China concluded the much-awaited annual Central Economic Work Conference (CEWC) on Dec 12, outlining the government's main economic objectives and policy plans for 2025, which are largely in line with our CEWC preview and Politburo meeting.

As usual, key growth and policy targets were not announced at CEWC but will be released at the National People's Congress (NPC) meeting next March. The CEWC recognized the growth headwinds from domestic demand weakness and external uncertainties, although the potential higher US tariffs was not cited explicitly.

Therefore, the CEWC prioritized "stabilizing growth" as the central task and emphasized boosting domestic demand with more proactive macro policies, with "reviving household consumption" listed as a top task. In particular, the government highlighted its comprehensive goals of achieving stable growth, stable employment and "reasonable rebound" of inflation, the latter of which is a direct response to the lingering deflation pressure and an important anchor for market expectation and policy setting. Overall speaking, the CEWC set a much more supportive macro policy tone to stabilize growth, while more details are still set to be revealed later.

More specifics expected throughout 2025-26

Our baseline forecast assumes that a plan of higher US tariffs may be released in Q1 2025 and implemented in stages starting from Q3 2025. Therefore, after the March NPC unveils next year's overall policy stimulus package, we think the government may also ramp up additional policy support in stages throughout the rest of 2025 and in 2026, as macro situations develop, higher tariffs are announced and their impact is felt. Some of the proposed policy targets and measures in the CEWC may be revised in the NPC meeting.

The CEWC emphasized more expectation management, better policy coordination and stronger local incentives. Some market participants and policy advisors may expect China to set 2025's growth target at "around 5 percent" again to anchor market expectations, which we think is very challenging to achieve. We see China's GDP growth slowing to around 4 percent in 2025, as headwinds from the lingering property downturn and potential higher US tariffs may be partly offset by stronger policy support.

'More proactive' fiscal policy

The CEWC called for "more proactive" fiscal policy, a tone similar to that in 2020 when China expanded overall fiscal support notably. It indicates a broadly stronger fiscal expansion in 2025. The CEWC explicitly called for higher headline fiscal deficit, more issuance of ultra-long special treasury bonds (CGB) and special local government bonds (LGB), and improving fiscal spending structure (to support social welfare and consumption), with a key focus to scale up fiscal subsidies for trade-in program of consumer goods and equipment upgrading. The government also mentioned rolling out policy measures to boost childbirth, which we think may include the establishment of a subsidy scheme for families with young children. Our baseline forecast assumes 2 percentage point of GDP expansion in augmented fiscal deficit (AFD) in 2025 and another 1 percentage point AFD expansion in 2026.

The former in 2025 includes a higher headline budget deficit of close to 4 percent of GDP (3.5-4 percent), larger ultra-long special CGB issuance of RMB 2 trillion, another RMB 500-1000 billion issuance of special CGB for capital injections to banks, and more special LGB issuance of RMB 4.5-5 trillion to support local debt swap and home inventory destocking. Overall speaking, total issuance of government bonds may increase by over RMB 3.5 trillion in 2025 from 2024.

Easier monetary policy with additional rate cuts

As highlighted in the Politburo meeting and we had expected, the CEWC vowed to take a "moderately easy" monetary policy stance, which is an explicit shift from the "prudent" tone that China had set during 2011-2024. The tone for 2025 is the same as that in 2008-2010, when China eased monetary policy aggressively to revive the economy after the global financial crisis. It indicates more convincing monetary policy easing ahead, although monetary policy room in 2025-2026 is much more limited than 15 years ago. The government explicitly called for cutting (reserve requirement ratio) RRR and policy rates, maintaining ample liquidity, stabilizing financial market and housing market, and guiding prices to recovery appropriately. Our baseline forecast expects the PBoC to cut policy rate by 30-40 basic points in 2025 and another 20-30 basic points in 2026, which could help lead to more cuts in LPR and mortgage rates.

We think the PBoC may also use various facilities (including more outright REPO of government bonds) to maintain ample liquidity and support faster total social financing credit growth in 2025.

Boosting consumption a top priority

The CEWC prioritized "boosting consumption" as the first key policy task, and called for implementing a special action plan for it. As expected, the government vowed explicitly to expand the scale and coverage of trade-in subsidies of consumer goods. We continue to expect the size of trade-in program may more than double to over RMB 300 billion in 2025 from RMB 150 billion in 2024, with expanded coverage for consumer electronics and some general consumption coupons, on top of auto and home appliances in 2024. As we anticipated before, the CEWC planned to "properly" increase pension payout levels for retired employees and urban-rural households, and increase the subsidy standard for household health insurance. These measures could gradually help underpin household confidence and unleash consumption potential in the long run, although the scale of additional fiscal spending may be not big in 2025. In addition, despite no mention from the CEWC, we think the government may create childcare / childbirth subsidies for families with young children, which could reach up to RMB 200 billion or more per year.

Stabilizing housing market a top task

The CEWC continue to emphasize stabilizing the housing market as a top policy task, with more forceful implementation of urban village renovation, unlocking the full potential of fundamental and upgrading housing demand, reasonable control of new land supply, and more progress of home inventory destocking.If the planned 1 million units of urban village renovation could be completed rapidly in one year (2025) with the help of government subsidies predominately, it could contribute to over 12 percent of annual residential sales and facilitate more progress in inventory destocking.

In the coming year, we think the government will also urge banks to increase support for the white-list scheme to ensure home deliveries of stalled projects. That said, policy execution is the key. We think it may still take some time for the government to adjust policy design and address the bottleneck restrictions for the destocking program, especially in setting clear guidelines about purchase price and enhancing incentives of local governments and developers.

More innovation and support for private sector, less rat-race, more opening-up

The CEWC vowed to push forward more structure reforms, as the government had outlined in the third plenum of the 20th Central Committee of the Communist Party of China. Some key areas are highlighted in the CEWC, such as: boosting high quality growth with stronger support for innovation, enacting legislation on facilitating the development of the private sector, implementing a special action plan to crack down the misconduct in the law enforcement related to the corporate sector, and enhancing local government's fiscal capacity.

In addition, the CEWC called for rectifying "rat-race" style competition and standardizing related behaviors of local governments and corporates, partly echoing the recent criticism of China's over-capacity issue. Despite the risk of higher US tariffs and more restrictions, the CEWC reiterated China's determination to further open up its domestic market and integrate with the global supply chain. The CEWC reiterated maintaining a largely stable RMB exchange rate at its "equilibrium level", while we think 5 plus percent RMB deprecation against the US dollar could be allowed to partly absorb the external shock from potential higher US tariffs. We think the government will likely closely manage the magnitude and pace of RMB depreciation, and we do not envisage the active use of currency depreciation as a macro policy tool.