Why China needs to keep monetary policy loose for the next decade

Central bank adopts credit guidance to supercharge Chinese tech

China’s central bank will keep the monetary spigot turned up high for at least a decade, according to a leading Chinese economist.

Beijing needs to do this to keep GDP expansion at roughly 5% each year until the mid-2030s, and achieve Xi’s long-term economic targets.

Mass Chinese fiscal and monetary loosening is afoot

At the end of 2024, China’s Central Economic Work Conference announced that it would implement “moderately loose monetary policy.”

The last time Beijing made use of this phrase was 14 years ago, in the immediate aftermath of the Global Financial Crisis, when it launched a mammoth four trillion stimulus package to keep the Chinese economy afloat.

The Conference is thus now signalling the deployment of large-scale fiscal and monetary stimulus in 2025, to deal with an ailing property market and any Trump–associated headwinds.

In addition to loose monetary policy, the Conference also made an unprecedented call for “even more active fiscal policy.”

Monetary policy to stay loose for a decade

Lian Ping (连平), a leading Chinese economist from East China Normal University, expects the central bank to keep monetary policy loose until at least 2035.

He argues that China’s current monetary loosening differs greatly from its shock GFC rescue plan, because this time it involves “medium and long-term considerations.”

Chief amongst these is fulfilling China’s long-term economic goal of achieving per capita income at middle-developed nation levels by 2035.

This means keeping per annum GDP growth at around 5% for the next decade.

“In the next several years, maintaining GDP growth at around 5% will require the adoption of intense loosening of macroeconomic policy,” Lian Ping writes.

While cutting interest rates won’t restore consumer demand immediately, Pian argues that China “still needs monetary policy to remain moderately loose, and keep market liquidity in ample condition.”

The Chinese central bank’s four core motivations

Lian Ping identifies at least four other core motivations for China’s central bank keeping monetary policy loose and liquidity high for the next decade.

The first is providing ample liquidity for the large-scale issuance of Chinese treasuries and local government bonds.

Loose monetary policy will support China’s expansion in fiscal policy that will see increases to both the deficit ratio and outstanding government debt.

2025 could see the issuance of around 2 trillion yuan in ultra-long-term Chinese treasuries.

Beijing plans to issue over 12 trillion yuan in special bonds from 2024 to 2028, to roll over risk-fraught local government hidden debt. This is equal to issuance of at least 2.4 trillion yuan each year.

The second is to provide long-term financial support to China’s efforts to grow its hi-tech sectors and achieve scientific and technological independence from the US.

This measure will also involve the Chinese central bank playing a greater credit guidance role, driving more funds to tech sector firms.

The third is supporting a recovery in the Chinese property market, which has been in a slump ever since 2021.

China’s top real estate enterprises, including listed companies, have at least 2 trillion yuan in debts they need to roll over in 2025.

The fifth is boosting the expectations of China’s capital markets, and maintaining the stability of stock and bond markets.

Lian expects the Chinese central bank to include the share market within macroprudential policy considerations in 2025, and expand the use of reloan tools to stabilise stock prices.