The People's Bank of China, the country's central bank, announced during its work conference, held in Beijing on January 3-4, that it will implement a moderately loose monetary policy in 2025.

The bank also stated it will reduce the reserve requirement ratio and interest rates at an appropriate time to ensure adequate liquidity and stable growth of financial aggregates. 

Since China began gradually establishing and improving its market economy in the late 1970s, its monetary policy has been adjusted as needed to keep pace with economic changes and demand. Monetary policy can be classified as tight, moderately tight, sound, moderately loose or loose.

Following the international financial crisis of 2008, China adopted a moderately loose monetary policy to stimulate economic growth. This approach, which aims to provide some relief by making money more accessible without triggering excessive inflation or destabilizing the economy, helped the country's economy recover more rapidly. As the economy returned to steady growth, China shifted to a sound monetary policy in 2011, which it has maintained for the past 14 years.

The decision to implement a moderately loose monetary policy is closely tied to the current economic development goals and the pressures China is facing.

The year 2025 will conclude the 14th Five-Year Plan (2021-25) and set the stage for the 15th Five-Year Plan (2026-30). The Central Economic Work Conference, held in December 2024, outlined China's economic priorities and tasks for the 12 months ahead.

Priorities include maintaining steady economic growth, stabilizing employment and prices, ensuring a basic equilibrium in the balance of international payments, and increasing residents' income in line with economic growth. 

Last year, the Chinese economy remained within an appropriate range, with a growth rate sufficient to meet the demands for employment, income and expenditure. However, quarterly growth rates showed a downward trend. If this trend is not reversed in a timely manner, it could hinder the achievement of steady growth in 2025.

Although the Chinese economy had stable structural foundations in 2024, with long-term growth fundamentals remaining intact, domestic demand was insufficient. Many businesses faced operational challenges, and there was pressure on the Central Government to ensure employment and increase residents' income.

In 2025, the Chinese economy will face an increasingly challenging external environment. The United States and several European countries are embracing loose monetary policies, the goal of which is to make borrowing cheaper, encourage investment, and boost consumer spending to drive economic growth, putting pressure on China's globally integrated economy to respond. Meanwhile, growing backlash against economic globalization adds to the complexity.

Against this backdrop, the Central Economic Work Conference indicated that adopting a moderately loose monetary policy in 2025 is a reasonable decision to support stable economic growth.

A moderately loose monetary policy sends a positive signal to the market. It signifies a balanced money supply, low interest rates and a relatively relaxed credit environment. Such a policy will boost investor and consumer confidence, increase financial support for key sectors, and channel more investment into fields such as technology innovation and daily consumption, which are major drivers of China's economic growth.

The key challenge of a moderately loose monetary policy lies in determining the right balance of "moderation."

If the policy is too tight, it may fail to stimulate the economy adequately. On the other hand, if it is too loose, it could lead to excessive liquidity and overheating in investment.

The ideal approach is a policy that fosters economic growth but also keeps inflation and financial risks under control, ensuring sustainable and steady development.

Copyedited by Elsbeth van Paridon 

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