China’s macroeconomic adjustments still faces significant challenges in 2025 and the key to success lies in “expanding domestic demand, stabilizing growth, and promoting transformation, said Wang Yiming, a policy advisor to the People’s Bank of China (PBOC), at the annual forum of the China Finance 40 Forum over the weekend.
Wang said that China should set a 5% economic growth target for 2025, calling it both a guiding expectation and an expression of confidence.
Despite numerous challenges in 2024, China’s economy exhibited a trend of stabilization and improvement, with a GDP growth rate of 4.8% in the first three quarters and it’s expected to achieve the full-year growth target of around 5%, he said.
Structural imbalances still exist in the economic operations, particularly insufficient effective demand, and from a long-term perspective, economic constraints are shifting from the supply side to the demand side, with factors such as adjustments in the real estate market, impaired balance sheets, and local government debt pressures significantly constraining demand, he noted.
To address weak domestic demand and lingering economic growth pressures, Wang suggested stronger policies in the short term, and called for more proactive fiscal measures and supportive monetary tools to sustain the new round of macroeconomic adjustments initiated by recent incremental policies.
Fiscal policy should be more proactive with a clear focus on boosting demand, particularly by ensuring that the growth of broad fiscal expenditures exceeds nominal GDP growth, he stressed.
According to a report by the China Finance 40 Forum, achieving a 5% economic growth target in 2025 would require broad fiscal expenditures to increase by 2.6 trillion yuan, reaching 40 trillion yuan, which would necessitate raising 11.8 trillion yuan through new debt channels.
Based on the estimates, Wang proposed moderately increasing the deficit ratio. During the pandemic in 2020, the deficit ratio was set at 3.6%, and in 2023, it rose to 3.8% due to an additional issuance of 1 trillion yuan in national bonds for disaster recovery. “Can we raise the deficit ratio to above 3.8% in 2025 to demonstrate greater policy strength?” Wang suggested this question merits study while emphasizing the need for clear policies to bolster confidence and improve expectations.
He proposed expanding the scale of special treasury bond issuance in 2025, not only to support infrastructure and new industry initiatives but also to supplement commercial banks’ capital.
As the authority has decided to allocate 800 billion yuan annually over five years (totaling 4 trillion yuan) from newly issued local government special bonds to swap hidden debts, Wang called for expanding the scope of the special bonds to include land acquisition, stock property purchases, and support for strategic emerging industries.
In terms of monetary policy, he stressed the need to increase the strength of supportive monetary policies and ensure ample liquidity and promoting a reasonable rebound in prices, noting that China’s Consumer Price Index (CPI) growth in October was only 0.3% year-on-year, far below the 3% target. He urged leveraging price-based tools, such as interest rate adjustments, to reduce debt costs, and when conditions permit, further reductions in interest rates and the reserve requirement ratio could be considered.
With the US Federal Reserve initiating interest rate cuts, China now has more room to reduce rates, which could be paired with debt swaps to innovate structural monetary policy tools, he added.
To drive economic transformation, China should from an investment- and export-driven model to one where consumption drives investment, facilitated by government initiatives, and expanding domestic demand should focus on boosting consumption, optimizing fiscal expenditure structures, and increasing public service spending to promote consumption growth, he said.
While consumption of goods is nearing saturation, policy priorities should pivot to service consumption and the restrictions in sectors like high-end healthcare, leisure and vacation services, and elderly care should be relaxed to meet the diverse needs of higher-income groups, he said.
As young people are the main force of consumption, policies should also encourage and unlock their consumption potential.
Wang stressed the importance of registering permanent residency at places of residence and providing basic public services and said that resolving social insurance, housing, and education issues for nearly 300 million migrant workers could unleash substantial consumption potential.
China will face uncertainty surrounding external conditions in 2025, particularly the possibility of renewed trade wars under a Trump administration, and China, having gained experience from the previous trade war, would respond more calmly this time, though it needs to strengthen policy reserves, closely monitor trade war developments, and respond promptly and effectively, he said.
Expanding opening-up remains the most effective strategy to deal with trade wars, including deepening economic and trade cooperation with Europe, Japan, and South Korea, as well as increasing institutional opening-up in areas such as intellectual property rights, industry subsidies, environmental standards, labor protections, government procurement, e-commerce, and finance, he added.