China's macroeconomic playbook for 2025 revealed

Liu Yuanchun reveals six key strategic goals for China's macroeconomic stimulus.

China is about to launch a milestone macroeconomic stimulus campaign in 2025, with the goal of offsetting any headwinds created by protectionist measures from the Trump administration.

Beijing also has the longer term goals of restructuring macroeconomic demand to tilt it more towards domestic consumption, and making adjustments to risk-fraught local government debt towards longer maturities and lower interest rates.

Liu Yuanchun (刘元春), chancellor of the Shanghai University of Finance and Economics, has highlighted six key strategic focal points for China’s macroeconomic policy ambitions in 2025.

Focal point 1: The deployment of active fiscal and monetary policy to expedite recovery of China’s property market.

Many Chinese economists have argued that this will be the key to boosting domestic consumer demand, by helping households to repair their balance sheets and achieving positive wealth effects.

“Stabilising real estate is the key to stabilising confidence and expectations in China, and breaking through negative cycles,” Liu wrote.

“Unconventional real estate rescue policies and reform measures will be extremely important during this second phase of macroeconomic adjustment.”

Focal point 2: Take advantage of the downturn in the real estate market to buy up large volumes of housing, and vigorously drive a new model of Chinese urbanisation.

Liu points out that when housing prices were high, the Chinese government found it difficult to support the development of social housing exorbitant to lofty costs.

Current low housing costs give China a “rare strategic opportunity” to effectively resolve the housing challenges of China’s migrant workers, as well as drive a new model of sustainable urbanisation.

Focal point 3. Take advantage of record low treasury yields to issue large volumes of Chinese government debt.

Liu says this will provide the ongoing funding support needed for in-depth reforms to expand domestic demand.

It will also help spur the development of China’s bond market, which is critical to ongoing efforts to reform the implementation of monetary policy and abet the internationalisation of the yuan.

“Bond market expansion needs to find a low-cost growth opportunities,” Liu writes. “We are undoubtedly at present in a critical window period.”

Focal point 4: Launch comprehensive reform of China’s local governments to deal with high levels of risk-fraught regional debt.

Chinese economists have expressed deep concern about systemic financial risk in relation to the high debt levels of local government authorities.

A key means of alleviating local government debt pressure will be to roll over their hidden debts - mainly in the form of loans made to financing platforms that enjoy their implicit guarantees - using municipal bonds for longer maturities and at lower rates.

Liu also hopes these reforms can achieve a “reshaping of local government goals and functional positioning,” which will “pull open a real curtain for Chinese government reforms.”

Focal point 5: Drive further opening of China’s economic system.

Liu considers the atmosphere of tension between China and the US to be an opportune period for driving China towards a “new era of independent and unilateral opening.”

According to Liu, this can drive China’s economy to become more competitive and resilient on the international marketplace.

Focal point 6: Focus more on overall growth in fiscal expenditures, instead of increases to the deficit ratio.

Liu argues that policymakers should not “focus excessively on deficit ratios,” but instead give greater attention to the pace of growth in broad fiscal expenditures.

This is because deficit ratios are likely to rise considerably as fiscal revenues post simultaneous declines.

“As revenues see declines or contractions, solely using deficit ratios as the core measure for levels of [fiscal] policy activity is inaccurate,” Liu writes.

“We should base things on how market participants actually feel, in order to re-determine the meaning of ‘active fiscal policy.’”