China's leadership surprised markets this week by signaling a change in its monetary policy stance for the first time in 14 years. The announcement highlights the depth of the country's economic challenges, even as experts warn that a large stimulus package remains unlikely.
The change involves moving from a “moderately expansionary” monetary policy to a more “cautious” approach in 2024, a phrase not used since the 2008 global financial crisis. At the time, China adopted an aggressively accommodative stance to combat the global recession . This policy adjustment marks the first recognition by the current leadership that more flexible monetary measures may be needed, paving the way for what analysts believe could be a new round of monetary easing.
“This change in tone reflects deep concerns about the economic outlook,” said Larry Hu, chief economist at Macquarie. “Stagnant domestic demand, combined with the looming threat of another trade war, has put significant pressure on policymakers.”
Despite numerous measures introduced since late September, recent data suggests China's economy is still grappling with deflationary pressures, weak consumer spending and a prolonged housing recession.
Tao Wang, head of Asian economics at UBS, noted that while further monetary easing is likely, its scope will be more limited than in past years. “We expect the People's Bank of China (PBOC) to implement a cumulative rate cut of more than 50 basis points within the next two years,” he said.
A shift compared to historical precedent
China's recent policy decisions stand in stark contrast to its response to the 2008 financial crisis, when China launched an unprecedented 4 trillion yuan ($586 billion) stimulus package. That package, at the time equivalent to about 13% of the country's GDP, was designed to stimulate growth and offset the effects of the worst global recession in decades.
Gabriel Wildau, CEO of Teneo, stressed that Beijing's reaction to the financial crisis has been “historically broad and aggressive.” At the time, the PBOC cut the one-year policy rate by 156 basis points and cut the reserve requirement ratio (RRR) by 1.5 percentage points over the course of the easing cycle, according to Ming Ming, a former central bank official . monetary policy department.
Fast forward to today, and Beijing's approach is decidedly more moderate. Last month, the government unveiled a five-year, 10 trillion yuan stimulus program aimed at addressing local government debt issues. However, as Ting Lu, Nomura's chief China economist, noted, this figure represents only 2.5% of China's annual GDP, much lower than the 2008 package.
To ease the strain on local government debt, economists at Morgan Stanley have called for an expansion of the debt conversion program. This mechanism is crucial, as debt from local government financial vehicles accounts for nearly half of China's GDP. Analysts also expect the central government's fiscal deficit to rise by 1.4 percentage points next year as Beijing borrows more to support growth.
Limited maneuvering space
The PBOC has already lowered key interest rates since late September, coinciding with the US Federal Reserve's easing cycle. This alignment has allowed China to reduce financing costs without significantly devaluing the yuan. However, the central bank has avoided more aggressive rate cuts due to concerns about capital outflows, which could occur if the interest rate gap between China and other countries widens too much.
Bruce Pang, chief economist for Greater China at JLL, stressed that maintaining economic growth is currently a higher priority than stabilizing the exchange rate. “The goal is to sustain the growth momentum,” Pang said, adding that the PBOC is likely to lower the reserve requirement ratio – a key liquidity management tool – by next month.
Market expectations for further rate cuts have already fueled a rally in Chinese government bonds, pushing the benchmark 10-year yield to record lows this week. Ju Wang, head of Greater China FX and Rates Strategy at BNP Paribas, predicted the PBOC's key interest rates could fall by as much as 50 basis points by the end of 2025, bringing rates closer to 1%.
No immediate “bazooka” measures
Although the Politburo's latest announcement has strengthened expectations for greater economic support, experts do not foresee the immediate implementation of large-scale stimulus measures. Gabriel Wildau noted that Beijing will likely take an incremental, data-driven approach, maintaining significant reserve resources to deal with potential U.S. tariffs or other external shocks.
“This is not a sign that dramatic, bazooka-style stimulus measures are on the horizon,” Wildau explained. Instead, he expects the new measures will be introduced gradually, with policymakers responding cautiously to evolving economic conditions.
One of the government's key priorities is to revive household consumption, which has yet to fully recover despite previous fiscal support. UBS's Wang suggested Beijing could expand its trade-in program, designed to encourage spending on new appliances and equipment upgrades, to more than 300 billion yuan.
Originally launched in July, the program allocated 300 billion yuan ($41.5 billion) in ultra-long-term government bonds to stimulate consumer demand and modernize equipment. However, Sunny Liu, chief economist at Oxford Economics, argued that existing fiscal measures did not place enough emphasis on consumption. Without stronger efforts to stimulate domestic spending, Liu warned, China could continue to face deflationary pressures in the near term.
The economic outlook remains uncertain
More details on Beijing's macroeconomic strategy are expected to emerge after the annual economic work conference, which is currently underway. However, most concrete policy decisions, including fiscal measures and direct consumer incentives, will likely be announced during the National People's Congress in March.
For now, China's leadership appears intent on balancing the need for economic support with the risks of overextending its monetary policy tools. Analysts agree that while further easing is on the horizon, it will likely be carefully calibrated to preserve stability in both domestic and international markets.
Maintaining a cautious stance, Beijing recognizes the significant challenges facing its economy and is preparing to act should conditions worsen further. It remains to be seen whether this approach will be enough to reinvigorate growth and restore confidence in the world's second-largest economy.
As China charts its path forward, it is clear that policymakers are proceeding cautiously, mindful of both internal vulnerabilities and external uncertainties. While the days of massive stimulus packages are now behind us, the country's leadership is determined to ensure growth remains on track, even in the face of growing headwinds.
