China’s leadership has signaled a commitment to bolstering its economy in the face of potential new US tariffs, as discussed during the Central Economic Work Conference, a key policy-setting meeting.
Chinese leaders laid out plans to increase government spending and ease monetary policy to stimulate investment and consumer spending in the world’s second-largest economy.
During the two-day Central Economic Work Conference, officials reaffirmed their commitment to addressing economic challenges while praising the guidance of President Xi Jinping. The leaders pledged to “enrich and refine the policy toolbox” to defuse risks and maintain economic stability. Chief among these risks is the potential for higher tariffs on Chinese imports by the United States under the incoming Trump administration.
According to a statement from the official Xinhua News Agency, the leaders agreed to prioritize initiatives that enhance people’s well-being and provide a sense of fulfillment, happiness, and security. This includes measures to reduce poverty, strengthen healthcare, and improve elder care. Additional policies could feature subsidies to support larger families as China’s population begins to decline.
To support these objectives, the government plans to increase its deficit beyond the 3% of GDP cap that has traditionally been in place. The issuance of ultra-long-term bonds is expected to fund these initiatives, though no specific financial targets were disclosed. While China’s national debt-to-GDP ratio stands at a manageable 68%, local governments face significant debt challenges exacerbated by the COVID-19 pandemic and a real estate crisis.
The Politburo also signaled a shift in monetary policy, moving from a “prudent” stance to a “moderately loose” approach. This shift echoes the strategy adopted during the 2008 global financial crisis, when China’s central bank took aggressive steps to ease credit. Recent actions by the People’s Bank of China (PBOC) have included cutting interest rates and reducing reserve requirements for banks, with expectations for further rate cuts in the months ahead. Cheaper credit aims to spur investments and increase housing market activity.
Despite these announcements, market reaction was mixed. Investors had anticipated more detailed policy measures from the conference. Following the news, China’s Shanghai Composite Index fell by 2%, and the Hang Seng Index in Hong Kong dropped 2.1%, reflecting investor skepticism about the effectiveness of the outlined policies.
Bond markets, however, have seen dramatic shifts. China’s 10-year bond yields fell to a record low of 1.77%, with speculation that yields could decline further. Comparisons have been drawn to Japan’s long-term policy of yield curve control, which has kept bond yields close to zero. Investors now fear a “Japanification” of China’s bond market, as declining yields suggest a long-term period of slow growth and extensive monetary easing.
Economists note that while the announced policy changes are meaningful, China’s leaders remain cautious in their approach. The threat of higher US tariffs under President Trump’s administration adds uncertainty to an already complex economic landscape. This unpredictability has limited China’s ability to commit to more drastic reforms.
Observers believe that China’s leadership is taking a “wait-and-see” approach. As Yeap Jun Rong of IG observed, Chinese authorities are operating in a “reactionary policy mode” due to the uncertainty of US trade policies. While further stimulus measures are expected, the timing and scope of those measures remain unclear.
The broader goal of Chinese leadership is to transform the country’s economy into one that is more innovative, high-quality, and self-sustaining. As access to advanced technology becomes more restricted due to US and allied sanctions, China has launched countermeasures and sought to enhance its own technological capabilities.
Analysts predict that the PBOC may cut rates further in 2025, with some forecasting that China’s 10-year bond yields could drop as low as 1.5%-1.6%. In this environment, discussions of “zero-yield” bonds have surfaced, raising questions about how China’s central bank will maintain economic momentum without eroding returns for investors.
The Associated Press and Bloomberg contributed to this report.
