China’s defence against Trump

US President-elect Donald Trump’s return to the White House is compelling countries across the whole spectrum of the United States’ major trading partners — China and Europe included — to recalibrate their economic policy. His pledge to impose additional tariffs exceeding 60 per cent on Chinese goods and up to 20pc on imports from Europe and the rest of the world to protect American manufacturers and jobs is pushing Washington’s allies and trading partners to readjust their economies.

Beijing, facing a bigger threat to its exports, seems to have already stepped up plans to rebalance its $19 trillion economy by vigorously boosting domestic consumption as a driver of growth through a “moderately loose monetary policy” and a “more active fiscal policy” to maintain growth in 2025.

At the Central Economic Work Conference (CEWC), a closely-watched economic agenda-setting meeting, China’s top leadership earlier this month vowed to make it a top priority to mount a lasting economic recovery by bolstering domestic consumption as a major driver of growth when trade relations with the biggest export market of the People’s Republic could worsen.

Beijing recalibrates policies to stimulate its economy and navigate a harsh external environment given the US tariff barrage

The pledge came days after a meeting of top Communist Party officials, the Politburo, endorsed a “moderately loose” monetary policy in the first easing of its stance in 14 years. The work conference only offers a broad outline of economic policy focus and direction without revealing many details. Specific targets are announced at the National People’s Congress meeting in March.

It is for only the second time in at least a decade that China’s leadership has made plans to boost consumption and stimulate overall domestic demand as a top priority. Though the CEWC recognised the growth headwinds from domestic demand weakness and external uncertainties, the potential higher US tariffs were not cited explicitly in its communiqué.

Prioritisation of vigorous efforts to stimulate consumption while reducing burdens on low and middle-income groups, enhancing investment efficiency and broadening domestic demand is listed as the first among the nine key tasks listed by the conference for the 2025 economic agenda. The media reported that this policy shift is driving China’s transition from the current growth model focused on fixed-asset investment and exports to a consumption-driven one, which comes after over two decades of deliberations.

China is the largest driver of global demand, contributing nearly 30pc to the world’s growth. Many countries need the dragon country to sustain a high level of import demand.

The stronger fiscal stimulus planned for next year forms part of China’s preparations to counter the impact of an expected increase in the US tariffs on Chinese imports as vowed by Mr Trump. This policy shift indicates that the world’s second-largest economy is bracing for a possible trade war with the US.

At the same time, it also shows China’s resolve to effectively deal with domestic problems. “The adverse impact from a changing external environment is deepening, and China’s economy still faces several difficulties and challenges,” state-run Xinhua News Agency reported from the meeting.

The CEWC said it was “necessary to maintain steady economic growth”, raise the fiscal deficit ratio and issue more government debt next year. The policy shift stoked expectations that China’s central bank would switch to a “moderately loose” monetary policy stance, raising expectations of more interest rate cuts and liquidity injections.

The previous “prudent” stance that the central bank had held for the past 14 years coincided with overall debt — including that of the government, households and companies — jumping more than five times, according to media reports. The economy expanded roughly three times over the same period.

The Chinese state media said the CEWC prioritised “stabilising growth” as the central task and emphasised boosting domestic demand with more proactive macro policies for “reviving household consumption”. In particular, the conference highlighted the 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, a comment piece in China Daily argued.

Besides uplifting consumption through a more proactive fiscal policy and easier monetary policy, other priority tasks listed for the next year include stabilising the housing market, more innovation and support for the private sector, less rat-race style competition, more opening-up of its market and integration with the global supply chain despite the risk of higher US tariffs and more restrictions. Another top priority is to use scientific and technological innovation to lead the development of new quality productive forces and build a modern industrial system.

Overall, the CEWC set a much more supportive macro policy tone to stabilise growth. The scale of the policies aimed at stimulating the economy is said to be unprecedented, reflecting China’s strong resolve to navigate a harsher external environment, address domestic structural imbalances, and ensure a steady long-term growth trajectory.

“We must face up to the difficulties, strengthen our confidence, and strive to transform all positive factors into actual achievements in development,” the communiqué said. With consumption comprising less than 40pc of China’s GDP and well below other developed economies, according to experts, there is enormous potential in consumption, particularly in services, to drive economic growth.

“This is a major shift from ‘prudent monetary policy”, The Global Times quoted an economic expert as saying, noting that this indicates strong policy measures for economic development next year. “Through the support of fiscal and monetary policy, China will promote technological innovation and consumption upgrade, which will not only put China in the globally leading position but also help optimise economic structure and achieve high-quality development.”

Published in Dawn, The Business and Finance Weekly, December 23rd, 2024