China vows bigger fiscal spending to boost consumption in 2025
Analysts say the likely options include an expansion of government subsidies for purchases of consumer goods as well as targeted aid for families and vulnerable groups
CHINA has signalled more public borrowing and spending in 2025 with a shift of policy focus to consumption, in an effort to repair the economy’s weak link as looming US tariffs threaten exports.
Top officials led by President Xi Jinping vowed to raise the fiscal deficit target next year in an announcement made following a two-day huddle of the Central Economic Work Conference in Beijing, according to the state-run Xinhua News Agency.
For only the second time in at least a decade, they made “lifting consumption vigorously” and stimulating overall domestic demand their top priority.
Chinese officials also vowed to strengthen the social safety net, with broad promises to bolster healthcare and pensions. Those initiatives have long been advocated by economists as the population ages, and households squirrel away savings to cover fees in case of medical emergencies.
While the tone of the meeting was very supportive of growth, it lacked concrete details on policies, said Larry Hu, head of China economics at Macquarie Group.
“I don’t think the government will hand out money to consumers directly,” he added. “It’s more likely the government will be spending more. China will leverage up the central government and increase public spending, so that overall demand can be lifted. That’s the big strategy.”
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The work conference traditionally offers only broad strokes of policy focus and direction without revealing much detail.
Specifics such as the growth target or the government’s Budget will only be unveiled in March during the annual legislative sessions. Concrete steps are more likely to be introduced by relevant ministries.
Thrifty population
Consumer spending growth has lagged industrial production since the pandemic. While an increase in overseas orders for Chinese goods helped to offset the domestic drag, Beijing now faces a pushback from countries worried over the impact of a flood of cheap exports.
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Senior US economic officials including Janet Yellen have repeatedly called on China to step up support for domestic consumption, arguing the government’s unfair subsidies for producers have led to overcapacity.
There are signs officials are starting to heed such appeals.
Earlier on Thursday (Dec 12), Chinese shares related to consumption surged on hopes for more policy details on boosting domestic demand from the meeting. Major cities including Shanghai and Beijing are launching a new round of voucher programmes to encourage local consumption before the holidays, also lifting sentiment.
So far, policymakers have largely kept investors guessing on the scale and specifics of their plans. Officials have resisted proposals from economists to hand out cash to consumers in recent years, with Xi warning against falling into a trap of “welfarism” or “feeding lazy people”.
Analysts see an expansion of government subsidies for purchases of consumer goods, as well as targeted aid for families and vulnerable groups as more likely options for next year.
China’s economic outlook for 2025 and beyond is increasingly uncertain, even though the work conference reaffirmed that it is on track to hit the official growth target of “around 5 per cent” this year. Many economists expect the government to set a similar goal for next year.
The threat of a new trade war with the US after the re-election of Donald Trump means exports will probably stop being a major growth driver after contributing to nearly a quarter of economic expansion this year.
“The adverse impact from a changing external environment is deepening, and China’s economy still faces a number of difficulties and challenges,” Xinhua reported from the meeting.
Domestic challenges are also piling up. Consumer and business confidence remains sluggish, contributing to persistent deflation. Prices across the economy have been falling for six straight quarters, the longest streak this century. A prolonged housing downturn shows no sign of bottoming out.
Officials at the work conference made a rare – albeit indirect – acknowledgement of the prolonged deflation plaguing China, vowing to “ensure the overall stability of employment and prices”.
They also highlighted a wish to ensure that income growth among residents is in line with the pace of economic expansion, a key challenge constraining consumption amid widespread salary cuts and layoffs over the last few years.
Many economists forecast Beijing will lift the budget deficit ratio to 4 per cent of gross domestic product next year, in a decisive break with a long-time practice of capping it at 3 per cent in the past.
Alongside a higher budget deficit, China will also increase next year’s issuance of ultra-long special treasury bonds, some of which were used to subsidise consumer purchases starting from this year. It’s also set to offer more local government special notes, an important source for infrastructure investment funding.
The meeting on Thursday mentioned the country will additionally come up with policies to promote childbirth but provided no details. Economists have called on the government to hand out cash to families with children and to provide greater tax benefits after the nation’s fertility rate plunged in recent years.
Various cities have rolled out local subsidies, but there have been few nationwide incentives offered to have more children.
The meeting largely confirmed a commitment made at the December huddle of the decision-making Politburo earlier this week to pump more stimulus into the economy. That included shifting China’s monetary policy stance for the first time in 14 years to a “moderately loose” strategy.
Policymakers will deliver cuts to interest rates and the reserve requirement ratio for banks “at an appropriate time”, according to the work conference. That is the first mention of such specific policy tools in at least a decade, underlining an unusually direct style of language that indicates urgency to boost confidence.
“Top leaders are now prioritising boosting consumption and investment in 2025, shifting focus from the industrial upgrading and innovation that dominated the communique for 2024,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle.
That “pivot underscores the pressing need to enhance domestic demand to better navigate external uncertainties”.
The meeting did not provide details on the possible timing of further monetary easing. Officials also repeated their usual pledge to keep the yuan “basically stable”, likely signalling the central bank will make an effort to slow depreciation of the Chinese currency as it loosens monetary policy.
Economists had been anticipating a cut to the reserve requirement ratio – which will free up money for banks to lend and invest – by the end of this year, as signalled by the central bank earlier. Forecasts generally see rate cuts as early as next year.
Some expect the People’s Bank of China to make the deepest rate cuts in a decade with at least 40 basis points of reduction, a cycle that risks putting pressure on the yuan to depreciate.
“I take the messages from this conference and the Politburo meeting positively,” said Zhang Zhiwei, president at Pinpoint Asset Management. “The shift of policy this week is clearly more significant than what took place in the last week of September.”
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