Experts predict that China's monetary shift may indicate economic concerns, but a "bazooka-style" stimulus is unlikely to be implemented.

• In 2008, the Chinese government responded to the global financial crisis with a "historically large monetary stimulus," according to Gabriel Wildau, managing director of Teneo.
• Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank, stated that the potential for monetary easing is now more restricted than it was 15 years ago.
• During the 2008 easing cycle, the People's Bank of China reduced its benchmark 1-year lending rate by 156 basis points and the cash reserves ratio by 1.5 percentage points.

The Chinese government surprised the market on Monday by signaling a change in its monetary policy stance after 14 years, indicating that the economic challenges facing the country are deeply ingrained, but an outsized stimulus is unlikely, according to experts.

China plans to shift its policy stance from "prudent" to "moderately loose" next year, a phrase not used since the global financial crisis in 2008.

Larry Hu, chief economist at Macquarie, stated that the current leadership has acknowledged the need for loose monetary policy, paving the way for a new monetary easing cycle.

Hu stated that policymakers are deeply concerned about the economic outlook due to the sluggish domestic demand and the threat of another trade war.

Despite numerous stimulus measures implemented since September, recent economic indicators reveal that the world's second-largest economy is still grappling with deflationary pressures, weak consumer demand, and a prolonged housing slump.

Tao Wang, head of Asia economics and chief China economist at UBS Investment Bank, stated that the potential for monetary easing is now more limited than it was 15 years ago, with an expected "over 50 basis points policy rate cut" over the next two years.

Policy shift

The Chinese government responded to the global financial crisis with a "historically large monetary stimulus," according to Gabriel Wildau, managing director of Teneo.

In November 2008, Beijing declared a 4 trillion yuan ($586 billion) plan, equivalent to 13% of China's GDP at the time, to maintain economic growth and mitigate the effects of the worst global recession in over 70 years.

In 2008, when the authorities adopted a "moderately loose" policy stance, the People's Bank of China reduced its benchmark 1-year lending rate by 156 basis points and the cash reserves ratio by 1.5 percentage points during the easing cycle, according to Ming Ming, a former official at the PBOC monetary policy department, as reported by state-backed media Economic Observer.

In October, Ting Lu, the chief China economist at Nomura, stated that the five-year stimulus package unveiled by China last month, worth 10 trillion yuan, was equivalent to about 2.5% of China's annual GDP, which aimed to address local government debt problems, while indicating more economic support would follow next year.

To reduce the local government financial vehicle debt, which is nearly half of the country's GDP, economists at Morgan Stanley recommend significantly scaling up the debt swap program.

The central government fiscal deficit in China is projected to increase by 1.4 percentage points next year, as the government borrows more to support the economy.

PBOC constraints

Since mid-September, the U.S. Federal Reserve has been easing its monetary policy, and in response, the PBOC has been lowering key interest rates.

The US Federal Reserve's rate cuts have given China the opportunity to lower its domestic borrowing costs without causing a significant decline in the Chinese yuan. Nevertheless, the People's Bank of China (PBOC) has refrained from implementing more aggressive rate cuts due to concerns about capital flight, as the difference between Chinese rates and those of other countries increases.

According to Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, the tone from Monday's Politburo meeting indicated that the PBOC is likely to cut key interest rates by 40 to 50 basis points to close to 1% towards the end of 2025.

The prolonged rally in Chinese government bonds has been fueled by bets on further rate cuts, resulting in record lows for the 10-year benchmark yield on Tuesday.

Securing economic growth momentum is more important than stabilizing the exchange rate, according to Bruce Pang, chief economist of Greater China at JLL, despite monetary easing potentially putting depreciation pressure on the Chinese yuan.

The central bank is expected to reduce the reserve requirement ratio, or RRR, a crucial tool for managing liquidity, within a month, according to Pang.

Not a 'bazooka'

UBS' Wang reportedly stated that more details on Beijing's macro policy plans will be revealed at the annual economic work conference, which is currently underway and will end on Thursday.

The key policy targets and details of stimulus measures will be unveiled at the National People's Congress in March, according to her.

Concrete policy follow-through, specifically regarding additional fiscal support and direct consumption incentives, is being closely monitored by investors and economists.

Wildau stated that the stronger language on Monday does not imply that "bazooka-style stimulus" will be implemented immediately. Instead, he believes that top leaders will introduce new stimulus measures in a "gradual, data-driven manner," while retaining some reserves for potential U.S. tariffs in the future.

Policymakers, led by Wang, prioritize reviving household consumption and predict that the government will more than double its trade-in program to over 300 billion yuan to motivate domestic spending.

In July, China announced the allocation of 300 billion yuan ($41.5 billion) in ultra-long special government bonds to support the trade-in and equipment upgrade policy, with the aim of boosting consumer demand.

According to Sunny Liu, lead economist at Oxford Economics, the existing fiscal stimulus package has not put much emphasis on increasing consumption, which is crucial for reviving the economy. Liu emphasized that China will continue to face deflationary pressures in the near future.