This Friday marks a significant moment in the financial landscape of China as the National Bureau of Statistics is set to release the macroeconomic data for December 2024 and the overall results for the yearThe anticipation surrounding the economic outlook for 2025 and potential policy stimulus measures has captured the attention of stakeholders across the spectrum.

In a recent interview, Sheng Songcheng, a distinguished professor of economics and finance at the China Europe International Business School, expressed optimism regarding the upward trajectory of the Chinese economyHe affirmed that if the Gross Domestic Product (GDP) growth in the fourth quarter reaches 5.3%, the overall annual growth for 2024 could hover around the targeted 5%. He noted that the first three quarters of 2024 had already seen a year-on-year GDP growth of 4.8%.

Sheng believes that domestic demand will be pivotal in shaping the economic landscape for 2025. He highlighted that in 2024, the Consumer Price Index (CPI) experiences a cumulative year-on-year growth of just 0.2%, underscoring the necessity for measures that boost consumption

He pointed out that fiscal policies would play a dominant role, complemented by monetary measuresSheng went as far as to suggest the possibility of expanding the overall fiscal budget deficit ratio to 4% this year, deviating from the traditionally accepted limit of 3% established in the 1991 treaty, which he argues is not universally applicable.

The need for robust consumer stimulus is underscored further by forecasts indicating a potential decline in global demand in 2025, exacerbated by ongoing tariff challengesMajor organizations predict that China's export growth could dwindle to zero, emphasizing the critical importance of consumption in driving GDP growthAs per Sheng’s analysis, consumer behavior in 2023 indicated a consumption rate of 55.6%, significantly lower than that of other countries at similar income levels—especially striking considering that the per capita GDP in China reached $13,300 in 2023.

Sheng further elaborated on the current price levels, which remain low, and the necessity of enhancing the intrinsic motivation for consumption

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An intriguing observation he made was that since March 2024, the year-on-year growth rate of the CPI in urban areas has consistently lagged behind that in rural areas, reflecting the relatively weak purchasing power of urban residentsThis trend suggests a complex dynamic where urban consumers, particularly in first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen, are exhibiting lower consumption performance compared to smaller cities, impacted chiefly by noticeable declines in real estate prices.

The retail performance in the major cities paints a contrasting picture, with retail sales in Beijing and Shanghai seeing declines year-on-year in November 2024, while the nationwide retail sales registered a growth of 3.0%. Such disparities highlight the shifting consumer confidence and behaviors guided by local economic conditions.

Sheng emphasized the need for an increase in subsidies for trade-in programs in 2025. The "old-for-new" policy launched in July 2024 significantly boosted sales in sectors such as automobiles and home appliances, thus invigorating the overall retail data

Moving forward into 2025, he anticipates that the scope of such subsidies will further encompass electronic consumer goods like smartphones and computersThe upcoming "Two Sessions" in March are expected to establish the financial scale of the "new and old" plans directed at stimulating consumption.

Turning to the real estate market, its trajectory is identified as crucial to consumer confidenceEven as the contribution of real estate to GDP diminishes—decreasing from over 7% to below 6%—it still maintains a position as a critical sector with a threshold standard above 5%. The ongoing adjustment in the real estate market began in July 2021, marking a significant transition in China's housing development approach.

According to Sheng, the average urban housing area per person in China now exceeds 40 square meters, indicating that housing issues have largely been addressed

The once-prevalent model of "high turnover, high leverage, and high debt" has reached its limits, paving the way for a market focused predominantly on improved demand.

The outlook for China’s real estate sector suggests a gradual stabilization in the coming yearsNotably, November 2024 recorded a 4.2% year-on-year increase in the sales area of commercial residential properties—a positive sign indicating a potential market turnaroundHistorical trends suggest that the decline in the real estate market will further diminish by 2025, with stabilization expected by 2026, contingent on policy effectiveness, consumer expectations, and broader economic conditions.

Sheng also highlighted the need for fiscal policies to be proactively adjusted as well as the potential for further reductions in loan-to-deposit ratios and interest rates to enhance economic growthMacro-stimulus policies remain the focal point for market participants as a more proactive fiscal stance has emerged as a consensus

The Central Economic Work Conference in December last year underscored the plan to raise the fiscal deficit ratio and bolster the issuance of special bonds for local governments.

Sheng asserted that there is no universally applicable alert line for fiscal deficit ratesThe 3% threshold established in the 1991 treaty primarily served to harmonize deficit rates among EU nations and may not align with China’s unique economic circumstancesCurrent data from the International Monetary Fund (IMF) indicate that by the end of 2023, the average government debt-to-GDP ratio among G20 countries stood at 118.2%, with G7 countries at 123.4%. In contrast, China's total government debt reached 85 trillion yuan with a debt ratio of 65.7%. This scenario underscores the potential for China to raise its fiscal deficit ratio to accommodate more aggressive fiscal policies.

When it comes to monetary policy, Sheng believes that cutting reserve ratios will play a primary role in aligning monetary strategies with fiscal initiatives

With approximately 70% of government bonds held by commercial banks, a reduction in the reserve requirement could significantly enhance banks' available funds, thereby effectively supporting the issuance of both government and local government bondsCurrently, the weighted average reserve requirement ratio for Chinese financial institutions stands around 6.6%, suggesting room for maneuver compared to other major economies.

Despite certain constraints on interest rate cuts due to disparities with U.Srates and the need to maintain RMB stability, Sheng envisions space for future reductions in interest ratesThe People’s Bank of China’s report for Q3 2024 pointed towards promoting reasonable price recovery as a key consideration for monetary policyThis is especially vital for local bonds, where interest expenses could be significantly reduced through efficient debt swaps, potentially saving around 600 billion yuan over five years as estimated by the Ministry of Finance.