A Chinese villager participating in the work-relief programs is using his social security card to obtain labor remuneration. In 2024, China invested 11.5 billion yuan to support the work-relief programs aimed at people in need of employment, especially rural residents. Photo: IC PHOTO

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The annual Central Economic Work Conference in December, 2024, proposed the implementation of more proactive and impactful macro policies, including a more proactive fiscal policy and a moderately loose monetary policy. This marks a pivotal departure from the proactive fiscal policy and prudent monetary policy that have characterized the past decade, reflecting a major, science-based decision made by the Central Committee of the Communist Party of China (CPC) based on a comprehensive analysis of the prevailing economic landscape. It is essential to underscore that the implementation of more proactive and impactful macro policies does not merely entail an intensification of policy measures. Rather, it emphasizes the advancement of more scientific and effective macroeconomic governance and adjustment, underpinned by a clearer and more coherent framework of macroeconomic regulation. This approach seeks to provide more robust support for sustaining upward economic momentum. As such, this major policy shift necessitates rigorous examination and a profound understanding.

Significance of policy shift

Under the CPC Central Committee’s overall leadership and decision-making, the Chinese economy has posted generally stable performance while making progress in 2024, with major annual goals and tasks of economic and social development to be successfully accomplished. The deepened adverse impact brought about by changes in the external environment and many difficulties and challenges still facing the domestic economic operation necessitates the implementation of more proactive and impactful macro policies.

The acceleration of a virtuous cycle between aggregate supply and demand in China’s economy can only be achieved through the implementation of more proactive and impactful macro policies. Currently, the interaction between aggregate supply and demand remains suboptimal, leaving significant potential for improvement. According to data from the Macro-Policy Trinity Index [structural policies, growth policies, and stabilization policies], while the output gap narrowed considerably in 2024, further measures are required to elevate potential growth rates to sustainable and reasonable levels and promote a higher degree of dynamic equilibrium between aggregate demand and supply.

From a demand-side perspective, such policies can unlock latent consumption demand among residents, stimulate social investment, and expand aggregate demand comprehensively. This can be achieved through interventions such as increasing credit availability, reducing taxes and fees, and enhancing government expenditures targeted at improving livelihoods. On the supply side, these policies can facilitate structural adjustments by prioritizing the development of high-end, intelligent, and green industries, as well as fostering scientific and technological innovation. This approach can facilitate new quality productive forces while driving industrial transformation and upgrading. Therefore, more proactive and impactful macro policies can create a virtuous cycle in which demand expansion spurs supply-side upgrading while high-quality supply stimulates demand potential.

Resolving difficulties and challenges in key areas also requires the adoption of more proactive and impactful macro policies, aimed at expanding the overall macroeconomic aggregate. While overall economic performance remained stable in 2024, significant challenges persist in key areas, including insufficient effective demand, overcapacity in certain industries, weak social expectations, and heightened employment pressures among specific demographic groups. These challenges are compounded by the intensifying complexity, severity, and unpredictability of the external environment.

For instance, while efforts to achieve fuller employment and create better quality jobs have yielded a generally stable employment situation, specific groups continue to face notable pressures. The number of college graduates is projected to reach a record 12.22 million in 2025, while the urbanization process necessitates the creation of new employment opportunities for rural migrants. Economic theory and international experience consistently underscore that economic growth is the foundation for addressing employment challenges. Accordingly, it is imperative to implement more proactive and impactful macro policies to drive economic growth to sustainable levels and strengthen the economic foundation, creating a solid basis for addressing risks and adapting to external uncertainties. 

Sufficient room for policy shift

The 2024 Central Economic Work Conference proposed implementing a moderately loose monetary policy, “with reductions in the reserve requirement ratio and interest rates at an appropriate timing to ensure ample liquidity,” aligning the scale of social financing and the growth of the money supply with economic growth and overall price level targets. The conference also suggested that “the country should adopt a more proactive fiscal policy and set a higher deficit-to-GDP ratio, and it should ensure that its fiscal policy is continuously forceful and more impactful.” Effectively implementing these policies, whether by reducing the reserve requirement ratio, lowering interest rates, or increasing the fiscal deficit ratio, requires sufficient policy space. 

The current economic conditions in China reveal that both monetary and fiscal policies retain considerable flexibility to support the implementation of more proactive and impactful macro policies. In terms of monetary policy, there remains ample scope for reductions in both the reserve requirement ratio and interest rates. The average statutory reserve requirement ratio for China’s banking sector exceeds 6%, a figure notably higher than that of major economies such as the United States (0%), the European Union (1%), and Japan (0.84%). This suggests room for further reductions, particularly for large financial institutions.

Regarding policy interest rates, instruments such as the seven-day reverse repo rate still have room to approach the zero lower bound, indicating the feasibility of additional rate cuts. In addition, as the US Federal Reserve transitions into a rate-cutting cycle, the narrowing interest rate differential between China and the US is expected to alleviate exchange rate pressures and reduce risks of foreign capital outflows, thereby enhancing the operational flexibility of China’s monetary policy.

From the perspective of fiscal policy, both China’s debt ratio and debt structure provide significant flexibility for strengthening policy measures. The government debt ratio remains markedly lower than that of developed economies such as the US and Japan, and the composition of China’s government debt—characterized by low proportions of foreign and central government debt—further underscores its fiscal resilience. In October 2024, China’s Ministry of Finance explicitly stated that there remains considerable room for China’s central finance to issue debts and expand deficit, reaffirming the capacity for expanded fiscal intervention.

While some local governments in certain regions face debt pressures, ongoing implementation of a package of measures to defuse risks caused by existing debts is expected to unlock additional fiscal policy space at the local level, which will be conducive to the practical implementation of more proactive fiscal policies.

The assessment of macro policy space should adopt a scientific and dynamic perspective, avoiding excessive concern over short-term policy space constraints that may arise from the implementation of more proactive and impactful macro policies. Macro policy space should not be seen as “the bigger, the better.” Amid downward economic pressures, maintaining unused policy space without increasing the intensity of interventions implies that macro policies have failed to fulfill their counter-cyclical regulatory functions. The primary objective of current policy regulation is to alleviate downward economic pressures and stabilize growth. As such, it is essential to strike an optimal balance between policy intensity, policy space, and regulatory effectiveness to sustain upward economic momentum. Furthermore, macro policy space should not be viewed as a finite resource that inevitably diminishes with use. From a long-term and dynamic perspective, the deployment of more proactive and impactful macro policies can effectively stimulate economic recovery, create favorable conditions for advancing reforms, and promote sustained economic growth. These positive outcomes, in turn, will enhance China’s capacity to replenish and expand policy space in the future.

Coordinating structural and macro policies

In recent years, the regulatory efficiency of stabilization policies, including monetary and fiscal policies, has demonstrated a gradual recovery. According to data from the Macro-Policy Trinity Index, the stabilization policy efficiency index has risen for six consecutive quarters, climbing from 42.2 in the second quarter of 2023 to 46.8 in the fourth quarter of 2024. Despite this upward trend, the index remains below the 2018–2019 average level of 52.0, highlighting the potential for further improvement.

Enhancing the effectiveness of stabilization policies necessitates the optimization of the operational mechanisms of monetary and fiscal policies. This requires not only fine-tuning their operation but also advancing structural adjustments. Additionally, it is imperative to strengthen the long-term drivers of economic growth, thereby improving the policy transmission mechanisms between monetary and fiscal domains. 

Coordinating structural and growth policies is essential for improving corporate investment returns and expanding investment opportunities, thereby strengthening the impact of stabilization policies on the real economy. In recent years, corporate investment—particularly in sectors tied to the real economy—has been relatively subdued. This can be attributed to factors such as comparatively low investment returns and limited investment opportunities. Merely increasing the intensity of monetary and fiscal policies is unlikely to effectively stimulate corporate investment. In fact, such an approach risks causing a misallocation of funds, redirecting investment away from the real economy toward the fictitious economy.

To address these challenges, structural policies must be strengthened to optimize the industrial structure and eliminate barriers to private investment in targeted sectors, thereby creating new channels for corporate investment. Concurrently, growth policies should be reinforced, with a particular focus on fostering technological advancement and improving the allocation of factors of production. These measures will help elevate expected returns on corporate investments. The integration of growth and structural policies can effectively eliminate obstacles and alleviate concerns that deter corporate investment, ensuring that businesses have the capacity, confidence, and motivation to invest. Furthermore, this coordinated approach enhances the effectiveness of monetary and fiscal policies by creating a more favorable environment for corporate investment.

Similarly, the synergetic coordination of structural and growth policies is pivotal in augmenting residents’ disposable incomes, thereby amplifying the efficacy of stabilization policies in stimulating consumption. Current income distribution structures impede the consumption capacity and motivation of certain demographic groups. Establishing a coherent and complementary institutional framework encompassing primary distribution, redistribution, and tertiary distribution will facilitate the optimization of income distribution structures, consequently enhancing the disposable incomes of middle- and low-income groups. Supplementary structural policies within the realm of social security can mitigate apprehensions regarding education, healthcare, elderly care, and housing, thereby reducing precautionary savings and further unlocking consumption potential.

Enhancing the implementation of growth policies will bolster the potential economic growth rate, subsequently elevating income growth expectations and generally augmenting consumption capacity. The integrated coordination of growth and structural policies will enhance residents’ consumption capacity, confidence, and motivation, significantly reinforcing the influence of monetary and fiscal policies on consumption.

In sum, the effective coordination of the Macro-Policy Trinity—comprising structural policies, growth policies, and stabilization policies—will foster more robust and sustainable advancement of more proactive and impactful macro policies. This, in turn, will contribute to the establishment of a virtuous cycle in China, characterized by enduring economic growth, structural optimization, and improved expectations.

Chen Yanbin is vice president of and a professor at Capital University of Economics and Business.

Edited by REN GUANHONG