3 key objectives in 2025:

1. Target a higher fiscal deficit as a percentage of GDP, further issuance of ultra-long special treasury bonds, and special local government bonds.
   
   
2. Shift monetary policy stance from “prudent” to “moderately loose”, implement timely RRR and interest rate cuts, and maintain liquidity to boost total social financing.
   
   
3. Maintain stable inflation and improve labour income.

9 key priorities in 2025:

1. Boost consumption, improve investment efficiency, and expand domestic demand through targeted policies and measures. These includes consumption & investment upgrading, state-led investment, urban renewal, and special logistics projects.
   
   
2. Leverage technological innovation such as AI to drive productivity growth, build modern industries, and cultivate emerging sectors. Encourage social capital in start-up investment.
   
   
3. Deepen economic, taxation, and financial market reforms.
   
   
4. Expand high-level opening up to stabilize foreign trade and investment and promote the development of services, green and data international trade.
   
   
5. Prevent and defuse risks in key areas like real estate, local government, and small and medium size financial institutions debt.
6. Coordinate new urbanization and rural revitalization to ensure food security, improve agricultural competitiveness, and develop county economies.
   
   
7. Strengthen regional development strategies to enhance the vitality of different regions and promote coordinated development.
   
   
8. Prioritize carbon reduction, pollution control, and ecological protection to drive green transformation of the economy.
   
   
9. Enhance employment support, improve public services, and implement policies to address people's livelihood concerns.

Implications

1. Top leaders reaffirmed their commitment to pro-growth policies and strengthened policy coordination to bolster economic stability amid rising uncertainties. We expect a GDP growth target of approximately 5% to be set at the Two Sessions in March 2025. Such a target would signal confidence and align with the broader objective of doubling GDP by 2035 (relative to 2020 levels), which necessitates an average annual growth rate of 4.8%.
   
   
2. Monetary policy remains pivotal to economic recovery. Reflecting the Politburo’s call for “extraordinary counter-cyclical adjustment,” policymakers reiterated a shift in monetary policy from “prudent” to “moderately loose” -- the first such pivot in 14 years. This change highlights the urgency of enhanced easing measures and aligns with our projections of the one-year LPR declining to 2.50% by late 2025. Tools such as liquidity injections and property destocking support are also expected to stabilize asset prices and bolster market sentiment.
   
   
3. A “more proactive” fiscal stance may entail raising the targeted deficit-to-GDP ratio beyond its traditional 3% threshold, as seen during the pandemic (3.6% in 2020) and in 2023 (3.8%) for disaster relief financing. While new stimulus details remain limited, the debt swap initiative launched in November offers a promising start. This program, restructuring local government implicit debt over five years, alleviates fiscal pressures, ensures essential service provision, and strengthens financial stability, effectively functioning as a fiscal stimulus (see “China: NPC unveils new stimulus; keeps some powder dry”, 8 Nov”.
   
   
4. Efforts to stimulate domestic demand are poised to intensify. Despite nascent recoveries in housing and car sales, industrial production slowed in October; and sequential retail sales growth remained subdued despite year-on-year gains. Challenges persist in the services sector, as reflected in the decline of the Caixin Services PMI to 51.5 in November. Inflation remains muted, with core CPI rising only 0.3% last month.
   
   Policymakers are likely to deploy additional tools, including special sovereign bonds for bank recapitalization and local government bonds to address unsold housing and idle land. With banks facing record-low net interest margins and earnings pressures, recapitalization efforts are warranted. These measures, coupled with efforts to invigorate consumer confidence and expand consumption, align with directives to “vigorously boost consumption” and “comprehensively expand domestic demand.” Such policies are vital as China faces mounting external risks, including potential tariff hikes under US President-elect Donald Trump.
   
   
5. Technological innovation also took center stage at the conference, with policymakers prioritizing the modernization of traditional industries, supply chain resilience, and technological self-reliance. These goals align with the “new quality productive forces” strategy, which emphasizes advancements in AI, robotics, biotechnology, and renewable energy. Complementary to this is the “new-type industrialization” initiative, aimed at elevating high-tech manufacturing and fostering innovation-driven growth. In light of intensifying US restrictions on semiconductor exports, achieving self-sufficiency in key technologies is imperative.

Conclusion

The Central Economic Work Conference set forth a strategic framework to navigate complex domestic and global challenges, laying the groundwork for the 15^th Five Year Plan. Detailed economic policies are expected to be unveiled during the 2025 Two Sessions in March.


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