The annual Central Economic Work Conference held in Beijing on December 11-12, 2024 clearly gave the green light for moderately easy monetary policy. In setting the tone for macroeconomic control policy in 2025, the meeting of the Politburo of the Central Committee of the Communist Party of China on December 9 had already expressly proposed to “implement a more proactive fiscal policy and a moderately flexible monetary policy.” Compared to the policy stance in recent years, fiscal policy has moved from “active” to “more proactive”, and monetary policy from “prudent” to “moderately loose”, meaning that the cards have been rehashed in terms of economic regulation.
The last time China used moderately easy monetary policy was 16 years ago. In November 2008, in response to the international financial crisis, China wanted to achieve rapid economic recovery. This policy continued in 2009 and 2010. Since 2011, China’s monetary policy has remained prudent, before becoming moderately flexible again for 2025.
Guarantee of adequate economic growth
In order to maintain reasonable economic growth, it is necessary to implement a moderately loose monetary policy. Data released by the National Bureau of Statistics (NBS) show that China’s GDP grew 5.3% year-on-year in the first quarter of 2024, 4.7% in the second quarter, and 4.6%. in the third trimester. Over the first three quarters, GDP increased by 4.8% year-on-year, the target set by the government for 2024 being around 5%.
Furthermore, 2025 is the last year of the 14th Five-Year Plan. He had not made any clear demands in terms of GDP growth due to the epidemic. However, in order to achieve Vision 2035 mentioned in the XIV Five-Year Plan, one of the objectives of which is to reach the level of moderately developed countries by 2035 in terms of GDP per capita, the average annual growth rate of GDP in during the period 2021-2025 must remain above 4.83%. Maintaining a reasonable pace is the key to achieving Vision 2035. A moderately flexible monetary policy on the demand side will thus increase demand on all fronts and maintain economic growth.
Strengthening unconventional countercyclical adjustments
The economic situation faces uncertainties and challenges, and it is necessary to strengthen unconventional counter-cyclical adjustments. Currently, the global economy is facing downward pressures, successive regional conflicts are emerging, technological revolution and industrial transformation are unfolding with vigor, and if we add challenges such as human rights US customs duties towards China, Sino-European trade frictions and the reorganization of industrial chains, the Chinese economy is facing a complex external environment. In 2008, China launched a moderately loose monetary policy in response to the international financial crisis. Now, to cope with the uncertainties and challenges facing the economy, China must also strengthen its unconventional counter-cyclical adjustment measures.
At this stage, problems related to demand contraction, supply shocks and worsening expectations remain within the Chinese economy. According to NBS data, from January to October 2024, the total profits of industrial enterprises with turnover exceeding 20 million yuan fell 4.3% year-on-year. Among them, those of enterprises with majority state ownership fell by 8.2% year-on-year, those of joint-stock enterprises by 5.7%, those of enterprises with foreign capital and Hong Kong capital by Macau and Taiwan increased by 0.9%, and those of private companies decreased by 1.3%. Industrial companies are not optimistic about profitability and their investments remain low. A moderately loose monetary policy and a proactive fiscal policy therefore send positive signals to the market and strengthen the confidence of market participants.
The current foundations of economic activity are solid
The current foundations of economic activity provide support for moderately easy monetary policy. In November 2024, the consumer price index (CPI) increased by 0.2% year-on-year. On average from January to November, it increased by 0.3% compared to the same period of 2023. In November 2024, the industrial producer price index (IPP) fell by 2.5% year-on-year. . On average from January to November, it fell by 2.1% compared to the same period of the previous year. The CPI and PPI are currently in a low range. In October, the M1 money supply fell by 6.1% and the M2 money supply increased by 7.5% compared to 2023, with both indicators also in a low range. The current money supply and price levels can therefore support a moderately loose monetary policy without generating too much inflationary pressure.
A moderately loose monetary policy will keep liquidity abundant and allow for increased credit. The prime lending rate is expected to fall further, leading to lower financing costs for the real economy. The reserve requirement ratio is also expected to fall further, releasing more liquidity into the market. The People’s Bank of China, the country’s central bank, may additionally purchase bonds to maintain adequate liquidity. Under a moderately loose monetary policy, the credit environment for businesses will be more relaxed, thereby favoring consumption and investment. The reduction in financing costs will also promote technological and industrial innovation and accelerate the development of new quality productive forces. The return to a moderately flexible monetary policy could also favorably stimulate the stock and real estate markets.
*YUAN ZHENG is a senior researcher at the Changjiang River Economic Belt Research Institute and a professor at the Institute of Economics, Southwest University of Economics and Finance.
Graphic: Key contents of economic work in 2025
1. Vigorously stimulate consumption, improve investment profitability and develop domestic demand in all its aspects.
