As of mid-November 2024, following the September 26 policy meeting, a comprehensive set of incremental measures has been introduced. Achieving the full-year target of 5% economic growth by the fourth quarter now seems highly probable. Reflecting on the year as a whole, the economic structure has undergone significant shifts. Notably, macroeconomic policies no longer produce rapid results within one to two quarters as they did in the past, and both monetary and fiscal policy directions are experiencing substantial transformations.
This discussion focuses on three critical aspects of the current economy while also offering an outlook for 2025:
1. The Outlook on Trump’s Trade Policy 2.0 (Effective January 20, 2025): This issue has garnered widespread attention. Since the pandemic, exports have been undeniably crucial to China’s economic momentum, particularly in 2024. How should China respond to the aggressive rhetoric of a 60% tariff under Trump’s policy agenda?
2. Policy Responses to Export Shocks: If exports face substantial pressure, macroeconomic adjustments in 2025 will need to intensify. Trade frictions are likely to exert considerable stress on the renminbi’s exchange rate, elevating the importance of fiscal policy. A pressing question is: How much more robust will fiscal stimulus be compared to 2024? Is there a limit to China’s fiscal capacity? These issues are central to both policymakers and market participants.
3. Stimulus Priorities and Market Confidence: Will there be a transformative economic reform plan capable of restoring investor confidence, as encapsulated in the phrase “launched today, limits up tomorrow”? The crux of this question lies in whether such reforms can strengthen market trust in China’s future economic growth trajectory. While the Third Plenary Session identified a modern industrial system as the cornerstone of China’s growth strategy, this goal faces notable challenges under current circumstances.
Before delving into these key issues, it is essential to first assess China’s economic conditions, identifying both growth drivers and structural tensions. This contextual understanding will provide a foundation for addressing the outlined questions.
Section I：Current Economic Landscape: Inflation, Demand-Side Contraction, and Financial Environment
1. Inflation: Weak Dynamics and Asset Prices
Inflation remains subdued, with the macroeconomy still in a state of deflationary pressure. Analyzing China’s inflation requires attention not only to CPI and PPI but also to asset prices, as they reflect household purchasing power in a high-savings economy like China’s. Asset prices significantly influence future inflation trends.
While the annual CPI has shown a quarter-by-quarter increase, core CPI has not exhibited an upward trend. The overall CPI growth has been largely driven by energy and food prices. In contrast, PPI has displayed substantial volatility throughout the year. Since September, the narrowing decline in PPI has stalled, falling short of expectations for a positive year-end turn. Looking ahead, with current capacity utilization levels, PPI could continue to decline in 2025.
In terms of asset prices, the deceleration in real estate prices has slowed, yet property, as a durable financial asset, has not yet reached a stabilizing bottom. Future real estate policy remains critical. Meanwhile, after two rounds of significant regulation, the stock market has moved past its phase of widespread panic, presenting a relatively optimistic outlook. This juxtaposition of strong expectations and weak realities highlights a key contradiction in the current economic environment.
2. Demand-Side Analysis: Consumption, Investment, and Exports
Consumer and corporate spending, including both consumption and capital expenditure, remains weak. Export growth, manufacturing investment, and infrastructure investment remain the focal points of economic adjustment.
On the consumption side, household spending has stabilized at a level exceeding 3%, a significant decline from the pre-pandemic average of 8%. However, since the introduction of a ¥300 billion “Two New” policy fund in July, goods consumption has gradually recovered from its trough. By October, goods consumption growth had outpaced that of dining services, with categories such as home appliances, office supplies, and automobiles exceeding expectations. This offers valuable lessons for future stimulus measures aimed at boosting consumption.
Corporate capital cycles reveal a stark divergence. With real interest rates remaining relatively high, small enterprises face sluggish capital expenditure, whereas capital spending by central and large state-owned enterprises continues to grow robustly. This is reflected in the solid performance of manufacturing investment and the growth of medium- and long-term corporate loans throughout the year, showcasing the impact of macroeconomic policies.
Export growth, while volatile, has generally trended positively in 2024. Some estimates suggest exports contributed approximately 2 percentage points to economic growth this year. However, concerns about the sustainability of this contribution in 2025 remain prevalent.
3. Financial Environment: Credit Contraction and Fiscal Expansion
Cash deposit growth among households and enterprises continues to decline, with weak demand for loans. Government bonds have become the primary driver of aggregate financing.
The financial credit cycle plays a critical role in economic growth. In the short term, a surge in financing can delay crises, but without corresponding economic growth, those crises will eventually materialize. This phenomenon has been particularly evident this year, as both households and businesses have increased deposits while reducing capital expenditures, entering a phase of credit cycle contraction.
Meanwhile, policy and market interest rates have trended downward, accelerating a “deposit migration” toward bank wealth management products. This has widened the gap between bond market yields and LPR rates, placing significant pressure on monetary authorities. Accelerated reforms of commercial banks are necessary to ensure a rapid decline in LPR rates; otherwise, the room for monetary policy maneuvers will remain constrained.
On the fiscal side, the issuance of special bonds and ultra-long-term special treasury bonds has surged this year, marking a phase of notable credit expansion. These measures have been instrumental in supporting key initiatives under the “Two Major” and “Two New” policies, demonstrating strong performance. However, the use of special bonds has expanded significantly, often extending into fiscal expenditures rather than remaining a strictly capital-neutral tool.
An increasing share of special bond funds is being allocated toward non-profit expenditures. If fiscal spending inefficiencies are not addressed and reduced, this approach merely defers greater risks into the future. Drawing on historical macroeconomic management experiences globally and domestically, fiscal spending reductions—especially in low-efficiency areas—are imperative. Given the already heavy burden on businesses, tax increases are not a viable option, leaving expenditure adjustments as the primary solution to mitigate long-term risks.
Section II：Key Growth Drivers and Contradictions in the Current Economic Landscape
The primary aspects of economic growth have been reviewed above. From these observations, it is evident that the main growth drivers lie in exports, manufacturing investment, and infrastructure investment. Looking ahead to next year, exports may undergo significant changes. Manufacturing investment is expected to maintain high growth rates, as it largely reflects the financial credit cycle. Central and large state-owned enterprises still possess the capacity to expand capital expenditure. Infrastructure investment growth may also see substantial shifts, which we will discuss further in the context of China’s fiscal space.
The main contradictions in the economy can be summarized in two points: the financial nature of real estate prices has not been effectively addressed through macroeconomic regulation, and the issue of triangular debt arising from the extension of local government debt across multiple parties.
Currently, the macroeconomic environment has not seen widespread bankruptcies of enterprises and banks. China is unlikely to adopt a macro-control approach that allows for a full clearing of debts. Real estate prices, undoubtedly carrying financial attributes, inherently reflect financial bubbles and the subsequent depression phase after the bubble bursts. From the perspective of both new and second-hand housing markets, the economy is entering the early stages of a depression phase. Over three years of adjustment have partially cleared the bubble.
There are various metrics for assessing the real estate bubble. One is the ratio of household income to housing prices, and another is the annual growth rate of residential area demand. From these perspectives, the real estate market is still some distance from bottoming out. Current macro-control measures are focused on reducing supply and demand-side constraints and have not yet transitioned into large-scale asset purchase programs. However, as outlined in earlier reports, issuing ultra-long-term special government bonds to purchase commercial housing remains the only viable solution to stabilize prices.
The central bank has already introduced relending tools to support inventory acquisition, but the cycles are too short to establish commercial logic at the local level. Large-scale funding, delivered in a single tranche to achieve economies of scale and commercial viability, is essential for effective real estate price regulation. Regardless of whether residents can bear the burden of the bubble, a hard landing of the real estate bubble must be avoided. We continue to believe this is the only feasible path forward.
Local government debt stems from three areas: maturing special-purpose bonds, implicit debt, and fiscal expenditures for public welfare. While a significant portion of local government debt can be attributed to the sharp decline in land-related revenues, it is also largely a reflection of the credit cycle. The short-term maturity of special-purpose bonds requires either refinancing or investments yielding high returns. As previously noted, a significant proportion of special-purpose bonds in recent years have been allocated to non-revenue-generating capital expenditures, marking the late stages of the credit cycle.
In early November this year, the National People’s Congress approved a plan for RMB 10 trillion in special-purpose bond refinancing, which will effectively ease the pressure of maturing implicit and special-purpose debt. Fiscal expenditures for public welfare are more rigid and difficult to reduce, highlighting a crucial direction for future reforms. An essential reform challenge lies in aligning public service provision with the free movement of populations.
Section III: Three Core Questions
1. How Should We Interpret Trump Trade 2.0?
Trump Trade 2.0 focuses on three key measures:
1. Raising tariffs on Chinese goods to 60%.
2. Revoking China’s most-favored-nation trade status.
3. Restricting transshipment trade involving Chinese exports.
This is not merely a negotiation tactic; assuming so would be a grave miscalculation. At its core, Trump’s economic policy aims to promote the reshoring of manufacturing, necessitating high tariff barriers and domestic tax cuts to make U.S. manufacturing competitive. Without this cornerstone, Trump’s economic framework loses much of its rationale. Hence, imposing broad global tariffs and specific punitive tariffs on China is an essential part of this strategy.
Furthermore, a second-phase trade agreement between China and the U.S. is virtually unattainable. The U.S. aims to export agricultural and livestock products, while China seeks access to U.S. chips and high-tech services. However, the U.S. refuses to sell chips, and China’s low inflation levels preclude large-scale agricultural imports. Thus, there is limited room for reciprocal trade concessions.
Non-core manufacturing sectors, such as small-scale consumer goods and construction materials, are particularly vulnerable to the high tariffs. These industries serve as bargaining chips for the U.S. since they are unlikely to return to American soil and can be outsourced to alternative regions globally.
Research indicates that Trump Trade 2.0 could reduce China’s economic growth by 2 percentage points in the future, with high-tech trade restrictions potentially exerting even greater pressure. China’s only viable response is to pursue large-scale economic liberalization, lower import tariffs, reduce export rebates, and diversify its trade markets beyond the U.S. Simultaneously, China should accelerate investment negotiations with Europe, South Korea, and Japan, broaden RMB capital account liberalization, and streamline regulatory constraints.
Given U.S. trade isolationism and widespread tariffs, Western economies with purchasing power will seek alternative markets. This presents a strategic opportunity for China. A China-EU investment agreement, for instance, could be finalized within 1–2 years, as exemplified by joint ventures between German and Chinese automotive companies. While the U.S. is tightening restrictions on capital flows to China, a successful China-EU pact could serve as a bridge for U.S. capital seeking to re-enter the Chinese market indirectly, leveraging improved economic conditions and investment opportunities.
2. How Much Fiscal Stimulus Space Does China Have?
As noted earlier, China’s monetary policy is highly constrained and cannot replicate Western practices of swiftly lowering interest rates to zero. Despite two modest rate cuts in July and September 2024, the profitability and revenue growth of major commercial banks remain low, and structural reforms in the banking sector have progressed sluggishly. These factors significantly limit monetary policy flexibility.
Moreover, the spread between Loan Prime Rates (LPR) and government bond yields represents a space for long-term reform rather than immediate policy maneuvering. In 2024, the RMB is likely to face substantial depreciation pressures due to the implementation of Trump Trade 2.0 and a strengthening dollar index. Expanding global trade links and reducing import tariffs could bolster global demand for RMB, stabilizing its exchange rate and providing some breathing room for monetary policy.
With limited monetary options, fiscal policy must take the lead decisively. Based on the growth drivers, contradictions, and trade challenges outlined earlier, fiscal stimulus in 2025 must surpass 2024 levels. The RMB 10 trillion debt restructuring plan approved in late 2024 primarily serves as a debt rollover mechanism and should not be counted toward fiscal expansion.
In the short term, central fiscal capacity is essentially unlimited, as debt repayment can always be deferred through the credit cycle. For 2024, fiscal resources stem from three main sources:
1. Central fiscal deficit: RMB 4.06 trillion, up RMB 180 billion from 2023.
2. New local government special bonds: RMB 3.9 trillion, up RMB 100 billion from 2023.
3. Ultra-long-term special government bonds: RMB 1 trillion.
This totals RMB 8.96 trillion for 2024. For 2025, the scale should exceed RMB 10 trillion, with the central fiscal deficit further increasing to RMB 5 trillion, new special bonds remaining at RMB 3.9 trillion, and ultra-long-term bonds expanding to RMB 2 trillion, totaling RMB 11 trillion.
Ultra-long-term special bonds are particularly critical, coordinating the credit cycle effectively. The RMB 2 trillion fund must support key priorities: infrastructure projects, financial capital supplementation, and commercial housing stock acquisitions. Although the latter carries uncertainties, it remains the only viable solution under current trade conditions. Failure to expand foreign trade and reduce import tariffs would necessitate even larger fiscal stimuli.
In the medium and long term, fiscal space hinges on comprehensive reform plans. Economic growth is the linchpin, as growth drives tax revenues. China’s tax structure—dominated by VAT, corporate income tax, and personal income tax—lacks a wealth tax, making it regressive. Without wealth taxes, fiscal burdens disproportionately shift to low-income households, limiting China’s capacity to raise taxes.
Additionally, the growing share of non-revenue-generating local government special bonds increases the risk exposure of central fiscal transfers. Rapid growth in non-tax revenue over the past year has also hindered market-oriented reforms, disrupting expectations and undermining systemic improvements. Therefore, fiscal resources must be allocated efficiently, focusing on long-term benefits.
3. What Should Stimulus Target?
Key options on the table include stimulating infrastructure, boosting consumption, and enhancing the social security system. Each has strong expansionary effects and merits consideration. These strategies, discussed extensively in *Three Scenarios for Economic Recovery*, converge on the ultimate goal of expanding domestic demand while navigating varying degrees of reform difficulty.
From a global perspective, external trade expansion and domestic demand growth must proceed simultaneously. Expanding the social security system poses the greatest challenge due to its extensive impact on vested interests. To maximize fiscal policy effectiveness, wasteful expenditures must be cut, prioritizing efficient allocation.
For 2025, we anticipate the macroeconomy to remain in a gradual recovery phase. Against a backdrop of heightened external uncertainties, fiscal and monetary policies must integrate counter-cyclical measures with structural reforms. Enhancing fiscal and taxation systems will be key to sustaining policy impact and driving long-term economic transformation.