China has recently signaled a shift in its monetary policy, moving from a “prudent” stance to a “moderately loose” approach.
This marks the first time in 14 years that the country has acknowledged the need for looser monetary policy. The decision follows growing concerns about the country’s economic challenges, including sluggish domestic demand, deflationary pressures, and a prolonged downturn in the housing market.
Economists and experts point out that while the policy change reflects the seriousness of the economic situation, it does not suggest the same kind of large-scale stimulus seen during the global financial crisis in 2008. Gabriel Wildau, managing director at Teneo, noted that in response to the 2008 crisis, the Chinese government launched an enormous monetary stimulus. However, experts argue that China’s current ability to execute such large-scale actions is much more constrained due to the increased complexity of the global economy and the country’s own economic realities.
In 2008, China introduced a massive 4 trillion yuan stimulus package, around 13% of its GDP at the time, which helped sustain growth during the global financial downturn. The People’s Bank of China (PBOC) also made substantial cuts to its benchmark 1-year lending rate and cash reserve ratio. However, this level of fiscal expansion is seen as unlikely today, as the country faces more challenging economic conditions and global uncertainties, such as the possibility of another trade war.
While the shift to a more loose monetary policy signals the government’s recognition of persistent economic problems, economists like Tao Wang from UBS Investment Bank caution that the scope for further monetary easing is limited compared to 15 years ago. Despite recent rate cuts, the PBOC remains cautious about making aggressive moves, fearing that further reductions could lead to capital flight, particularly if the interest rate differential between China and other major economies widens.
China’s most recent stimulus measures, including a 10 trillion yuan five-year plan unveiled in October, have been more focused on addressing local government debt rather than directly boosting consumption. As a result, experts suggest that while additional fiscal support and consumption incentives could be forthcoming, they will likely be incremental rather than sweeping.
Bruce Pang, chief economist at JLL, predicts that the PBOC will likely cut key interest rates by 40 to 50 basis points by the end of 2025 to stimulate the economy. However, he also notes that the priority will be maintaining growth momentum rather than stabilizing the yuan’s exchange rate. Despite the urgency for economic recovery, experts like Wildau emphasize that a “bazooka-style” stimulus, which would involve massive, sweeping measures, is unlikely to materialize soon.
The Chinese government’s policy direction will be further clarified in the upcoming Central Economic Work Conference, where the country’s economic agenda for 2025 will be discussed. Investors are closely monitoring these developments to understand how China plans to address its economic difficulties, especially in light of potential challenges like the threat of new US tariffs.
