There China announced its intention to adopt “more active” policies to stimulate domestic demand in 2025. This is a decisive change of parameter after 14 years of austerity. The decision was made known through a press release from Politburo of the Communist Party
These measures aim to counter the slowdown of the Chinese economy, shaken by a crisis in the real estate sector, a decline in stock markets and a decline in consumer confidence.
Beijingtherefore, is preparing for a phase of unprecedented economic interventionism, with more active policies and a boost to the public deficit to support consumption, investments and foreign trade. International pressure, fueled by the threat of new US tariffs, and the need to relaunch the real estate sector have led the Politburo to a clear change of strategy, putting an end to the long phase of austerity which aimed at containing domestic demand to the benefit of exports.
Weak inflation
The slowdown in domestic consumption has been one of the main obstacles to the country’s economic growth. The latest data shows that the consumer price index (CPI) rose just 0.2% in November year-on-year, below expectations (+0.5%). On a monthly basis, prices fell by 0.6%, signaling weakness in domestic demand despite the stimulus measures already introduced.
The producer price index (PPI), which measures production costs for companies, contracted by 2.5% year-on-year, although the decline was less pronounced than in October (-2.9% ). This is the 26th consecutive month of deflation in producer prices, a clear sign of the difficulty of companies in passing costs on to consumers.
Turning point in monetary policy
The Politburo meeting led to a change in strategy unprecedented in the last 14 years. The Chinese government has said that monetary policy will shift from a “prudent” to a “moderately expansionary” stance. “More active fiscal policies” will be implemented to support the economy, with the aim of strengthening countercyclical adjustments and stabilizing financial markets.
The announcement had an immediate impact on the markets: the Hang Seng index in Hong Kong recorded a rally of +2%, while the CSI 300 of the Shanghai and Shenzhen stock exchanges reduced its losses, going from -0.6% at -0.1%.
According to Goldman Sachs analysts, China could bring the fiscal deficit to 1.8% of GDP in 2025 and implement further measures to benefit the real estate sector, a major source of financial instability.
Real estate sector
The real estate sector remains one of the main critical issues. The decline in property prices has affected the wealth of Chinese families, reducing purchasing power and consumer confidence. To reverse the trend, Beijing has already eased restrictions on home purchases and reduced local government debt, but the government may now take bolder measures to support the sector.
Analysts at UBS Group AG and Barclays Plc believe the 2025 deficit-to-GDP ratio could exceed 3%, a paradigm shift from China’s traditional fiscal prudence. This move would allow the government to finance expansionary policies, in line with growth objectives set at around 5% for next year.
Economists’ forecasts
Expectations for the Central Economic Works Conference, scheduled for next week, are high. China’s top leaders will have to define the main economic objectives and intervention strategies for 2025. The increase in the deficit/GDP ratio, combined with a more expansionary monetary policy, could represent a turning point in Chinese economic policies.
“Recent stimulus measures have improved business sentiment and household confidence, but Chinese people’s ability and willingness to consume remains low,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. Bruce Pang, an economist at Jones Lang LaSalle, also highlighted that “efforts so far have not been sufficient to stimulate demand” but acknowledged an improvement in the core consumer price index.
Analysts are optimistic
Chinese stock markets are in an adjustment phase after the rally between September and October. The CSI 300 index is hovering between the 3,700 and 4,000 point threshold. Analysts believe that, in the event of a drop below 3,700 points, the recent progress would be nullified, while a stable exceeding of 4,000 points could favor a rise towards the 4,450/4,500 point area.
