Implementing a more proactive fiscal policy and moderately loose monetary policy to foster China's economic growth in 2025

Editor's note: Yuan Song is a researcher at the School of Economics at Zhejiang University. The article reflects the author's opinions and not necessarily the views of CGTN.

Reflecting on China's economic performance this year, the country is on track to achieve its primary economic and social development goals, with an expected growth rate of about 5 percent, contributing nearly 30 percent to global economic growth. However, as the new year approaches, China's economy continues to face significant challenges. Additionally, intensifying geopolitical conflicts, rising global protectionism, and the deepening adverse effects of shifts in the external environment further compound these challenges.

China's economy remains firmly grounded, with numerous advantages, strong resilience, and significant potential for continued development. The fundamental conditions and the long-term trend of steady improvement remain unchanged. In 2025, adopting a more proactive fiscal policy and a moderately accommodative monetary policy will be essential. Additionally, fostering greater coordination between fiscal and financial policies will enhance policy synergy, transforming positive factors across various sectors into tangible development outcomes.

First, the scale of fiscal expenditure should be expanded, and the fiscal deficit rate increased. Currently, China's government debt risks are generally manageable, particularly as the central government retains significant capacity to issue government bonds. It is recommended that both the scale and growth rate of fiscal spending be raised next year, with a substantial increase in the fiscal deficit rate compared to the 3-percent level in 2024. Raising the deficit rate to a range of 3.5 percent to 4 percent in 2025 could unlock over 5 trillion yuan ($686.6 billion) in fiscal spending capacity, providing a robust boost to aggregate demand and driving economic growth.

Second, the issuance of ultra-long-term special national and local bonds should be expanded to strengthen fiscal counter-cyclical measures. These funds should support the "two new" policies, large-scale equipment renewal and consumer goods trade-ins, to boost consumption in 2025. Efforts should focus on broadening subsidy coverage, optimizing structures, increasing rates, and targeting productive consumption like equipment upgrades and essential living consumption. These measures will stabilize consumption, expand domestic demand, and create jobs. Additionally, investments in major national strategies and key security projects should be scaled up, with a forward-looking approach to address future strategic needs. Such policies will ensure economic security, support key initiatives, and drive development by linking investment to consumption growth.

Third, optimize the structure of fiscal expenditure to enhance efficiency. A shift in focus from investment to consumption-based fiscal policies is recommended. Specifically, increasing financial investments in healthcare, education, pensions, and other essential livelihood areas, as well as providing greater support to vulnerable groups, could address residents' economic uncertainties. This would reduce precautionary savings, boost resident' consumption tendencies, and strengthen fiscal policies as a key driver of consumption.

Fourth, deepen the reform of the fiscal and taxation system, enhance local financial autonomy, and further analyze the relationship between central and local fiscal and administrative powers. On the one hand, transferring authority and expenditure responsibilities to the central government can reduce local governments' reliance on hidden debt by limiting excessive fiscal obligations. On the other hand, optimizing the local tax system and fostering independent financial capacity can boost local revenue sources. This would enhance the stability and self-sufficiency of local finances, supporting the sustainable development of local economies.

In terms of monetary policy, a moderately loose monetary policy should be implemented to ensure sufficient liquidity for sustained economic growth. China should shift away from the "prudent monetary policy" stance adopted in 2011 and adopt a more active monetary policy to stimulate economic expansion. Specifically, reducing the reserve requirement ratio and interest rate by 0.5 percentage point could lower the loan market quotation rate (LPR) by 25 basis points. This would ensure adequate liquidity in the system and reduce financing costs. Lowering interest rates will enhance financial institutions' capacity to extend loans, support enterprises and residents in meeting capital needs, stabilize price levels, and facilitate structural adjustments in key areas.

Sixth, explore the expansion of the central bank's macroprudential policies and enhancement of its financial stabilization function. At present, there are still potential risks in the financial sector, such as the buildup of risks in specific markets and the need for some financial institutions to reform and mitigate these risks. The People's Bank of China should continue to pay close attention to potential risks and, at the same time, in response to changes in financial markets, continue improving its macroprudential tools to ensure the overall stability of the financial system.

Last but not least, enhance the synergies between fiscal and financial policies. The People's Bank of China should continue using innovative tools, such as the sale and purchase of government bonds, repo operations, and refinancing, while reinforcing industrial policies through structural tools to further support fiscal policy implementation.