The Chinese government convened its annual Central Economic Work Conference in Beijing on December 11th and 12th. The conference culminated in a pithy yet emphatic readout that stressed the need to bolster consumption, strengthen investment efficiency, and improve domestic demand across the board.
The prioritisation of a focused campaign “dedicated to stimulating consumption” and “large-scale equipment upgrades and consumer goods trade-in programs” – with both coming before the pledged construction of a “modernized industrial system” – reflects a subtle yet significant reorientation of the leadership. This is rather revealing: the leadership thus communicates that it will place consumption first – perhaps the first time in over a decade, signaling the significant weight and urgency with which the central government perceives the country’s present consumption malaise.
Whilst advanced manufacturing has continued to soar under heavily supply-side-driven state policies and hugely successful national champions – especially in electric vehicles and solar panels – boosting domestic consumption remains a top challenge and priority. CPI fell by 0.6% in November, as compared with a modest 0.3% gain in October. Slowing growth in food prices have sparked worries that China is trending towards a more secular economic slowdown, even despite the many high-level press conferences and announcements of prospective stimulus measures that have taken place since September 2024.
Elsewhere, Chinese export growth has slowed, with total import shrinking in November, and outbound shipments growing by a margin of 6.7% on month, less than the expected 8.5%. Imports shrank 3.9% – the worst performance in nine months. Banks have revised down their estimates of Chinese growth rates in view of the impending tariff hikes under Donald J Trump by the U.S. government.
The work conference took place on the heels of an equally indicative monthly Politburo meeting, the read-out of which heralded bold, adventurous monetary and fiscal stimulus measures to come in 2025. At the meeting, Chinese leaders concurred that an “appropriately loose” monetary policy stance is necessitated by the present state of the economy, and acknowledged that the country’s debt-to-GDP ratio must rise in order to make way for governmental interventions that can resuscitate the sluggish economy.
China has the capacity – but will it use it?
There is a temptation to dismiss such concerns, by noting that the Chinese leadership tends to “think long-term” and is hence by no means perturbed by short-term downturns. Indeed, such assertions have been cited in defense of the pace at which the post-COVID economic recovery has occurred. Speculative accounts would add that Beijing is closely observing the incoming Trump administration prior to deciding upon the scale and means of its stimulus. Yet what should be clear to most observers by now is that much more is needed to revive confidence amongst consumers, investors, and corporations in China today.
The good news is that China has both the political capacity and functional bandwidth to drive forward drastic and meaningful changes. Indeed, the structural reforms outlined in the Third Plenum this summer demonstrated in full that the economically minded policy leadership – comprising senior bureaucrats, technocratic economists, and pro-business regulators – is highly cognisant of the headwinds facing the country. An ageing population behooves reforms to the state pension system. The quest of strengthening Total Factor Productivity behooves structured (“new”) urbanisation and sustained reforms to the hukou system, both of which were highlighted in the read-out following the Plenum. With its secure and robust political standing, the “Centre” is well-positioned to lead the “Periphery” comprising provincial and local governments, in making the necessary readjustments to their policy courses.
I concur with my learned friend, Shan Weijian, who penned a highly compelling op-ed earlier this month, arguing that amongst the world’s major economies, China has the highest interest rate (adjusting for the economy’s low inflation rates) and the highest ratio of deposits banks are mandated to maintain – roughly 7%, as compared with 0 – 1% for the U.S., European Union, and Japan. Cuts to this ratio would go a long way in injecting liquidity into the economy.
Recent announcements by the Ministry of Finance have articulated the encouraging message that Beijing is prepared to raise local government debt limits, as a means of addressing fully existing hidden debt. Indeed, despite the relative concentration and severity of local debt in select provinces, the central government possesses sufficient fiscal space to absorb such debt through a range of tools – including the accelerated issuance of special-purpose bonds that transfer the debt burden from local government financing vehicles (LGFVs) to Beijing. Of course, such drastic solutions must be accompanied by a fair share of personnel swaps and fixes to preempt concerns over moral hazard and structurally enabled impunity.
The key lies with rekindling entrepreneurship – of all kinds.
Fundamentally, the reignition of the Chinese economy requires a systemic – normative, even – readjustment to macroeconomic policymaking. There needs to be an unbridled, unreserved, and unabashed embracing of the entrepreneurial spirit – one rooted in experimentation, adventurism, risk-taking, and “Grow, then redistribute”. By placing the entrepreneur front and centre, China can go a long way in ensuring that it meets the 5% target it has set out for itself – a critical sign of reassurance in the face of an increasingly skeptical audience in the Global North.
Beyond the highly effervescent and affirmative rhetoric concerning the role played by entrepreneurs, the Chinese leadership must provide legal, financial, and institutional assistance to support private businesses – thereby putting their proverbial money where their mouth already is. The centre must actively enunciate that the excess politicisation at all levels and stages of the regulatory process cannot be tolerated. It must advise junior-level officials who are unduly risk-averse in their interpretations of local laws and business registration processes, to the point where they end up excluding prospective talents and market entrants, to change tack.
Sectors such as venture capital must be afforded the room to thrive – for starters, state-owned venture capital enterprises should adopt a renewed set of investment criteria, whilst encouraging private partners to do the same, when it comes to backing disruptive innovation. Whilst old recipes that are tried and tested may feel more bureaucratically safe, they cannot be counted upon as sources of bottom-up, transformative change. Strengthening the rule of law and protection of property rights is hence crucial in ensuring that entrepreneurs feel hopeful and confident enough to continually double down on China.
The ethos of entrepreneurship does not solely apply to the private sector. Indeed, it remains relevant even beyond the business context. The readout at the Politburo meeting in September mentioned the term “three exempts” – exempting well-meaning officials who make mistakes due to lack of experience; exempting officials who make mistakes in experiments, especially those in new domains without clear restrictions; and exempting officials who inadvertently err when promoting development.
The inclusion of this term was intended to be a conspicuous and unmistakable signal from the very top. Opening-up and reform require audacity and risk-tasking.
Whilst risk-taking may be anathema to career bureaucrats, it has long been a part of the success story of the ruling Party in China – especially in the wake of the end of the Mao period. It was Deng Xiaoping’s penchant for calculated risk-taking that prompted the then-leadership to agree to introducing unfettered markets into China, and China into the world. Officials must once again be empowered to make necessary mistakes – so long as such errors are conducive towards their sound and reasonable governance.
