Unconventional monetary steps eyed
China may take unconventional monetary steps to finance bolder fiscal expansion next year as a top-level meeting has marked a rare shift in policy stance to navigate intensified uncertainties, policy researchers and economists said on Tuesday.
Those measures, possibly including a sizable central bank purchase of government bonds, coupled with more aggressive cuts in interest rates and reductions in banks' required reserves, would align with policymakers' sharpened determination to bolster policy potency and avoid any sharp economic slowdown, they added.
Hu Yifan, head of macroeconomics for Asia-Pacific at UBS Global Wealth Management, said that strengthening fiscal stimulus would be key for China to offset tariff threats from the United States in 2025, with trillions of yuan in additional central government debt likely needed in the coming years for housing market destocking and social protection enhancement.
"We do not rule out the central bank purchasing these bonds on its balance sheet, with the bonds likely designated for specific usages," Hu said, adding that the central bank may also provide low-interest loans to policy-oriented banks to finance related spending.
Hu's remarks came after the Political Bureau of the Communist Party of China Central Committee held a meeting on Monday to analyze and study economic work in 2025 and the top leadership called for a more proactive fiscal policy and a moderately loose monetary policy, marking a shift from the "prudent" monetary stance for the first time since China dealt with the 2007-09 global financial crisis.
"The proactive expressions made us believe that China's GDP growth target may remain the same at around 5 percent for 2025," Hu said, highlighting policymakers' determination in terms of stabilizing growth and strengthening the case for stronger macroeconomic policy buffers.
Chinese equities rose on Tuesday, with the benchmark Shanghai Composite Index up 0.59 percent to close at 3,422.66 points.
"Monetary easing is expected to be bolder next year compared with 2024," said Feng Jianlin, chief economist at Beijing FOST Economic Consulting.
Noting that China has reduced the seven-day reverse repo ratea main policy interest rate benchmark — by 30 basis points this year, Feng said that cumulative cuts to the rate could amount to 30 to 40 points in 2025, with market-based lending benchmarks, the loan prime rates, likely to decline by larger margins.
Lu Ting, chief China economist at Nomura, said his team expects a 50-basis-point reserve requirement ratio cut, which reduces the proportion of deposits banks must keep as reserves to boost market liquidity, before the end of the year and two RRR cuts in 2025.
According to analysts, Monday's meeting underlined for the first time ever strengthening "unconventional countercyclical adjustments", which economists said refer to measures other than interest rate cuts and RRR reductions that can involve closer monetary and fiscal policy coordination.
"Unconventional measures, including the central bank providing financing to fiscal expansion, may ultimately be taken, yet the key question is whether the measures would be effective enough," said Shao Yu, a distinguished researcher at the National Institution for Finance & Development.
According to Shao, compared with the last time China adopted a moderately loose monetary policy, the space for stimulating the property and infrastructure sectors has narrowed. "How to strengthen the effectiveness of policy has therefore become more important."
Shao, who is also a distinguished professor of Fudan University's School of Management, said it is crucial to avoid the upcoming stimuli from leaving long-term issues like debt and oversupply problems, emphasizing the need to direct more resources to social welfare such as childcare and future-oriented industries such as the low-altitude sector.
The People's Bank of China and the Ministry of Finance established a joint working group for central bank treasury bond transactions this year, with PBOC Governor Pan Gongsheng vowing to jointly study improving the issuance pace, maturity structure and custody system of treasury bonds.
