"Biggest is better" for China's 2025 stimulus package

The China Banking News briefing for Friday, 24 January, 2025.

Jan 24, 2025

Our briefing on critical economic and financial developments in China as of Friday, 24 January, 2025.

Morgan Stanley anticipates 700 billion yuan in consumer stimulus this year, to facilitate China’s structural transition towards a more consumer-oriented economy.
How China’s has prepared for its biggest stimulus package since the GFC, with economists anticipating up to 10 trillion yuan in stimulus over the next two to three years.

Xing Ziqiang (邢自强), chief economist at Morgan Stanley China, writes that 24 September last year marked the launching point for Beijing’s stimulus campaign to achieve a structural transformation of the Chinese economy.

He identifies two major phases - the first focused on resolving the hidden debt of China’s local governments, in preparation for more fiscal spending in 2025.

The second phase of China’s stimulus campaign is focused on “appropriate stimulus of consumption via fiscal means.”

Xing expects total consumer-side stimulus to reach 700 billion yuan (approx. USD$96.06 billion) in 2025.

This 700 billion yuan in consumer side-stimulus will consist of:

300 billion yuan to expand China’s cash-for-clunkers campaign and drive further purchases of durable consumer goods.
A further 100 billion yuan in spending on welfare and healthcare subsidies for China’s disadvantaged demographics.
A 5% rise in public service salaries - the first such increase in a decade.

China’s cash-for-clunkers campaign totalled 150 billion yuan in 2024, and was hailed as a successful driver of purchases of vehicles and household appliances.

This year it will further expand to encompass other consumer goods, such as smartphones and consumer electronic devices.

Xing notes that Beijing has ample room to lift welfare spending, because China still lags far behind other economies in this regard.

Welfare spending accounts for 20 - 25% of GDP in many OECD nations, and 10 -15% in middle-income countries.

By comparison, this figure is just 8% for China, which according to Xing marks a doubling compared to 2012.

Xing nonetheless points out that China’s fiscal policy still “faces the need to transition from the development side to the social welfare and consumption side.”

Boosting consumption and inflation is the goal

Xing said Beijing’s messaging on the need to increase consumption and correct structural imbalances in China’s economy is unmistakable.

“The objective of these measures is to stimulate consumption, and sends a proactive signal,” he said.

China hopes that support for consumption will also help address one of the economy’s recent problems - weak inflation.

According to Xing, many Chinese economists expect government spending of around 10 trillion yuan over a two year period, likely enough to deal with the problem of deep-seated inflation.

How China is gearing up for its biggest stimulus campaign since the GFC

Xi is about to launch China’s biggest stimulus package since the Global Financial Crisis that rocked the international financial system over a decade ago.

Chinese economists anticipate spending equal to 10% of current GDP, for 10 trillion yuan in stimulus over a one-to-two year period.

A key goal of the stimulus plan is a structural transformation of China’s economy that will give far greater play to domestic consumption.

This will correct structural imbalances that have defined China’s economy this century - with investment and exports playing a disproportionate role, and potentially set the stage for stronger growth over years to come.

How it all kicked off kicked off last year

The first strong signal of Beijing’s plans for major stimulus package was a meeting of the Communist Party’s Politburo convened at the end of July last year.

In addition to calling for “strengthening counter-cyclical adjustments,” the meeting also stressed the need to “expand domestic demand by making spurring of consumption the focus.”

“The focus of economic policy will turn more towards benefiting living standards and driving consumption.”

Two months later at the end of September 2024, the State Council and the Politburo unveiled a landmark raft of quantitative increase policies (一揽子增量政策).

These laid the foundations for ongoing stimulus campaign by Beijing, encompassing “fiscal and monetary policy, as well as employment, investment and consumption.”

Beijing again stressed the need to “expand investment in improvement to living standards, and vigorously cultivate and spur potential domestic consumption.”

The need for structural transformation is evident in the statement that “near-term goals and medium and long-term goals are not separated, but require coordinated consideration.”

China’s central bank loosens further in September

On 24 September, China’s top financial authorities, including the central bank and the securities regulator, unveiled other key policies to stabilise the housing market and the stock market.

Chinese economists consider this a critical part of efforts to improve consumption, by creating the wealth effect of rising asset prices that should make households more inclined to spend.

Chief amongst the policies unveiled at the end of September were the Chinese central bank’s announcement that it planned to reduce interest rates and the required reserve ratio, as well as launch two new credit schemes to support the stock market.

These were the:

Securities, Fund and Insurance Company Swap Facility (SFISF), and the
Re-loan to support buy-backs and increases in share holdings by listed companies and their key shareholders.

China’s Ministry of Finance joins the chorus

On 12 October, China’s Ministry of Finance stepped up with information on its plans for the upcoming stimulus campaign, indicating that a raft of expansionary policies would:

Drive the stabilisation of the housing market.
Expand protection and support for disadvantaged population groups - thus making them more inclined to consume.
Support the dissolution of local government debt.
Supplement the capital of state-owned banks - paving the way for lending to support the stimulus package.

The Ministry of Finance followed this up on 8 November by shooting “three arrows simultaneously” (三箭齐发) to deal with the problem of local government debt risk.

This is critical for Beijing’s fiscal stimulus ambitions, because as with the mammoth GFC stimulus, China’s local governments will be entrusted with much of the on-the-ground spending.

The finance ministry said it would take measures to dispose of 12 trillion yuan of hidden local government debt within a five year period.

Biggest is better - fiscal stimulus expected to reach 10% of China’s GDP

The crowning event for 2024’s stimulus preparations was the Central Economic Work Conference held in December.

It called for “moderately loose monetary policy” - a term not heard since 2010 in the aftermath of the GFC, as well as “even more active fiscal policy” - an unprecedented choice of terms from Beijing.

The Politburo also made reference to “unconventional” stimulus for 2025 - further serving as another emphatic signal from Beijing of a transformational fiscal shake-up.

Guan Tao (管涛), chief economist at the investment banking wing of Bank of China, says Beijing will err on the side of caution by making the stimulus package bigger than potentially need be.

In this regard, it will follow the example of the US government with its Covid-era stimulus.

“The US Federal Reserve decided that doing more was better than doing little,” Guan writes. “The risk created by too much support was less than the risk of too little.”

For this reason, many Chinese economists expect the 2025 stimulus package to reach 10% of current GDP, for at least 10 trillion yuan of economic stimulus over a one-to-two year period.