China's macroeconomic history points to outsized stimulus in 2025

Guan Tao expects Beijing to make good on its stimulus promises next year.

The history of China's fiscal and monetary policy execution points to outsized stimulus in 2025, according to one of the country's top economists.

Guan Tao (管涛), chief economist at Bank of China's investment banking wing, observes that Beijing’s senior-most decision-makers have always been painstakingly cautious and subtle with the wording they use to describe their macroeconomic policy plans.

For this reason, even minor changes to official statements can serve as emphatic signals of major policy changes ahead.

A brief history of Chinese macroeconomic policy

China has only made use of a modern macroeconomic framework for the past three decades.

At the end of 1993, the Third Plenum of the Communist Party’s 14th Central Committee issued a resolution that called for "changing the role of government, and establishing healthy macroeconomic adjustment systems."

This marked the start of the concerted use of fiscal and monetary policy to influence the performance of the Chinese economy.

Ever since then, Chinese policymakers have been highly cautious and deliberate in the phrasing they've used to communicate their fiscal and monetary policy goals.

In a recent opinion piece, Guan traced the history of the terminology used by Beijing to signal shifts in macroeconomic settings.

Throughout the 90s and until the Global Financial Crisis, Beijing regularly made adjustments to its macroeconomic policy settings and corresponding terminology, to deal with seesawing levels of growth and inflation.

Fiscal and monetary policy started off as "tight" during the period from 1993 to 1996 to deal with the heavy inflation created by price liberalisation, before shifting to "moderately tight" once inflation was contained.

Fiscal policy then became "active" and monetary policy became "steady" in the middle of 1998, to deal with the fallout of the Asian Financial Crisis.

In the mid-noughts, both fiscal and monetary policy were designated "steady," before Beijing launched tightening in the first half of 2008, to deal with inflation and economic overheating caused by China’s rapid emergence as an export superpower.

The Global Financial Crisis (GFC) forced an abrupt reversal, however, with Beijing making haste to adopt "active" fiscal policy and "moderately loose monetary policy" in the second half of 2008, in order to deal with the ensuing Great Recession.

China keeps macroeconomic settings steady since GFC

For more than a decade now, however, Beijing has been highly consistent in its description of macroeconomic policy settings.

It's continuously used the terms "active" with reference to fiscal policy, and "steady" when describing monetary policy.

This reflects the adoption of more consistently assertive macroeconomic policy, to keep China's growth on an even keel in the wake of the GFC and amidst worsening relations with the US.

2025 to usher in major macroeconomic policy change

The latest Central Economic Work Conference has seen significant changes to the phrasing used by Beijing to describe its macroeconomic policy preferences.

"Active fiscal policy" has shifted to "even more active fiscal policy" along with "unconventional counter-cyclical adjustments."

"Steady monetary policy" has shifted to "moderately loose monetary policy" - a term that hasn't been in play since the immediate aftermath of the GFC.

Guan Tao sees this as a strong portent of far more active fiscal and monetary policy in 2025 - particularly given that minor embellishments to policy descriptions in recent years have corresponded with rises in deficit spending and the deficit ratio.

He expects next year's budget to outline a deficit ratio of as high as 4%, burst well past the 3% threshold that’s considered the upper ceiling for prudent debt-fuelled spending by government.

Guan sees fiscal policy focusing heavily on urban renewal projects, as well as improvements to welfare spending, healthcare and pension schemes that promise to boost consumption by strengthening China's social safety net.