China's GDP Target for 2025 Remains at 5%

China's economic planners may set the GDP growth target for 2025 at approximately 5 percent, maintaining the same goal as for this year. This decision follows a high-level meeting aimed at establishing proactive and effective macroeconomic strategies to address ongoing challenges and stimulate economic growth.

Luo Zhiheng, the chief economist at Yuekai Securities, stressed the importance of adopting a fast-paced and intensive approach to fiscal and monetary policy in order to meet this objective. In an interview, he highlighted that being ahead of market expectations and fostering better coordination between different policies is crucial.

The annual Central Economic Work Conference recently set the agenda for the upcoming year, marking a shift towards more proactive fiscal policies and a moderately loose monetary stance. This change ends a long-standing period of cautious monetary policy spanning 14 years.

According to Luo, China is currently facing a range of economic hurdles, including weak domestic demand, external pressures from global economic challenges, and ongoing trade tensions with the United States. In this context, a counter-cyclical approach is essential to bolster growth.

Notably, there are plans to increase the deficit ratio for 2025. Luo mentioned that a target of up to 4 percent of GDP could be considered, a rise from the current 3 percent goal established for 2023. He emphasized that while the deficit ratio reflects fiscal support levels, it also serves as an indicator of the government's commitment to addressing economic challenges.

With uncertainties regarding fiscal revenue and bond issuance rates, policymakers are encouraged to be ready to adjust budgets promptly to facilitate increased spending and utilize the full potential of fiscal policy to stabilize the economy.

Additionally, the effectiveness of fiscal measures can be amplified by broadening the application of local government special-purpose bonds and optimizing the allocation of these funds. Recently, the State Council has allowed local authorities more freedom in using these bonds, specifying which areas are off-limits.

Complementing fiscal strategies, monetary easing measures such as cuts to the reserve requirement ratio (RRR) and interest rates are also essential. Luo pointed out that the People's Bank of China has the potential to lower interest rates by around 0.5 percentage points in 2025 while carefully considering the impacts on the economy and banking sector.

As of now, the average RRR for financial institutions stands at about 6.6 percent, which leaves room for further reductions when compared to similar policies in other countries.

Luo advocated for prompt implementation of these counter-cyclical measures to stay ahead of market developments, improve market sentiment, and encourage domestic demand.

Promoting internal demand will be a significant focus for the government next year. Luo stated that transitioning from an investment-driven to a consumption-driven economy is vital but will not happen overnight. Striking a balance between investment and consumption is crucial for sustained growth.

GDP, China, Economy