China’s announcement that it changed its stance on monetary policy suggests that the government acknowledges that more effective measures are necessary to revive the Chinese economy.

The Political Bureau of the Communist Party of China Central Committee held a meeting early last week to analyse and study the economic work of 2025, chaired by President Xi Jinping. Comments mentioned a change in monetary policy from ‘prudent’ to ‘moderately loose’ and that authorities must implement more proactive fiscal measures to boost domestic consumption.

The various stimulus measures taken by the Chinese government in 2024 have been essentially through cutting the banks’ Reserve Requirement Ratio (RRR) and lowering interest rates, including mortgage rates, to stimulate consumption and revive the property market. Those measures have been relatively ineffective, although the manufacturing PMI rose above the 50 level in October and November.

However, the Chinese economy remains driven by export-led manufacturing with significant downside risks if higher tariffs on Chinese exports are implemented in the US and in the EU. To offset the negative consequences of lower exports, stimulating domestic demand becomes paramount. A looser monetary policy would also imply a weaker Yuan, creating risks of capital flight and potential issues with the new US administration. Moreover, Project Blue believes that the Chinese government wants to keep the option open to weaken its currency in the future to mitigate the impact of tariffs.

The weakness of the Chinese domestic consumption is illustrated by low inflation rates. China’s November CPI rose by a mere 0.2% y-o-y vs 0.3% in October, its lowest level since June.  China’s producer price index (PPI) fell for the 26th month with a 2.6% y-o-y decline. Deflation risks are likely to increase in the event of a trade war between China and the US.

The markets’ hopes and expectations for fiscal measures have been consistently disappointed over the past two years and cautiousness about a shift from monetary to fiscal policy is legitimate. Moreover, the magnitude of any fiscal stimulus is still unknown. Project Blue also believes that other structural reforms including welfare, pension and social security are necessary to restore durably consumers’ confidence.

Taking effective fiscal measures would mitigate the potential negative impact of higher tariffs in 2025, support growth and confidence across the economy and increase demand for commodities, steelmaking and base metals.  It looks like the markets are ready to give the Chinese government the benefit of the doubt. But time is running short.