very likely to lead to an increase in the interest rate on 10-year government bonds and the overall economic yield curve.
An increase in the fiscal deficit means an increase in aggregate demand, and the demand for loans from households and enterprises will rise accordingly. Therefore, the central bank can further loosen monetary policy so that the two policies can combine to maximize their respective effects and achieve an impact of 1+1 being greater than 2.
Another key issue of the Chinese economy is sound management of local government debt.
In the past, in the process of promoting infrastructure investment, local governments were more aggressive in setting up their own platforms for investment and financing, which became a source of hidden debts.
Beginning in 2010, China began to tighten the management of platforms to curb the sharp growth in local government debt. In 2018, the central government asked local governments to clear their hidden debts by 2028. Among them, Guangzhou and Beijing achieved this goal on their own strengths a few years ago.
In addition to hidden debts, China's local government statutory debts, or "explicit debts", amounted to 40.7 trillion yuan ($5.6 trillion) by the end of 2023, while that of the central government was only 30 trillion yuan. In 2025, local governments will need to repay nearly 4 trillion yuan in such debts.
To this end, the new policy issued in November by the Ministry of Finance — with 12 trillion yuan to be used to resolve local debts — is an important adjustment.
Through debt swaps, local governments will have less debt repayment pressure, giving them more financial resources to improve residents' wellbeing, subsidize consumption and increase infrastructure investment. Also, in view of the high proportion of local government debt in total government debt, the proportion of national debt should be increased to some extent this year.
In terms of real estate, since 2021, real estate prices and investment have both shown a downtrend for three consecutive years. Stabilizing the realty market remains vital for 2025. However, the correction in the sector is likely to continue for quite some time. Too many houses have been built in China in the past few years — just as some scholars have pointed out: "China will no longer bank on real estate for significant economic growth in the future, as the per capita housing area is close to two-thirds of the US level, while its per capita GDP is only one-sixth."
Despite the above fact, China's real estate problems are not that serious to trigger a financial crisis. The authorities have in fact introduced a series of policy measures to stabilize the real estate market, and signs of stabilization are visible.
In this case, China's stable mortgage policy has been key. As of the end of the third quarter of 2024, the balance of real estate loans was 52.9 trillion yuan, accounting for only 20.9 percent of the credit balance. So far, mortgage defaults have been low. As for the "triangular debt" between real estate companies and upstream and downstream enterprises and the realization of guaranteed delivery of buildings, the government can consider establishing a specific institution and injecting a sum of money to help maintain the stability of the real estate industry.
External forces
With the US intending to further hike tariffs on several countries, there is a greater chance that Sino-US trade tensions will escalate. China's export growth was relatively high in 2024, and the base effect will also have a certain adverse impact on its export growth this year. The imposition by the US of tariffs is a practice of "cutting off the nose to spite the face", as it will worsen inflation there.
Against such a backdrop, measures to maintain export momentum, such as increasing subsidies and export tax rebates, are not expected, as they would embolden the US to impose more tariffs.
In fact, the impact of tariffs on China's economy is limited, both in terms of tariff pass-through and the elasticity of the US demand for Chinese products. Some studies estimate that if a 60 percent tariff is imposed on Chinese exports, there may be a 1 percent dip in China's GDP, and less-than-1 percent drag on the GDP growth rate.
In addition, over the past decade or so, China has been adjusting its economic structure and gradually reducing its dependence on external demand.
The share of exports to the US has also declined significantly in recent years. Therefore, the impact of US President Donald Trump's tariff policy on China's exports and economic growth is still manageable, though it cannot be ignored.
Some media outlets estimate that China's trade surplus reached a record $1 trillion in 2024 — which is solid enough to prove that the US policy of decoupling and breaking the chain has failed.
But it should also be noted that a trade surplus is not, and should not be, the goal of China's trade policy. On the contrary, China should reduce its trade surplus by expanding domestic demand.
Last but not least, China should pay close attention to fluctuations in the exchange rate. There has been pressure due to the yuan depreciation in the second quarter of 2024, which is mainly due to a wave of enterprises going overseas, leading to a surge in outbound direct investment.
In the third quarter, the Chinese government said that it would implement an expansionary fiscal and monetary policy, while the US Federal Reserve slowed down its interest rate cuts, weighing on the RMB exchange rate due to the expected widening of interest rate differentials between the two countries.
In this case, at the policy level, the central bank emphasized at its meeting at the beginning of the year that China will guard against the risk of exchange rate overshoot. Therefore, the current exchange rate fluctuations are likely to be short-term, and there will not be a sharp depreciation of the RMB exchange rate against the greenback. In addition, considering the economic fundamentals of China, the pressure on the exchange rate will gradually decrease if a sound economy can be maintained throughout 2025.
The writer is a researcher of the Chinese Academy of Social Sciences. This op-ed is a translated version of the writer's article to the China Finance 40 Forum, or CF40, a Beijing-based think tank.
The views do not necessarily reflect those of China Daily.
