CBN Special丨What does China’s unconventional monetary steps mean for 2025?

In setting priorities for its economic policy for 2025, China is emphasizing the need to adopt a moderately loose monetary policy next year, including the rollout of rate cuts and cuts in the reserve requirement ratio at an appropriate time to ensure ample liquidityThe nation's policymakers set the policy agenda for the world's second-largest economy at the annual Central Economic Work Conference in Beijing on Wednesday and Thursday.While noting heightened negative factors from the outside environment and challenges now facing the economy, policymakers reaffirmed the need to forge ahead with high-quality development, comprehensively deepen reform, expand high-level opening-up and develop a modern industrial system.They pledged to implement more proactive and effective macroeconomic policies, boost domestic demand, drive the integration of sci-tech innovation and industrial innovation, and stabilize the real estate sector and stock markets.The meeting also signaled a rare increase in its deficit-to-GDP ratios, through fiscal expenditures and issuance of ultra-long special treasury bonds and local government special-purpose bonds.The policy stance is aligned with signals from a tone-setting meeting on Monday of the Political Bureau of the CPC Central Committee.Among a series of positive signals regarding China's economy conveyed at the two key meetings, the most notable is that the meetings urged the implementation of a more proactive fiscal policy and a moderately loose monetary policy.The announcement of a moderately loose monetary policy in particular has drawn widespread attention. The last time monetary policy was moderately loose was in the 2008 to 2010 period after the global financial crisis. The change in stance will further open up the space for policy easing, according to analysts.Monday’s meeting said the policy toolkit will be beefed up, unconventional counter-cyclical adjustments will be strengthened, policy coordination will be stepped up, and macro regulation will be more forward-looking, targeted, and effective. Policy researchers and economists predict that China may take unconventional monetary steps to finance bolder fiscal expansion next year, possibly including a sizable central bank purchase of government bonds, coupled with more aggressive cuts in interest rates and reductions in banks' required reserves.This shift in monetary policy provides a much needed boost to the stock market. China’s A-share market reacted positively at the news, having climbed for 3 consecutive days since Tuesday.As domestic and international economic environments continue to evolve, the transition to a moderately loose policy is a timely and responsive measure to current economic challenges, and also a strategic approach to ensure stable growth and long-term development, particularly during crucial periods of economic transformation.Moreover, moderate monetary easing can stimulate market vitality and drive industrial upgrading and innovative development. In addition, a moderate approach to monetary easing can provide clearer and more explicit signals to the market, bolstering confidence in China's economic recovery.In fact, since the beginning of this year, China's monetary policy has exhibited a trend of moderate loosening while maintaining a prudent approach.Over the past year, the central bank has made several precise and considerable adjustments, including cuts to the reserve requirement ratio (RRR) and interest rates. The one-year loan prime rate (LPR) has decreased from 3.45 percent to 3.10 percent, while the LPR for loans with a term of five years or more has fallen from 4.20 percent to 3.60 percent, marking the largest reductions within a year in history.Next year, the PBOC will likely cut the policy rates by 40 bps to 60 bps, trim the five-year LPR by 60 bps to 100 bps, and lower the RRR by 150 bps to 250 bps, according to Zhang Jun, chief economist of China Galaxy Securities.The PBOC will go on paring the RRR and interest rates next year while stepping up its unconventional easing policies, such as purchasing government bonds and conducting outright reverse repurchase operations, said Ming Ming, chief economist at Citic Securities.Shifting the policy tone from "prudent" to "moderately loose" not only responds positively to the current economic situation but also serves as a crucial measure for strengthening expectation management.In addition, changes in the external environment have created a unique opportunity for China to adjust its monetary policy stance. In September, the US Federal Reserve announced a 50-bp cut to its benchmark interest rate, the first reduction in borrowing costs since March 2020. Wall Street investors now expect the Fed to implement another rate cut this month. In its latest Asian Development Outlook released on Wednesday, the Asian Development Bank (ADB) maintained its previous growth forecasts for China at 4.8 percent for 2024 and 4.5 percent for 2025. Notably, the bank lowered the growth forecast for developing Asia to 4.9 percent for 2024 and 4.8 percent for 2025.On Wednesday, a report on the Oxford Economics also said that the new US administration's tariffs will likely exacerbate the "slowbalisation" globally. In contrast to uncertainty from the US, China's positive role for the global economy has been highlighted by major international economic organizations. During a meeting with China's top leader on Tuesday, the heads of major international economic organizations, including President of the New Development Bank Dilma Rousseff, Managing Director of the International Monetary Fund Kristalina Georgieva, President of the World Bank Group Ajay Banga and Director-General of the World Trade Organization Ngozi Okonjo-Iweala, hailed China's remarkable achievements.Amid global economic challenges and the rise of unilateralism and protectionism, countries around the world are looking to China with hope and belief that it will remain a key engine of global economic growth.