China vows to increase borrowing and decrease interest rates in response to Trump's tariff intimidations
China announced on Thursday its intention to boost its budget deficit, borrow more, and loosen monetary policy to maintain stable economic growth, as it braces for potential trade tensions with the United States under President Donald Trump's return.
This commitment was made at the annual agenda-setting meeting of China's top leaders, the Central Economic Work Conference, which took place on December 11-12. The statement from CCTV following the closed-door meeting acknowledged that the adverse effects of external environmental changes have worsened.
The Chinese economy, currently the world's second largest, has been slowing due to a severe property market crisis, high local government debt, and weak domestic demand. Exports, one of the few positives, face the threat of higher US tariffs.
Xinhua, the state news agency, pledged to keep the yuan currency's basic stability at a reasonable and balanced level.
The CEWC commitments echoed the dovish tone of a statement by a Communist Party leader more than a decade ago, released on Monday after a Politburo meeting, which discussed switching to a "more loosely" monetary policy stance and using "more active" fiscal tools, along with increasing unconventional counter-cyclical adjustments.
The CEWC summary also suggested higher budget deficits and more debt issuance at both central and local government levels. Leaders also agreed to reduce bank reserve requirements and cut interest rates "as soon as possible."
"The direction is clear, but the size of the stimulus package is uncertain, which will become clear only after the US announces the tariffs," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
Analysts see this shift in messaging as indicating China's prioritization of growth over financial risks.
At the CEWC, Beijing sets annual targets for economic growth, budget deficits, debt issuance, and other variables. The targets are agreed upon at the meeting, but they are not officially released until the annual parliament meeting in March.
The CEWC summary emphasized the need for steady economic growth, but it did not specify a specific rate.
"Maintaining a 5% growth rate will be challenging in 2025, given the additional 'Trump shock' impact on exports and capital expenditure," said Xu Tianchen, senior economist at the Economist Intelligence Unit.
However, he added that a sufficient level of stimulus would prevent a sharp economic decline, and growth would not fall below 4.5%.
Tariff threats
Trump's tariff threats have raised concerns in China's industrial sector, which exports goods worth over $400 billion to the US annually. Many Chinese manufacturers are shifting production overseas to avoid tariffs.
Exporters warn that the tariffs will further reduce profits, leading to job losses, reduced investment, and slower economic growth. They also noted that the tariffs would exacerbate China's industrial overcapacity and deflationary pressures.
If exports start to decline, China will need to look for internal growth engines. However, consumers are less wealthy due to falling property prices and minimal social welfare, leading to low household demand, which poses a major risk to growth.
Beijing has been increasingly vocal about boosting consumption throughout the year, but it has only offered limited policies, such as a subsidy scheme for car and appliance purchases.
The CEWC summary expressed a commitment to expanding the subsidy scheme and increasing pensions, as well as efforts to boost household incomes and "vigorously" stimulate consumer demand.
"The call to vigorously boost consumption is a positive sign," said Lynn Song, ING's chief economist for Greater China.
The Chinese economy, facing potential trade tensions and threats of higher US tariffs, is prioritizing growth over financial risks, as evidenced by the CEWC commitments to boost budget deficits, issue more debt, and adopt a more loosely monetary policy. The business sector in China, which relies heavily on exports to the US, is concerned about the potential impact of tariffs on profits, investments, and growth.
