On December 10, 2024, The Epoch Times reported that the Chinese Communist Party’s Politburo held a meeting on Monday, December 9, stating that next year, they plan to implement a moderately loose monetary policy and an active fiscal policy to promote economic structural reforms. However, following this announcement, the Chinese stock market experienced a comprehensive decline. This marks a shift back to loose monetary policy for the CCP since the global financial crisis in 2008. Analysts suggest that driving the Chinese economy through loose monetary policy is becoming increasingly challenging. Some senior CCP officials have pointed out that without successful political system reforms, economic structural reforms will not succeed.
The Politburo meeting on Monday set the tone for economic development in 2025, stating that next year they will implement “active fiscal policy” and “moderately loose monetary policy.”
On Monday, the Chinese stock market declined. At the close, the Shanghai Composite Index fell by 0.05% to 3402.53 points, the Shenzhen Component Index dropped by 0.55% to 10,731.66 points, and the ChiNext Index (price) decreased by 0.81% to 2248.63 points. The overall market saw more decliners than gainers, with over 3200 stocks dropping. The total trading volume on the Shanghai and Shenzhen stock exchanges fell below two trillion for the 19th consecutive day.
Regarding the CCP’s economic policy direction, The Wall Street Journal pointed out that this signifies the first shift in the CCP’s monetary policy stance in over a decade, expecting more loose monetary policies to be introduced next year.
After the global financial crisis in 2008, the CCP adopted a “moderately loose” monetary policy and shifted towards a “prudent” monetary policy by the end of 2010.
In November, the CCP’s Minister of Finance, Lanhua’an, stated that they plan to implement a more robust fiscal policy next year. In December, the Governor of the CCP’s central bank, Pan Gongsheng, indicated that the central bank will continue to adhere to a supportive monetary policy stance and policy orientation next year.
Stephen Ennis, a partner at SPI Asset Management, commented that “this report undoubtedly indicates that the economic policies shifted since September are still effective.”
Foreign media previously reported that the CCP’s Central Economic Work Conference, which is crucial for observing their economic policies, is scheduled to be held from the 11th to 12th of this month.
The Wall Street Journal further suggested that economists believe mentioning a more active fiscal policy at the conference indicates that Beijing might arrange for a higher fiscal deficit rate at the National People’s Congress meeting in March next year. Xinhua News Agency recently stated in a commentary that the central government has significant room for increasing debt and deficits next year.
In fact, the CCP began gradually introducing loose monetary and active fiscal policies since the end of September this year, but the effects have not been significant.
At the end of September, the CCP’s central bank introduced some loose monetary policies, such as reserve requirement ratio cuts, interest rate reductions, and lowering lending rates for existing housing loans. In October, the Ministry of Finance launched a local debt swap program totaling one trillion.
In October, China’s new home prices saw a year-on-year decrease widen from 5.8% in September to 5.9%, marking the 16th consecutive month of decline. The industrial added value above a designated size increased by 5.3% year-on-year, lower than the market’s expectation of 5.6%, and down by 0.1 percentage point compared to September.
In 2008, the CCP implemented a four trillion infrastructure plan to achieve a soft landing for the Chinese economy. However, the current economic environment in China is vastly different, making it difficult for large-scale debt stimulus to have a similar effect as back then.
Renowned blogger “Luo Sir Financial Talk” recently pointed out that the multipliers of the Chinese currency have been severely weakened, land fiscal revenue has sharply decreased, and local debt issues are more severe than in the past, with real estate and large infrastructure projects approaching saturation.
Most importantly, by 2024, China’s M2 (broad money supply) has surpassed 304 trillion yuan, more than six times the amount in 2008. The household debt ratio has increased from less than 18% in 2008 to 65% in 2024.
The key point is that the demographic dividend in China is beginning to disappear, with the population of people aged 60 and above nearing 300 million in 2024, more than double that of 2008. Additionally, China’s fertility rate has plummeted by 70% compared to 2008.
These factors indicate that driving China’s economic development through loose monetary policies is increasingly challenging.
The Politburo meeting also emphasized the need to “vigorously boost consumption,” “comprehensively expand domestic demand,” and “play a leading role in economic structural reforms to ensure landmark reform measures are effectively implemented.”
The economic community generally agrees that the current dilemma of China’s economy lies in inadequate domestic demand and weak consumption, which are long-standing structural issues. The proportion of household income in distribution is too low, with large amounts of funds flowing into infrastructure and high-tech sectors. Meanwhile, social welfare provided by the state in terms of healthcare, retirement, and education is insufficient and lags behind developed countries.
Former CCP Premier Wen Jiabao once stated that without successful political system reforms, economic structural reforms cannot progress, and the achievements made may be lost.
The economic structural reforms proposed by the CCP are a necessary move at present. Professor Xu Chenggang from the China Economic and Institutional Center at Stanford University in the United States recently stated that the reasons behind the CCP’s “reform and opening up” over forty years ago are the same as the reasons for regressing in the past decade – all aiming to save the CCP’s authoritarian rule. Xu Chenggang also noted that “the fundamental issue facing China’s economic development is (political) institutional problems.”