China's economic fate hinges on "unconventional" stimulus in 2025
The Chinese central bank paves way for international cooperation on monetary policy.
Our briefing on key economic and financial developments in China as of Tuesday, 10 December, 2024:
The Politburo’s Economic Work Meeting for 2025 has flagged vigorous and “unconventional” fiscal stimulus next year. Bank of China’s (BOC) Guan Tao says the implementation of this agenda could determine the near-term fate of the Chinese economy.
The Chinese central bank is adjusting its money supply metrics, to better reflect liquidity and bring its data readings in line with international best practices.
China's Communist Party flags "unconventional" stimulus plans for 2025
The Communist Party's Politburo convened its key economic work meeting for the upcoming year on 9 December.
The Politburo said that in 2025 it would "implement more active fiscal policy and moderately loose monetary policy," as well as "strengthen unconventional counter-cyclical adjustments."
"[We will] raise the foresight, targeted nature and effectiveness of macro-economic adjustments," the Politburo announced.
Other key goals outlined by the Party included:
Further comprehensively deepening reform.
Expanding high-level external opening.
The expansion of domestic demand.
Stabilisation of the property and stock markets.
Continual increases to Chinese living standards.
“China’s economic fate depends upon stimulus ”
The future of China's economy will be determined by the size and impacts of its fiscal stimulus package, said Guan Tao (管涛), chief economist at Bank of China's investment banking vehicle.
He anticipates no less than 10 trillion yuan in fiscal stimulus within a one to two-year time frame, funded by the issuance of ultra-long Treasury bonds by Beijing.
This spending will mainly be applied to two areas:
Improvements to the level of basic public services.
Accelerating the establishment of small and medium-sized county-level cities within China's capital city conurbations.
An example of the type of projects China's fiscal stimulus program will encompass is the investment of four trillion yuan in improvements to urban pipe networks over a five-year period.
According to Guan, if this fiscal stimulus is pulled off effectively, it could "play a key role in reviving the confidence of the market and turning around market expectations."
Since September of this year, the Chinese government has unveiled a raft of monetary, financial and fiscal policy measures to revive faltering growth.
Why China is changing up its money supply metrics
On 2 December, the People's Bank of China (PBOC) - being the Chinese central bank - announced that starting from 1 January 2025, it would expand the range of items included under its definition of the M1 narrow money supply.
In addition to money in circulation (M0) and institutional/ enterprise demand deposits, China's M1 money supply will also include personal demand deposits and non-bank institutional client provisions.
Banking official Li Gengnan (李庚南) says the move is part of efforts to bring China's money supply definitions in line with international standards and enhance their accuracy.
"China's current M1 definition is too narrow, making it difficult to accurately reflects payments capability and levels of liquidity," Li wrote.
"The most critical issue is that our definition of demand deposits is excessively narrow, and confined to just enterprise demand deposits.
"It does not include household demand deposits with commensurate levels of liquidity under M1, which is not in keeping with reason."
Li said the decision will raise China's ability to cooperate with other sovereign monetary authorities.
"[This will] expedite international coordination of monetary policy and international monetary cooperation," Li wrote.
"Expanding the M1 definition will help to bring matters in line with international money supply standards, raise the level of international comparability, and make it more convenient to conduct international comparison and analysis."
According to Li, the decision also has major significance for policy signalling and Chinese macroeconomic analysis.
"From the perspective of macroeconomic analysis and decision-making, the expansion of M1 is obviously a key turning point.
"This will not only influence the rationale behind analysis of the money supply, it will also adjust the signalling function of M1 readings."
Li said the move will affect the central bank's liquidity injections, as well as the living standards and investment decisions of Chinese households via its impact on prices.