China's new game plan for dealing with Trump-induced economic turmoil
Domestic consumption and yuan internationalisation viewed as top priorities.
China's most prestigious think tank has just given the run down for what it considers to be the best macroeconomic game plan for dealing with Trump-induced market uncertainty.
Zhang Ming (张明), deputy-head of the Chinese Academy of Social Sciences’ (CASS) Financial Research Institute, says the key points of this policy game plan should include:
Establishing growth in domestic demand the utmost priority.
Subsiding consumer demand from low-income households.
Boosting the housing and stock markets to increase consumer demand via wealth effects.
Short-term expansion of macroeconomic stimulus.
Long-term structural reforms to deal with secular headwinds.
High-level economic opening and stepping up efforts to attract foreign investment.
Capitalising upon US isolationism to drive internationalisation of the Chinese yuan.
"When it comes to how we can strengthen the resilience of China's economy, the most important thing of all is that we do our own thing well," Zhang Ming wrote in a recent opinion piece ("张明、王晓曦：应如何增强我国经济的韧性") published by The Banker (银行家) magazine.
"We must firmly expand domestic demand, as well as firmly and unshiftingly expand high-level opening."
Expanding domestic demand now China’s number one mission
The Central Economic Work Conference held in December 2024 said that expansion of domestic demand would be the top economic mission for 2025.
The Conference also called for "vigorously spurring consumption," as well as implementing "unconventional counter-cyclical adjustments."
The official pronouncements arrived just following Trump's election win. China's top policymakers no doubt foresaw a strong likelihood of trade disturbances following the start of Trump's second term in office as president.
Zhang Ming, notes, however, that the call for greater consumption also arrived following a drop in China’s domestic consumption growth to historic lows, as Chinese society continues to reel from the impacts of the Covid pandemic.
In 2024, consumer goods retail sales rose just 3.3% year-on-year (YoY), as compared to average growth of 9.7% during the period from 2015 to 2019, just prior to the pandemic.
End consumption made an average quarterly contribution of just 2.3 percentage points to Chinese GDP, as compared to 4.2 percentage points for the period from 2015 to 2019.
Lagging income growth behind weak post-Covid consumption
Zhang argues that the primary factor holding back consumption growth in the 2020s has been the sharp slowdown in household income growth since the Covid pandemic.
China's urban and rural per capita disposable incomes saw YoY growth of just 4.6% and 6.6% respectively in 2024, as compared to 7.9% and 9.6% in 2019.
"Households are quite dour when it comes to their expectations and confidence with regard to future employment and incomes," Zhang writes.
"Risk averse sentiment has strengthened, and this is embodied in financial markets by a rise in precautionary savings.
"Since 2022, new household deposits have markedly increased, while the scope of new loans has contracted."
Zhang argues that the enterprise sector is failing to adequately share profits with households. He also points to the failings of China's social safety net, as well as urban-rural disparities in terms of income and asset wealth.
In order to overcome these challenges, Zhang considers it imperative to step up fiscal stimulus in the short-term and accelerate structural reforms over the longer term.
Stepping up short-term macroeconomic stimulus
The Central Economic Work Conference held in December flagged a major stimulus campaign for 2025, with its unprecedented call for "even more active fiscal policy and moderately loose monetary policy."
Zhang Ming sees stimulus policy as boosting domestic demand across three areas:
Compensating for insufficient demand in the short-term with debt-fuelled government spending.
Increasing the short-term incomes of Chinese households with fiscal subsidies to boost domestic consumption.
Driving a rebound in property and stock values to create a wealth effect that also spurs consumption.
Debt-fuelled fiscal spending
In line with the consensus opinion of Chinese economists, Zhang points to inadequate aggregate demand as the "primary contradiction" afflicting China's economy at present.
"In order to deal with the problem of insufficient domestic demand, central government fiscal policy should expand debt-raising and expenditures, to pragmatically drive a rebound in consumption and investment," Zhang writes.
"It should make plans in advance for additional [fiscal] policy expansion outside of the quota for this year's second half, and in particular expand the issuance of special treasury bonds."
In addition to accelerating the issuance of special purpose local government bonds and special treasuries under the annual quota, Zhang also calls for the issuance of a further two to three trillion yuan in special treasuries.
Subsidies to raise incomes and drive consumption
Zhang's second proposal is to use fiscal subsidies to increase the short-term incomes of low and medium-income Chinese households.
He calls for the issuance of "general benefit" consumption vouchers to increase spending by less affluent families.
In order to enhance the multiplier effect of the vouchers, Zhang wants policymakers to refrain from binding them to any specific products or services.
Zhang's proposals are also in line with the recommendations made by the Central Economic Work Conference last year, which called for "driving increases in the incomes and reductions in the burdens of low and medium-income demographics."
Boosting the property and stock markets to generate wealth effects
Zhang wants Beijing to use fiscal policy and other measures to drive a rebound in real estate and stock prices. This can create wealth effects that will boost consumption by invigorating household confidence.
With regard to property markets, Zhang calls for "stabilising housing prices in the core areas of first-tier cities as soon as possible," initially by means of comprehensive loosening of restrictions on home purchases and home loans.
"This will spur inelastic demand and demand from home-buyers seeking better dwellings," Zhang writes.
Zhang also calls for providing low-cost funds to leading real estate companies via the issuance of special purpose bonds.
In order to deal with the problem of idle housing inventory, Zhang wants local governments in second and third-tier cities to buy up these dwellings, for conversion into social housing made available in the form of rental accommodation.
When it comes to the stock market, Zhang calls for "favouring bulls not bears."
He wants China to drive more long-term investment in the stock market by regional social insurance funds and insurance funds, in order to provide support to equity values.
Zhang also wants Beijing to issue 2 trillion yuan in special treasury bonds, to fund the creation of a Chinese stock market stabilisation fund that can even out price fluctuations.
Accelerating long-term structural reforms
In addition to dealing with the short-term challenges created by Sino-US economic tensions, Zhang argues that Chinese fiscal policy also needs to play a role in dealing with the long-term secular changes that are poised to hold back growth in future.
Chief amongst them are demographic changes that will shrink the China's working age population, while also increasing the burden of aged care expenditures.
Another major issue is the mounting ineffectiveness of the investment-driven growth strategy that worked so well for China’s economic helmsmen in the past.
"As the population ages and investment-driven economic growth rates decline, China's economic growth potential is displaying an ongoing trend of decline," Zhang writes."
"In order to reverse this trend, it is necessary to rely on structural reforms to spur potential economic growth."
Zhang sees this as encompassing:
Greater support for growth of the private economy.
Income re-allocation reforms and raising the wealth of low and medium-income demographics
Education, healthcare, aged care and housing reforms, that reduce the entrenched tendency of Chinese households to amass precautionary savings.
External opening and foreign investment
Many Chinese pundits have called for Beijing to capitalise upon the global animosity created by Trump's tariffs to increase its global influence, by pushing for greater economic opening and stepping up trade relations with other nations.
"The tariff war will not only shock international financial markets in the short-term, it will also result in long-term changes to global trade and investment flows, and reshape the global trade and financial system," Zhang writes.
Zhang calls for capitalising upon the opportunities this creates for China's economy by strengthening ties with the European Union and ASEAN.
His specific proposals include:
Strengthening cooperation with European countries, and relaunching negotiations for free trade zones and bilateral investment agreements.
Deepening industry chain integration under RCEP as well as trade and economic cooperation with China and Europe. Driving greater exports to ASEAN and the EU, and opening up markets for semi-conductors and electric vehicles.
Establishing a "China + N" (中国+N) industrial supply. Reducing US export dependence, and maintaining the security and controllability of industrial supply chains. Driving investment in the diversification of product sources, and raising the replaceability of intermediate parts.
Zhang also outlines measures to deal with the negative impact on foreign-direct investment of mounting tensions between China and the West, including:
Expanding trials for the opening up of China's telecoms, healthcare and education sectors.
Encouraging multinational companies to invest in the establishment of investment firms in China.
Accelerating the establishment of a grand unified domestic market.
Reducing barriers and costs for the free circulation of factors of production and products domestically.
Driving foreign direct investment to shift more to China's centre and west.
Pragmatically implementing equal treatment for foreign-invested, state-owned and private enterprises.
Internationalisation of the Chinese yuan
Zhang believes Trump's tariff war marks a historic inflection point for the global monetary order, providing a golden opportunity to drive further internationalisation of the Chinese yuan.
He notes that the US dollar did not see a rapid appreciation in value following Trump's Liberation Day tariffs, as it has during prior periods of economic and financial turmoil.
"The US dollar did not, as it has in the past, assume the role of safe harbour for international financial markets," Zhang writes.
"This marks the end of a historic period...a new international economic, trade and financial order is rising from the ashes."
While Trump's trade protectionism will cause headwinds for the Chinese export sector, Zhang sees it as a boon for Beijing ambitions to expand its international financial influence.
"If the US proceeds further along the path of isolationism, then the international monetary system will reach a window of accelerating evolution,” he writes.
"Internationalisation of the renminbi will encounter a rare external opportunity.
"We should seize this opportunity, act swiftly, and expand the vigour of the push for renminbi internationalisation."
Zhang advocates a three-part strategy for advancing renminbi internationalisation that includes:
Accelerating the use of the renminbi for pricing and settlement of global commodities transactions.
Expanding the provision of high-quality and secure renminbi-denominated assets to global investors, such as Chinese treasuries.
Accelerating the development and promotion of renminbi cross-border payments and settlement infrastructure, such as CIPS and the digital currency bridge.