China’s policy shift signals economic concerns, but don’t expect outsized stimulus

China’s top leadership surprised markets on Monday by signaling the first shift in monetary policy stance in 14 years. Experts said the economic challenges facing the country were deep-rooted, but the results showed that a huge stimulus package was unlikely.

China is considering switching its policy stance from “prudent” to “moderately accommodative” next year, a term it hasn’t used since the depths of the global financial crisis in 2008. It relaxed its stance and maintained that policy until 2010.

Macquarie chief economist Larry Hu said this was the first time the current leadership had acknowledged that monetary policy should be eased and the stage was set for a “new easing cycle”.

Hu added: “This tone suggests that policymakers are deeply concerned about the economic outlook, given weak domestic demand and the threat of renewed trade wars.”

Despite a flurry of stimulus packages since late September, recent economic indicators show that the world’s second-largest economy is still struggling with deflationary pressures amid weak consumer demand and a prolonged housing recession. Showing.

“The potential room for monetary easing is much more limited than it was 15 years ago,” said Tao Wang, head of Asian economics and chief China economist at UBS investment bank. We predict that the policy rate will be cut by more than a point. .

Teneo managing director Gabriel Wildo said the Chinese government had launched a “historically large financial stimulus package in response to the global financial crisis.”

In November 2008, the Chinese government announced a plan to raise 4 trillion yuan ($586 billion), about 13% of China’s GDP at the time, to sustain growth and avoid the effects of the worst global economic downturn in more than 70 years. announced the policy.

When the authorities adopted a “moderate easing” policy stance in 2008, the People’s Bank of China lowered the benchmark one-year lending rate by a total of 156 basis points and the cash reserve ratio by 1.5 percentage points during the easing cycle. said Ming Ming. A former official at the People’s Bank of China’s Monetary Policy Department told state media Economic Observer.

Last month, China announced a five-year economic stimulus package totaling 10 trillion yuan to tackle local government debt problems, while hinting that more economic support would follow next year. Ting Lu, Nomura’s chief China economist, said in October that this is only about 2.5% of China’s annual GDP.

Economists at Morgan Stanley said the debt exchange program would need to be significantly expanded to offset local government financial vehicle debt, which is equivalent to nearly half of gross domestic product.

Morgan Stanley expects the central government’s budget deficit to widen by 1.4 percentage points next year as the government increases borrowing to support the economy. China has kept this year’s central government deficit target unchanged at 3%.

The central bank has been lowering its key interest rates since late September, after the US Federal Reserve (Fed) began its easing cycle with a significant rate cut of 50 basis points (bp) in mid-September.

The US Federal Reserve’s interest rate cuts have given China room to lower domestic borrowing costs without causing a sharp depreciation of the yuan. However, the People’s Bank of China is refraining from cutting interest rates more aggressively, fearing the possibility of capital flight if the gap between China’s interest rates and those of other countries widens.

Ju Wang, head of Greater China foreign exchange and rates strategy at BNP Paribas, said the tone of Monday’s Politburo meeting is that the People’s Bank will cut key interest rates by 40-50 basis points by nearly 1% towards the end of 2025. This strengthened market expectations that there is a high possibility that the price will be lowered to . it said in a memo Tuesday.

Expectations of further interest rate cuts have accelerated a long rally in Chinese government bonds, with the benchmark 10-year bond yield hitting a record low on Tuesday.

Monetary easing may put downward pressure on the Chinese yuan, but [economic] Growth momentum will take precedence over exchange rate stability,” Bruce Pang, JLL’s chief economist for Greater China, told CNBC.

Pan expects the central bank to lower the reserve requirement ratio (RRR), a key liquidity adjustment tool, within a month.

UBS’s Wang added that details of the Chinese government’s macro policy plans will be revealed at the annual economic work conference. The meeting is reportedly currently underway and will conclude on Thursday.

However, he added that most of the key policy goals and details of the stimulus package will be announced only at the National People’s Congress next March.

Investors and economists will be watching closely to see whether concrete measures are implemented, particularly in the form of additional fiscal support or direct spending incentives.

Wildau said Monday’s stronger language did not suggest “a bazooka-style stimulus package would be implemented immediately,” and that leaders “will continue to do so in stages, depending on the data, while still retaining some ammunition.” He said he expects new economic stimulus measures to be rolled out. In response to next year’s US tariffs.

Wang said the recovery of household consumption is a top priority for policymakers, and the government expects to more than double the trade-in program to more than 300 billion yuan to encourage domestic spending. .

In July, China announced the allocation of 300 billion yuan ($41.5 billion) in super-long-term special bonds to support trade-in and equipment renewal policies to stimulate consumer demand.

Sunny Liu, chief economist at Oxford Economics, said in a note on Wednesday that existing fiscal stimulus, beyond trade-in programs, has little focus on boosting consumption, which is key to economic reflation, and said China He emphasized that Japan will continue to face deflation. There will be pressure in the short term.

CNBC’s Evelyn Cheng contributed to this report.