Litmus test for China

CHINA’S recent annual Central Economic Work Conference (CEWC) is expected to shape a pivotal year in economic strategy, presenting opportunities for investors with a keen interest in the world’s second-largest economy.

With a resolute focus on stimulating consumption, stabilising key markets and addressing external challenges, the 2025 investment outlook for China appears cautiously optimistic. However, the conference’s sobering tone reflects the complexities of balancing growth ambitions with economic uncertainties.

Notably, for the first time in over a decade, “lifting consumption” has emerged as the top priority in the CEWC’s nine-point plan, overtaking industrial upgrading.

Analysts believe this shift underscores Beijing’s recognition of the need to bolster domestic demand amid global headwinds.

Maybank Investment Bank (Maybank IB) Research emphasises the significance of this policy pivot, noting that it marks “a historic break from previous norms”.

The research firm expects the official fiscal deficit to rise from 3% of gross domestic product (GDP) in 2024 to 4% in 2025, with an augmented deficit potentially reaching 5.5%.

“The mention of a higher fiscal deficit is encouraging,” Maybank states. “It implies that more central government funds will be directed towards non-income-generating areas, such as stimulating consumption.”

Consumption as a growth engine

The CEWC’s blueprint for 2025 includes consumer-focused initiatives such as expanding trade-in subsidies to new categories like mobile devices, alongside increased public spending on social safety nets. These measures aim to alleviate financial pressures on lower-income families while fostering new consumption trends, including winter tourism (the “snow economy”) and elderly-oriented services (the “silver economy”).

UOB Group highlights this as a critical development.

“Expanding domestic consumption and improving investment efficiency are at the top of the task list for 2025,” the banking group asserts.

The firm predicts an extension of consumer goods trade-in programmes to encompass tourism, entertainment, digital and green consumption.

Maybank IB Research concurs, projecting GDP growth of 4.5% in 2025, supported by these consumption-driven policies. “Instead of a bazooka, we expect policymakers to adopt a nimble approach,” it states, suggesting the intensity of stimulus will depend on external shocks and domestic economic conditions.

Property and stock markets

While the CEWC’s discussions on the property market were brief, the commitment to stabilise both property and stock markets was unequivocal. This pledge aligns with recent real estate measures aimed at addressing supply-demand imbalances and mitigating risks to consumer sentiment.

“The property market’s stabilisation is vital to restoring asset wealth and bolstering consumer confidence,” MaybankIB Research notes. It anticipates gradual improvements in real estate conditions, albeit without a sweeping policy overhaul.

UOB adds that macroeconomic stability extends to the capital markets, where a “reasonable and balanced” yuan exchange rate is a priority.

“The basic stability of the yuan exchange rate will be maintained at a reasonable level,” UOB states, highlighting the importance of currency stability in supporting investor sentiment.

Monetary policy: A

delicate balance

Meanwhile, it appears that the People’s Bank of China (PBoC) is poised to adopt a more accommodative stance, transitioning from “prudent” to “appropriately loose” monetary policy.

Both MaybankIB Research and UOB foresee reductions in the reserve requirement ratio (RRR) by 50 to 100 basis points (bps) in 2025.

However, MaybankIB Research cautions that policy rate cuts may be limited due to banks’ compressed net interest margins. “Policy rate cuts tend to be asymmetric, lowering banks’ lending rates more than deposit rates,” it observes. Consequently, the PBoC may rely more on RRR cuts to maintain sufficient liquidity.

UOB expects a measured approach as well, predicting a 30 bps reduction in the benchmark seven-day reverse repo rate.

“Maintaining sufficient liquidity while matching the growth of social financing scale and money supply with economic growth is critical,” it states.

Fiscal policy: A proactive stance

China’s fiscal strategy for 2025 is characterised by increased spending, with a focus on expanding domestic demand and technological innovation. The issuance of ultra-long-term government bonds and local government special bonds is expected to double, reaching 10 trillion yuan, according to MaybankIB Research.

“This suggests that fiscal expenditures will intensify,” UOB notes, projecting the fiscal deficit target to approach 4% of GDP.

The funds are likely to support infrastructure investments in transportation, energy and urban renewal, alongside consumption-stimulating programmes.

MaybankIB Research highlights the broader implications of this fiscal approach: “Higher spending on social safety nets and novel consumer services signals a shift towards long-term economic sustainability.”

Risks and opportunities

Despite the proactive measures outlined at the CEWC, uncertainties persist. External shocks, including geopolitical tensions and subdued global demand, could challenge China’s growth trajectory. Additionally, the effectiveness of consumption-driven policies hinges on consumer confidence and the timely execution of fiscal initiatives.

UOB identifies these risks but remains cautiously optimistic.

“The question remains whether policymakers can offer significantly larger stimulus on top of measures already announced,” it states. However, it underscores the potential of regional and technological strategies to catalyse growth, noting the CEWC’s focus on green transformation and industrial upgrading.

Overall, China’s 2025 investment landscape is one of cautious optimism, shaped by a significant policy pivot towards consumption, stabilisation of key markets and proactive fiscal measures.

While challenges persist, the CEWC’s roadmap provides a clear signal of Beijing’s intent to navigate economic uncertainties with a balanced approach.

As UOB puts it, “Expanding domestic demand and stabilising markets are the cornerstones of China’s growth strategy in 2025”, while MaybankIB Research points out that, “This year’s CEWC underscores the government’s commitment to adapt and innovate in the face of evolving economic challenges.”

Investors will keenly watch the implementation of these policies, particularly at the National People’s Congress in March, when further details are expected. In the meantime, the coming year is set to be a litmus test for China’s ability to balance ambition with pragmatism in its economic journey.