MNI: China To Ensure 5% GDP Amid Export Uncertainty: CASS's Yu
MNI (BEIJING) - China must ensure 5% y/y GDP growth in 2025 through strong fiscal expansion, monetary easing and infrastructure investment to boost domestic demand as U.S. tariffs drive export uncertainty, a prominent economist said, noting the yuan is unlikely to suffer sharp depreciation despite its current short-term volatility.
China can sustain raising the deficit ratio to 5% from 3% or higher, said Yu Yongding, a senior academic at the Chinese Academy of Social Sciences (CASS), adding authorities had the policy tools available to repeat 2024’s 5% GDP growth this year.
Beijing could expand its fiscal support considering the government debt-to-GDP ratio stood at 67.5% at the end of 2023, while net international investment was USD3 trillion and net assets were CNY292 trillion alongside the country’s status as a high saver, he argued.
China’s top policy makers have signaled their intent to enhance counter-cyclical efforts since September, such as increased borrowing, deficit expansion and accommodative monetary policy, which Yu said showed Beijing had pivoted to a macro-economic focus from its previous tendency to avoid short-term stimulus. (See MNI INTERVIEW: PBOC To Ease Further In 2025 - CITIC's Ming)
The change is “entirely correct and absolutely necessary,” noted Yu, who is also a former member of the People’s Bank of China monetary policy committee and a senior economic policy advisor.
Authorities must maintain growth expectations following 2024’s achievement amid softer CPI and PPI results, he added.
POLICY COORDINATION
Greater fiscal support can help maximize the effectiveness of monetary policy and reduce the liquidity trap risk, Yu continued.
Lenders’ narrow deposit-loan interest rate spreads and the widening difference between China and U.S. rates are weighing on monetary easing, pressuring the yuan and increasing capital flows – a serious risk, Yu noted.
However, a higher deficit ratio, which will boost demand for loans and increased government bond issuance, is likely to drive up 10-year yields and elevate the overall economic yield curve, he added.The central bank could cut the reserve requirement ratio (RRR) and increase the scale of its bond buying program should government bond issuance drive market interest rates higher, he explained.
Yu also doubts the yuan will experience significant depreciation this year should China maintain solid economic momentum.The PBOC signaled its distaste for further rapid weakness after it raised the macro-prudential adjustment parameter for cross-border financing in January, he said. The Bank has various policy tools to stabilise the currency, he explained, pointing to the PBOC’s over USD3 trillion of forex reserves. (See MNI: PBOC To Ensure Yuan Stability In Trump's Second Term)
ECONOMIC DRIVERS
Government-led infrastructure investment remains the primary tool for counter-cyclical efforts in the short term rather than consumption, Yu argued, noting authorities could focus on public-interest projects in education, health, and elderly care among others.Improving city drainage alone would require an investment exceeding CNY4.5 trillion, he explained, noting infrastructure investment must grow much higher than 2024’s 4.4% to achieve 5% GDP growth.
While authorities should also boost consumption, this will take time, Yu added. Without first increasing income, directly stimulating consumption through policy measures is unlikely to result in sustained growth, he warned, adding reforming the tax and social security systems to promote income equalisation across different social groups can help boost spending.
Consumption only contributed 44.5% to GDP growth in 2024 compared to 82.5% in 2023, he noted.
EXPORTS & TARIFFS
China has gradually reduced its dependence on external demand over the past decade, with the share of exports to the U.S also declining significantly over recent years, Yu added. While U.S. President Donald Trump's tariffs may impact exports and economic growth, the effects remain manageable, he said, noting threats of 60% duties on Chinese goods is most likely a bargaining tool.
Higher tariffs will worsen U.S. inflation, he noted. China should refrain from subsidies or export tax rebates to sustain exports, as such measures would only embolden Trump to impose even higher tariffs with greater confidence, he argued.
China will find increasing its record 2024 USD1 trillion trade surplus difficult this year, even without factoring in Trump’s trade policies, Yu continued.