China is considering unconventional monetary measures to finance a bolder fiscal expansion next year, marking a significant shift in policy to address mounting economic uncertainties. Policy researchers and economists indicated that the People’s Bank of China (PBOC) may engage in substantial government bond purchases and implement aggressive interest rate cuts, alongside reducing banks’ reserve requirements. These steps aim to enhance policy effectiveness and prevent a sharp economic slowdown.
Hu Yifan, head of macroeconomics for Asia-Pacific at UBS Global Wealth Management, highlighted that a strengthened fiscal stimulus is essential for China to counter potential tariff threats from the United States in 2025. The government will likely need trillions of yuan in additional debt to address housing market issues and bolster social protection systems. Hu also suggested that the central bank might buy these bonds for specific purposes or offer low-interest loans to policy banks to fund relevant projects.
This potential policy shift follows a recent meeting by the Political Bureau of the Communist Party of China Central Committee, which analyzed the country’s economic strategy for 2025. For the first time since the global financial crisis of 2007-09, the leadership called for a more proactive fiscal policy and a moderately loose monetary stance, signaling a departure from the previous “prudent” monetary approach.
Hu noted that these signals could mean the country’s GDP growth target for 2025 might remain around 5%, with policymakers focused on stabilizing economic growth and ensuring a robust macroeconomic policy response. Chinese equities reflected optimism, with the Shanghai Composite Index rising 0.59% on Tuesday.
Economists anticipate bolder monetary easing in 2025 compared to 2024. Feng Jianlin, chief economist at Beijing FOST Economic Consulting, predicted that the People’s Bank of China could reduce its seven-day reverse repo rate by an additional 30 to 40 basis points next year. Additionally, market-based lending rates, including loan prime rates, are expected to decline more significantly.
Nomura’s chief China economist, Lu Ting, also expects a 50-basis-point reserve requirement ratio (RRR) cut by the end of this year, followed by two additional RRR cuts in 2025. These measures are designed to increase liquidity in the financial system and stimulate economic activity.
For the first time, Monday’s meeting emphasized the need for “unconventional countercyclical adjustments,” which may include more direct coordination between monetary and fiscal policies. These unconventional measures could see the central bank providing financing to support fiscal expansion, although experts question their potential effectiveness.
Shao Yu, a distinguished researcher at the National Institution for Finance & Development, cautioned that while these measures could provide short-term relief, there are concerns about long-term issues such as rising debt levels and oversupply in certain sectors. Shao emphasized the importance of ensuring that the stimulus is directed toward sustainable areas like social welfare, childcare, and future-oriented industries, such as low-altitude sectors.
Additionally, the People’s Bank of China and the Ministry of Finance have formed a joint working group to improve the issuance pace, maturity structure, and management of government bonds. This collaboration aims to enhance China’s fiscal and monetary coordination in the coming years.