The recently held Central Economic Work Conference (CEWC) in China has set the tone for the country’s economic agenda in the coming year. Judging from the content of the meeting, the policy emphasis on "seeking progress while maintaining stability" comes as no surprise. On one hand, this aligns with the general policy direction of recent years. On the other hand, both the Fourth Plenary Session and the recent Politburo meetings in China have repeatedly emphasized and discussed the direction of macroeconomic policy. The CEWC can be seen as the concrete implementation of the country’s 15th Five-Year Plan and the policy framework established at the central plenary sessions. Some of the more specific details have addressed existing controversies and issues, further enhancing the clarity of the policies.

The meeting emphasized the leading role of domestic demand. In summarizing this year’s economic situation, it highlighted two key points, namely "tapping into the potential of the economy" and “strengthening internal capabilities to cope with external challenges". These two aspects, whether related to supply-side potential or the "internal strength" on the demand side, essentially reflect a positive stance toward the “expanding domestic demand” policy in recent years. Looking ahead, while external exports have contributed more to China’s economic growth this year, from the central government’s perspective, this is the result of "strengthening internal capabilities". On one hand, with the external environment still complex, its foreign trade conditions are unlikely to ease for the foreseeable future. Hence, external demand remains highly uncertain and cannot be relied upon as a steady driver of growth, and it is essential for China to focus inward, particularly in strengthening the country’s own economic power.

This also carries an underlying implication that the prominence and seriousness of the domestic demand imbalance has become a major issue in China’s economy. In recent years, domestic demand in China has remained sluggish. As ANBOUND’s founder, Kung Chan, has noted, China’s economy is caught in a "1.5-cycle" state, in which domestic demand remains the core contradiction in the current economic landscape. The recent meeting reiterated this point, and thus, expanding domestic demand has been identified as the most effective solution to address the problem.

A recent article by the Chinese President Xi Jinping, published in Qiushi magazine, further elaborated on the significance and role of domestic demand. The article emphasized that expanding domestic demand is not only crucial for economic stability but also for economic security, and that it is not a temporary measure, but a strategic move. Regarding the relationship between the domestic and international cycles, the article stated that expanding domestic demand and promoting opening-up are not contradictory. The smoother the domestic cycle, the stronger its ability to attract global resources and factors of production. This, in turn, will facilitate the creation of a new development framework, where the domestic economy is the main driver, with domestic and international dual circulation mutually reinforcing each other. This will also create new advantages for participating in international competition and cooperation.

In the article, the policy for expanding domestic demand also touches on the approach advocated by ANBOUND, which emphasizes strengthening both the supply and demand sides. This means that, in terms of policy, counter-cyclical and cross-cyclical strategies should be combined. As the article stresses, the strategy of expanding domestic demand must be organically integrated with deepening supply-side structural reforms. Both the supply and demand sides must work in tandem and coordinate effectively to create a higher-level dynamic balance, where demand drives supply and supply creates demand.

Additionally, a relevant official specifically mentioned that next year, while continuing to support export trade, there will be an emphasis on expanding imports, which also signals the expansion of domestic demand. This will likely involve a series of changes and reforms related to exchange rates, capital flows, and other factors. From this perspective, next year’s series of policy arrangements in China will revolve around the broader strategy of expanding domestic demand. This is not only a key focus for next year’s economic policy, but also a central element for high-quality development during the entire 15th Five-Year Plan period.

Unlike the RMB 4 trillion yuan stimulus policy in 2008, the current expansion of domestic demand faces the challenge of no longer being able to rely on investment-driven growth. The current scale expansion is limited by market capacity, and boosting consumption cannot solve the issue in the short term. In any sense, this will be a policy choice with a long-term focus. Regarding investment and consumption, the CEWC proposed deepening the implementation of special actions to boost consumption and formulating plans to increase income for urban and rural residents, which means that the overall goal of promoting consumption will be achieved through short-term targeted actions and long-term income growth. For investment, the directive is to promote the stabilization of investment and prevent further decline. This indicates that in the coming year, consumption will be the focus of “growth”, while investment will be focused on “stability.”

In fact, fixed asset investment has seen rare negative growth this year, hence when meeting mentioned “promoting investment stabilization”, the emphasis is naturally on “stability”. This is likely to be the key point of counter-cyclical policies. The real estate sector, appearing under the task of "risk prevention", further underscores the focus on stability. At the same time, efforts to prevent "involution", i.e., excessive competition, can also be seen as part of the broader concept of "stability".

As for the "growth" in demand, it lies in developing new forms of productive capacity to optimize supply, with a focus on consumption. Moreover, “growth” is also reflected in reforms, such as advancing the construction of a unified national market and creating more institutional space. Therefore, the expansion of domestic demand will shift its focus from investment-driven growth to consumption-driven growth.

According to ANBOUND’s founder Kung Chan, the idea of a consumption-led economy was solidified at the Fourth Plenary Session. The emphasis on this point at this year’s CEWC signals that this shift in focus is now a confirmed policy decision. This is a truly significant and strategic decision.

For next year's macroeconomic policy direction, fiscal policy will be "more proactive," while monetary policy will maintain a stance of "moderate ease". However, compared to the "extraordinary counter-cyclical adjustments" of previous years, this year’s emphasis on "strengthening counter-cyclical and cross-cyclical policy adjustments" reflects a slight shift in policy tone. Overall, while the general approach for next year remains unchanged, there have been new adjustments in the focus and strategy.

In terms of fiscal policy, the meeting proposed maintaining necessary fiscal deficits, total debt levels, and overall expenditure, while strengthening fiscal management, optimizing the structure of fiscal spending, and regulating tax incentives and fiscal subsidy policies. There will be a focus on addressing local fiscal difficulties and ensuring that the "three guarantees" (guaranteeing basic public services, ensuring minimum living standards, and guaranteeing basic social security) at the grassroots level are met. This indicates that in the coming year, fiscal expenditure will be aligned with the scale of this year’s indicators, and overall, fiscal policy will remain in a "steady leverage" state. Therefore, fiscal expansion will be constrained, which similarly limits the space for expanding government debt. In terms of structure, the central government will increase its efforts to ease the fiscal pressure on local governments. At the same time, this points to the urgency of fiscal reform and the restructuring of central-local government relations. As the trend of local governments continuing to reduce debts, the broader trend of the central government increasing leverage while local governments reduce leverage will continue.

In terms of monetary policy, the CEWC proposed continuing the implementation of a moderately accommodative monetary policy. The key considerations for monetary policy will be promoting stable economic growth and a reasonable increase in prices. The policy tools, such as reserve requirement ratio (RRR) cuts and interest rate reductions, will be flexibly and efficiently applied to ensure ample liquidity, smooth the transmission of monetary policy, and guide financial institutions to strengthen support for expanding domestic demand, technological innovation, and small and medium-sized enterprises (SMEs). The goal is to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. From this perspective, the policy tone of "moderate easing" seen this year will continue, with greater flexibility in policy implementation. The necessity for broad-based policy tools like RRR cuts and interest rate reductions has not increased. Instead, the role of structural policies will be more significant. At the same time, the focus of foreign exchange policy will remain on "stability". While the goal will continue to be maintaining a "reasonable and balanced" exchange rate, in the coming year, the policy shift will move from preventing rapid RMB depreciation to preventing rapid appreciation. This also suggests that the overall macro policy will maintain a supportive, rather than stimulative, tone.

At this year's CEWC, while the overall approach to the issues of increment and stock remains seeking progress while maintaining stability, there has been an adjustment in the language used, with a stronger focus on "improving quality and efficiency". In other words, with the economy "stabilizing and improving", the push for "progress" will be more pronounced in the future. As for the stock, the emphasis has been placed on "optimization" and "revitalization". As the meeting stated, its aim is to continue to expand domestic demand, optimize supply, improve the increment, and revitalize the stock, developing new forms of productive capacity suited to local conditions, and further advancing the construction of a unified national market.

In practice, as the scale of the economy continues to grow and there are limits to debt capacity, future growth will increasingly rely on the improvement and optimization of existing resources. This will require maintaining a balance within the "seeking progress while maintaining stability" policy framework. The relationship between stock and increment can be seen as a focal point of various contradictions for a long time to come, and it will serve as a key starting point for determining the policy tone moving forward.

Final analysis conclusion:

China’s Central Economic Work Conference has outlined the policy tone and key points for next year's macroeconomic policies and economic direction. The "domestic demand orientation" and "high-quality development" are actually in line with the country’s 15th Five-Year Plan recommendations from the Fourth Plenary Session. The "seeking progress while maintaining stability" policy approach reflects a balance between "domestic demand" and "external demand", as well as consideration of the relationship between "stock" and "increment". Overall, it maintains a supportive policy tone.

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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.