China’s leadership surprised markets this week by signaling a shift in its monetary policy stance for the first time in 14 years. The announcement highlights the depth of the country’s economic challenges, though experts caution that a sweeping stimulus package remains unlikely.
The shift involves moving from a “moderately loose” monetary policy to a more “cautious” approach in 2024, a phrase not used since the 2008 global financial crisis. At that time, China adopted an aggressively accommodative stance to combat the global downturn. This policy adjustment marks the current leadership’s first acknowledgment that looser monetary measures may be necessary, paving the way for what analysts believe could be a new cycle of monetary easing.
“This shift in tone reflects deep concerns about the economic outlook,” said Larry Hu, chief economist at Macquarie. “Stagnant domestic demand, coupled with the looming threat of another trade war, has put significant pressure on policymakers.”
Despite several rounds of measures introduced since late September, recent data suggests China’s economy is still struggling with deflationary pressures, weak consumer spending, and a prolonged housing downturn.
Tao Wang, head of Asian economics at UBS, noted that while additional monetary easing is likely, its scope will be more limited compared to past years. “We expect the People’s Bank of China (PBOC) to implement a cumulative rate cut of over 50 basis points within the next two years,” she said.
A shift from historical precedent
China’s recent policy deliberations come in stark contrast to its response to the 2008 financial crisis, when it rolled out an unprecedented 4 trillion yuan ($586 billion) stimulus package. That package, equivalent to about 13% of the country’s GDP at the time, was designed to spur growth and offset the effects of the worst global recession in decades.
Gabriel Wildau, managing director at Teneo, pointed out that Beijing’s reaction to the financial crisis was “historically large and aggressive.” Back then, the PBOC reduced its one-year key lending 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 official in the central bank’s monetary policy department.
Fast forward to today, and Beijing’s approach is markedly more restrained. Last month, the government unveiled a five-year, 10 trillion yuan stimulus program aimed at addressing local government debt issues. However, as Nomura’s chief China economist Ting Lu observed, this amount represents only 2.5% of China’s annual GDP—far smaller than the 2008 package.
To mitigate the strain on local government debt, Morgan Stanley economists have called for an expansion of the debt swap program. This mechanism is crucial, as debt from local government financing vehicles accounts for nearly half of China’s GDP. Analysts also anticipate that the central government’s fiscal deficit will rise by 1.4 percentage points next year, as Beijing borrows more to support growth.
Limited room for maneuver
The PBOC has already been lowering benchmark interest rates since late September, coinciding with the U.S. Federal Reserve’s easing cycle. This alignment has allowed China to reduce borrowing 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, emphasized that maintaining economic growth is currently a higher priority than stabilizing the exchange rate. “The focus is on sustaining growth momentum,” Pang said, adding that the PBOC is likely to lower the reserve requirement ratio—a key tool for managing liquidity—within the 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 that the PBOC’s key interest rates could drop by as much as 50 basis points by the end of 2025, bringing rates closer to 1%.
No immediate “bazooka” measures
While the Politburo’s latest announcement has bolstered expectations of increased economic support, experts do not foresee the immediate rollout of large-scale stimulus measures. Gabriel Wildau noted that Beijing is likely to adopt an incremental and data-driven approach, keeping significant resources in reserve to address potential U.S. tariffs or other external shocks.
“This isn’t a signal that dramatic, bazooka-style stimulus measures are on the horizon,” Wildau explained. Instead, he anticipates that new measures will be introduced gradually, with policymakers responding cautiously to unfolding economic conditions.
One of the government’s key priorities is reviving household consumption, which has yet to recover fully despite earlier fiscal support. UBS’s Wang suggested that Beijing may expand its trade-in program—designed to encourage spending on new appliances and equipment upgrades—to over 300 billion yuan.
Originally launched in July, the program allocated 300 billion yuan ($41.5 billion) in ultra-long-term government bonds to boost consumer demand and modernize equipment. However, Sunny Liu, chief economist at Oxford Economics, argued that existing fiscal measures have placed insufficient emphasis on consumption. Without stronger efforts to stimulate domestic spending, Liu warned, China could continue to face deflationary pressures in the near term.
Economic outlook remains uncertain
More details about Beijing’s macroeconomic strategy are expected to emerge following 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 more easing is on the horizon, it will likely be carefully calibrated to preserve stability in both domestic and international markets.
By signaling a cautious stance, Beijing is acknowledging the significant challenges facing its economy while preparing to act if conditions deteriorate further. Whether this approach will be enough to reinvigorate growth and restore confidence in the world’s second-largest economy remains to be seen.
As China charts its path forward, it is clear that policymakers are treading carefully, mindful of both internal vulnerabilities and external uncertainties. While the days of massive stimulus packages may be behind us, the country’s leadership is determined to ensure that growth remains on track, even in the face of mounting headwinds.
