More supportive policy environment expected in 2025

The annual session of the Chinese National People’s Congress (NPC) convened on March 5 in Beijing. In the government work report delivered by Premier Li Qiang, a series of policy goals and priorities were announced. The key message is to ensure stable economic growth through appropriate fiscal expansion, with domestic consumption and technological innovation further emphasized as key priorities as part of the economy’s structural transformation.

In line with expectations, an annual growth target of 5% was announced to signal the commitment to stable growth. Fiscal spending might be the key stabilizer for domestic demand, with the budget deficit ratio raised by 1 percentage point to 4% of nominal gross domestic product (GDP), the highest level since 2010. This suggests an additional fiscal deficit of Chinese yuan (CNY) 1.6trillion in 2025. To finance the fiscal expansion, a higher government bond quota was set, highlighting the issuance of CNY 1.3trillion in ultra-long-term special central government bonds (CGB) and CNY 4.4trillion special local government bonds (LGB). In addition, CNY 500billion of special CGB will be issued to support large state-owned banks in replenishing the core capital.

Monetary policy might be moderate in comparison to fiscal measures. The key tone remained as “moderately loose monetary policy” as announced at last December’s Central Economic Work Conference, and The People's Bank of China (PBOC) committed to cutting interest rates and the reserve requirement ratio (RRR) at appropriate times. Given the sustained weakness in household and corporate confidence, it is unlikely to boost aggregate demand solely through monetary easing. Therefore, fiscal policy will take the lead in 2025, while monetary policy will play a supportive role. 

Another constraint is the USD-CNY interest rate differential, which might remain high and exert pressure on the CNY exchange rate as the U.S. Federal Reserve might delay interest rate cuts. As a result, a RRR cut might be prioritized to improve liquidity in banking system and assist government financing, while an interest rate cut might only be implemented when growth risks become more evident.

Besides the traditional fiscal and monetary policies, the meeting highlighted domestic consumption and technological innovation as key drivers for sustainable growth. According to the Ministry of Commerce, the CNY 150billion consumption subsidy effectively boosted total spending to CNY 1.3trillion, particularly in household appliance and automobiles. This encouraged the Chinese government to continue with a new round of CNY 300billion in subsidies in 2025. Meanwhile, the government also called for CNY 300billion to establish a long-term mechanism for income growth and stabilize the property market, which are both critical to supporting consumer confidence.

On the technology front, an “AI plus” initiative was advocated for the first time in the Government Work Report. The key is to empower industries with AI and improve productivity. Policy and fiscal supports might be escalated for electric vehicles (EV), PCs, smartphones, robotics, etc. Recent technological breakthroughs might have reminded Chinese policy makers about the importance of private companies and market competition. Therefore, private technology companies might also benefit from a more supportive regulatory environment.

Headwinds persist

Despite recent optimism among local investors, headwinds persist, which might trigger market volatility and policy adjustments.

Internally, deflationary risks might continue and undermine the effectiveness of fiscal and monetary easing. In contrast to the 2% inflation target announced at the NPC, headline consumer price index (CPI) declined by 0.7% year-over-year (y/y) in February. Even after being adjusted for the seasonal effect of the Chinese New Year, this print still implies pressures from weakening domestic demand.

On the external side, U.S. tariff policy continues to add uncertainties to Chinese exports and growth. Chinese export growth slid to 2.3% y/y in January and February (Dec. 24: 10.7% y/y), probably due to the fading effect of front-loaded exports before the U.S. implemented additional tariffs. Looking forward, U.S. President Trump is likely to continue raising tariffs against China and expand tariff coverage to Chinese goods re-exported to the U.S. via other markets. The NPC policy announcements reflected China’s restrained approach to trade tensions, with a greater focus on domestic policies. However, uncertainties regarding trade tensions escalation are still at large, which may call for more domestic stimulus to provide offsets.

Investment implications

Recent developments in technology, policy and regulation suggest that China might be back on the track to recovery, and risk appetite among investors is improving. That said, given the looming headwinds, more solid data publishing is required to confirm the bottom-out. Under such circumstances, active management and diversification are essential.

The recent rally in Chinese A-share and Hong Kong markets was mainly driven by improving expectations about technology sector (Exhibit 1). However, after the short and sharp rally, investors might need to focus on corporate fundamentals and stock selection for sustainable returns. We remain constructive on technology companies with solid corporate fundamentals and strong growth potentials brought by technological advances. Leaders in AI, internet platforms, EV and autonomous driving, robotics, and consumer electronics might benefit from inflows.

On the other hand, volatility management in portfolio construction remains important during this volatile period for Chinese and Asian investors. The recent under-performance of Chinese high-dividend stocks might also point to improved dividend yield for investors seeking stable income.

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