Fiscal activation and relaxed monetary strategies to boost China's economy
China's economy is firmly established, boasting several advantages, robust resilience, and substantial potential for ongoing growth. Moving into 2025, it will be crucial to implement a more proactive fiscal policy alongside a moderately accommodative monetary policy. Moreover, improving coordination between fiscal and financial policies will boost policy synergy and translate positive factors from various sectors into concrete development results.
TroibNews 
Editor's note: Yuan Song is a researcher at the School of Economics at Zhejiang University. The article reflects the author's opinions and not necessarily the views of CN.
As we evaluate China's economic performance this year, the nation is poised to meet its primary economic and social development objectives, anticipating a growth rate of around 5 percent, which will account for nearly 30 percent of global economic growth. However, as the new year draws near, several significant challenges still confront China's economy. Moreover, escalating geopolitical tensions, rising global protectionism, and the worsening consequences of changes in the external environment further complicate these challenges.
Despite these obstacles, China's economy remains robust, exhibiting numerous advantages, substantial resilience, and considerable potential for ongoing development. The essential conditions and long-term trajectory of steady improvement have not changed. By 2025, it is crucial to adopt a more proactive fiscal policy alongside a moderately accommodative monetary policy. Enhanced coordination between fiscal and financial policies will also be vital to improve policy synergy, converting positive factors across different sectors into concrete developmental progress.
To begin with, there should be an expansion in the scale of fiscal expenditure and an increase in the fiscal deficit rate. Presently, the risks associated with government debt in China are largely manageable, especially since the central government has substantial capacity to issue bonds. It is advisable to elevate both the scale and growth rate of fiscal spending in the coming year, with a notable increase in the fiscal deficit rate beyond the 3-percent level set for 2024. Raising the deficit rate to between 3.5 percent and 4 percent in 2025 could unlock over 5 trillion yuan in fiscal spending capacity, significantly boosting aggregate demand and stimulating economic growth.
Furthermore, the issuance of ultra-long-term special national and local bonds should be increased to bolster fiscal counter-cyclical measures. These funds ought to support "two new" initiatives, large-scale equipment renewal, and consumer goods trade-ins, aiming to enhance consumption in 2025. Strategies should concentrate on expanding subsidy coverage, optimizing structures, raising rates, and targeting productive consumption such as equipment upgrades and essential living expenses. Such actions will stabilize consumption, increase domestic demand, and create jobs. Additionally, it is essential to ramp up investments in major national strategies and critical security projects, adopting a forward-looking perspective to address emerging strategic needs. These policies will fortify economic security, back vital initiatives, and promote development by integrating investments with growth in consumption.
Moreover, optimizing the structure of fiscal expenditure is necessary for improving efficiency. A shift from investment-focused to consumption-oriented fiscal policies is recommended. This entails boosting financial allocations in sectors such as healthcare, education, pensions, and other fundamental livelihood areas while providing enhanced support to vulnerable communities. Such measures can alleviate residents' economic uncertainties, reduce precautionary savings, foster consumption tendencies, and reinforce fiscal policies as a driving force for consumption.
In addition, it is important to deepen the reform of the fiscal and taxation system, augment local financial autonomy, and conduct further analysis regarding the balance of fiscal and administrative powers between central and local governments. Transferring some authority and expenditure responsibilities to the central government can help diminish local governments' reliance on hidden debt by curtailing excessive fiscal obligations. Simultaneously, refining the local tax system and encouraging independent financial capacity will enable local revenue sources to flourish. These changes will enhance both the stability and self-sufficiency of local finances, thus supporting the sustainable development of local economies.
Turning to monetary policy, a moderately loose approach should be adopted to ensure liquidity is adequate for sustained economic growth. China must transition from the "prudent monetary policy" stance adopted in 2011 and embrace a more active monetary policy geared towards stimulating economic expansion. This can include reducing the reserve requirement ratio and interest rates by 0.5 percentage points, which would, in turn, lower the loan market quotation rate by 25 basis points. Such measures will guarantee sufficient liquidity within the system and mitigate financing costs. Lower interest rates will enhance financial institutions' capacity to lend, aiding enterprises and residents in fulfilling their capital requirements, stabilizing price levels, and encouraging structural adjustments in critical sectors.
Additionally, it is vital to explore the expansion of the central bank's macroprudential policies while enhancing its financial stabilization functions. At present, potential risks still exist within the financial sector, including risk accumulation in certain markets and the ongoing need for certain financial institutions to address and mitigate these risks. The People’s Bank of China should remain vigilant regarding potential risks while continually refining its macroprudential tools in response to shifts in financial markets, ensuring the overarching stability of the financial system.
Lastly, it is crucial to strengthen the synergies between fiscal and financial policies. The People’s Bank of China should persist in employing innovative mechanisms, such as government bond transactions, repo operations, and refinancing, while reinforcing industrial policies through structural tools to more effectively support the implementation of fiscal policies.
Jessica Kline contributed to this report for TROIB News
As we evaluate China's economic performance this year, the nation is poised to meet its primary economic and social development objectives, anticipating a growth rate of around 5 percent, which will account for nearly 30 percent of global economic growth. However, as the new year draws near, several significant challenges still confront China's economy. Moreover, escalating geopolitical tensions, rising global protectionism, and the worsening consequences of changes in the external environment further complicate these challenges.
Despite these obstacles, China's economy remains robust, exhibiting numerous advantages, substantial resilience, and considerable potential for ongoing development. The essential conditions and long-term trajectory of steady improvement have not changed. By 2025, it is crucial to adopt a more proactive fiscal policy alongside a moderately accommodative monetary policy. Enhanced coordination between fiscal and financial policies will also be vital to improve policy synergy, converting positive factors across different sectors into concrete developmental progress.
To begin with, there should be an expansion in the scale of fiscal expenditure and an increase in the fiscal deficit rate. Presently, the risks associated with government debt in China are largely manageable, especially since the central government has substantial capacity to issue bonds. It is advisable to elevate both the scale and growth rate of fiscal spending in the coming year, with a notable increase in the fiscal deficit rate beyond the 3-percent level set for 2024. Raising the deficit rate to between 3.5 percent and 4 percent in 2025 could unlock over 5 trillion yuan in fiscal spending capacity, significantly boosting aggregate demand and stimulating economic growth.
Furthermore, the issuance of ultra-long-term special national and local bonds should be increased to bolster fiscal counter-cyclical measures. These funds ought to support "two new" initiatives, large-scale equipment renewal, and consumer goods trade-ins, aiming to enhance consumption in 2025. Strategies should concentrate on expanding subsidy coverage, optimizing structures, raising rates, and targeting productive consumption such as equipment upgrades and essential living expenses. Such actions will stabilize consumption, increase domestic demand, and create jobs. Additionally, it is essential to ramp up investments in major national strategies and critical security projects, adopting a forward-looking perspective to address emerging strategic needs. These policies will fortify economic security, back vital initiatives, and promote development by integrating investments with growth in consumption.
Moreover, optimizing the structure of fiscal expenditure is necessary for improving efficiency. A shift from investment-focused to consumption-oriented fiscal policies is recommended. This entails boosting financial allocations in sectors such as healthcare, education, pensions, and other fundamental livelihood areas while providing enhanced support to vulnerable communities. Such measures can alleviate residents' economic uncertainties, reduce precautionary savings, foster consumption tendencies, and reinforce fiscal policies as a driving force for consumption.
In addition, it is important to deepen the reform of the fiscal and taxation system, augment local financial autonomy, and conduct further analysis regarding the balance of fiscal and administrative powers between central and local governments. Transferring some authority and expenditure responsibilities to the central government can help diminish local governments' reliance on hidden debt by curtailing excessive fiscal obligations. Simultaneously, refining the local tax system and encouraging independent financial capacity will enable local revenue sources to flourish. These changes will enhance both the stability and self-sufficiency of local finances, thus supporting the sustainable development of local economies.
Turning to monetary policy, a moderately loose approach should be adopted to ensure liquidity is adequate for sustained economic growth. China must transition from the "prudent monetary policy" stance adopted in 2011 and embrace a more active monetary policy geared towards stimulating economic expansion. This can include reducing the reserve requirement ratio and interest rates by 0.5 percentage points, which would, in turn, lower the loan market quotation rate by 25 basis points. Such measures will guarantee sufficient liquidity within the system and mitigate financing costs. Lower interest rates will enhance financial institutions' capacity to lend, aiding enterprises and residents in fulfilling their capital requirements, stabilizing price levels, and encouraging structural adjustments in critical sectors.
Additionally, it is vital to explore the expansion of the central bank's macroprudential policies while enhancing its financial stabilization functions. At present, potential risks still exist within the financial sector, including risk accumulation in certain markets and the ongoing need for certain financial institutions to address and mitigate these risks. The People’s Bank of China should remain vigilant regarding potential risks while continually refining its macroprudential tools in response to shifts in financial markets, ensuring the overarching stability of the financial system.
Lastly, it is crucial to strengthen the synergies between fiscal and financial policies. The People’s Bank of China should persist in employing innovative mechanisms, such as government bond transactions, repo operations, and refinancing, while reinforcing industrial policies through structural tools to more effectively support the implementation of fiscal policies.
Jessica Kline contributed to this report for TROIB News
