Going Long on China: Top Ten Highlights of the Second Round of Policy Initiatives

Report Highlights

1. Background of the meeting: The Political Bureau meeting was not held in November; there were four discussions on the economy this year, and similar years in history saw abrupt changes in macroeconomic regulation. This meeting is not just a rehearsal for the economic work meeting but marks a shift in policy from a phase of dual wide rescue to a comprehensive deployment to stimulate the economy in 2025.

2. The year 2025 is a year of continuity from the 20th National Congress, the conclusion of the 14th Five-Year Plan, and the establishment of a new Sino-American relationship, with economic growth as the foundation. "More proactive and effective macro policies" and "extraordinary counter-cyclical adjustments" demonstrate the determination to stabilize growth, opening up imaginative space for counter-cyclical tools and moving beyond mere number guessing.

3. Fiscal policy is "more proactive," with central government deficit and borrowing space opening up; monetary policy is "moderately loose," for the first time in the past 14 years, with greater interest rate cuts expected and the possibility of retaining QE expansion.

4. Industrial policy: Expanding domestic demand is prioritized, with a focus on service consumption; under the new Sino-American relationship, scientific and technological innovation remains a top priority; attention is given to regional developments such as the Yangtze River Delta, Guangdong-Hong Kong-Macao, Northeast ice and snow economy, and Hainan Free Trade Zone.

5. Real estate: Continued positive statements since September 26; stock market: The Political Bureau meeting in December first mentioned it, and more innovative policies to stabilize the stock market can be expected.

Main Text

Introduction: The relationship between the December Political Bureau meeting and the economic work meeting: What is mentioned is key, and what is not mentioned does not mean it is absent. We believe this meeting is not only a preview but also the starting gun for the second round of policies.

1. Dao and Shu: More than just a preview, but the starting gun for the second round

The unusual behind the regular timing: Emphasis on the economy. There are two backgrounds for this meeting's timing: the Political Bureau meeting was not held in November, and similar situations occurred in 2013, 2014, and 2022, where macroeconomic regulation saw abrupt changes at the end of 2014 and 2022: In November 2014, after a two-year hiatus, interest rate cuts initiated a bull market in 2015, and in December 2022, the optimization of epidemic prevention led to a reopening rebound. Additionally, this year, the Political Bureau has discussed the economy four times (April, July, September, December), matching the four times in 2018 and only second to five times in 2020, with 2018 facing Sino-U.S. trade frictions and 2020 experiencing the outbreak of the pandemic.

Shifting from the first round of dual wide rescue on September 26 to a comprehensive deployment to stimulate the economic recovery in 2025. The September 26 meeting focused on stabilizing the targets for the year, with the first round of dual wide measures: the central bank's structural monetary tools supporting the stock market and fiscal measures of 10 trillion yuan for debt relief, leading to a significant rise in the stock market and exiting the bear market. The December 9 meeting may mark the transition from the first phase of dual wide rescue to a comprehensive deployment to bring the economy back to inflation in 2025.

Moving beyond number guessing, emphasizing the multiplier effect of consensus building and expectation management under the advantages of the system. This meeting is not just a rehearsal for the economic work meeting; more importantly, it is about building consensus and managing expectations. The difficult response tools can be divided into Dao and Shu, with China's systemic advantages making the leverage effect of the former's strategic consensus greater: The early December Political Bureau meeting builds consensus within the party → The mid-December economic work meeting builds consensus among the central government and ministries → The local two sessions in January-February 2025 build consensus among grassroots governments → The national two sessions in March 2025, achieving expectation management with a light touch, forming a leverage multiplier effect among the party, central government, and local governments, enabling counter-cyclical policies to drive the asset-liability sheet expansion of households and enterprises

II. New Internal and External Issues: The More Thorough the Difficulty Estimates, the More Comprehensive the Responses

The target determines the direction of strength; facing the problem is the starting point for solving it. The Politburo meeting in July judged the issues from a medium to long-term perspective, focusing on the "growing pains of the transformation of old and new driving forces"; on September 26, it pointed out that "the economic operation has encountered some new situations and problems," but did not specify the details. This meeting emphasized "preventing and resolving risks in key areas and external shocks, stabilizing expectations, and stimulating vitality," and "maintaining social harmony and stability." We believe the current issues can be focused on two points: External Environment: During a period of global turmoil and transformation, the new Sino-U.S. relationship is established, and export may be under pressure due to tariff policies. After returning from the G20 summit in Brazil in November, General Secretary Xi pointed out at the fourth "Belt and Road" construction work symposium that the world has entered a new period of turmoil and transformation, with unilateralism and protectionism significantly rising. After Trump's victory, the uncertainty of the new Sino-U.S. relationship remains to be observed, and tariff policies may suppress exports. The more severe the external situation, the greater the need to expand domestic demand and seek new growth points along the Belt and Road. Social Stability: Preventing extreme cases and resolving conflicts and disputes in a timely manner. The policy's determination stems from the balance between development and security; social livelihood issues are a bottom-line thinking. The focus on employment groups has expanded from college graduates to "migrant workers, poverty alleviation populations, zero-employment families, etc.," marking a phased shift in policy thinking. This meeting emphasized "ensuring the stability of the overall social situation through effective livelihood guarantees and safety and stability work." According to Xinhua News Agency, General Secretary Xi mentioned in his instructions regarding the Zhuhai car-ramming incident that risk source prevention and control should be strengthened, conflicts and disputes should be resolved in a timely manner, extreme cases should be strictly prevented, and the safety of people's lives and social stability should be fully guaranteed. Under bottom-line thinking, the policy focus on stabilizing growth is likely to continue.

III. The Strongest Determination to Stabilize Growth in Four Years and a Rich Arsenal Displayed

Determination to stabilize growth: 2025 is the year of the 20th National Congress continuation and the conclusion of the 14th Five-Year Plan, as well as the year of the establishment of the new Sino-U.S. relationship. The year 2025 is the continuation year of the 20th National Congress, from the third to the fourth plenary session, implementing the economic deployment of the third plenary session and completing the assessment of the 14th Five-Year Plan's concluding goals. The year 2025 is also the year of the establishment of the new Sino-U.S. relationship after the U.S. elections, with economic growth being the fundamental basis. During the meeting between the two heads of state on November 16, the General Secretary mentioned that "the interactions between the two major countries cannot suppress each other from the so-called 'position of strength'." The last similar statement from our side appeared during the high-level Sino-U.S. strategic dialogue on March 21, where Yang Jiechi mentioned, "You have no right to say that you are talking to China from a position of strength." In 2020, the actual GDP growth rates of China and the U.S. were 2.2% vs -2.2%.

A rich arsenal is not limited to numbers; it leverages the advantages of a flexible and responsive system. This meeting required "to adhere to seeking progress while maintaining stability and promoting stability through progress," emphasizing "implementing more proactive macro policies" and "strengthening extraordinary counter-cyclical adjustments," without mentioning "cross-cycle adjustments." Overall, it continues the policy tone set on September 26, expressing a strong demand for stabilizing growth, with specific details to be determined at the economic work conferenceWe believe that the counter-cyclical policy toolkit should open up imaginative space, and investors should step out of the guessing game of numbers. The toolkit includes significant interest rate cuts, the central government's deficit borrowing capacity, high household savings, and ample foreign exchange reserves. Leveraging China's systemic advantages, monthly Politburo meetings and bi-monthly Standing Committee meetings of the National People's Congress may become flexible adjustment windows. In terms of specific work prioritization, expanding domestic demand has been moved ahead of technological innovation, reflecting a policy focus that may lean towards development over security.

Four, New Proposition: Uphold Integrity and Innovate

Dare to speak, dare to act, and dare to innovate; firmly change what should be changed, and do not change what should not be changed. This meeting proposed: "Uphold integrity and innovate, prioritize establishment before breaking, system integration, and collaborative cooperation." The latest issue of "Qiushi" published an article by the General Secretary titled "We Must Uphold Integrity and Innovate," emphasizing: "We must uphold integrity and innovate, daring to say things that have not been said before and daring to do things that have not been done before"; "We must have strong determination to maintain our principles and aspirations, while also having the courage and boldness to innovate and tackle challenges"; "We must adhere to the unity of upholding integrity and innovation, firmly change what should be changed, and do not change what should not be changed." We believe that emphasizing integrity and innovation is about inspiring and mobilizing, echoing the 926 meeting's call to "support those who take responsibility and back those who get things done," and the October research in Anhui stating "how many times can one fight in life." For the capital market, the 25-year counter-cyclical adjustment tools should open up imaginative space, including our annual strategy [HuaChuang Strategy Yao Pei] on the re-inflation bull market—2025 investment strategy mentioning the dual easing policy reserves: Monetary: last resort lender - significant interest rate cuts - QE expansion; Fiscal: asset purchases - nationalization of debt restructuring - central government borrowing.

Five, Fiscal: Central Deficit Borrowing Capacity

China's government leverage ratio of 68% is low compared to OECD countries, and the central borrowing capacity is enormous. This meeting emphasized "implementing a more proactive fiscal policy," which is a stronger stance compared to the conventional expression of "implementing an active fiscal policy" in recent years, continuing the positive signals from the 926 meeting. Combined with Lan Fang'an's statement on November 8th, "In conjunction with next year's economic and social development goals, implement a more robust fiscal policy," it is expected that fiscal measures may be significantly strengthened next year. In 2023, the U.S. government leverage ratio is 113%, Japan 219%, the Eurozone 88%, while China is only 56% (central 23.8%, local 32.3%). If we include local hidden debts of 14.3 trillion, the total reaches 67.5%. On October 12th, Minister Lan Fang'an emphasized that "the central government still has considerable borrowing and deficit enhancement capacity," referencing the fiscal expansion led by Premier Zhu Rongji from 1998 to 2003, where the central government leverage ratio increased significantly from 5% to 20%.

6. Currency: Trade-off between Face (Exchange Rate) and Substance (Interest Rate)

For the first time in 14 years, "moderate easing" is mentioned again, with an exchange rate of 7.3, a bond yield of 1.9, and a stock index of 3400, which may not constitute a constraint on easing, and significant interest rate cuts are on the way. This meeting described the monetary policy as "moderate easing," marking the first mention of "moderate easing" since the political bureau meeting in 2009-2010, which was aimed at countering the subprime mortgage crisis. The previous 14 years have consistently referred to "prudent monetary policy." Referring to the central bank's recent statements indicating "will continue to adhere to a supportive monetary policy stance and policy orientation," we can expect more significant interest rate cuts next year, retaining the imagination for QE expansion, with a structural focus on "technological innovation, green finance, consumer finance, real estate, and capital markets." Recent asset price combinations of stocks, bonds, and currencies have raised concerns about constraints on monetary easing. We believe that vague psychological levels do not represent rigid adherence to rules; breaking through range constraints often brings new innovations, referencing the U.S. in 1933 and Japan in 1995, where rapid short-term currency depreciation can effectively stimulate the economy and markets under certain conditions. Key attention should be paid to the economic work conference's statements related to exchange rates; the 926 political bureau meeting did not mention the 730's "maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level," referencing the central bank's third-quarter monetary policy report, which added "maintaining exchange rate flexibility" compared to the second quarter.

7. Expanding Domestic Demand

New areas of fiscal effort: Service consumption. In this meeting's key work deployment, expanding domestic demand was prioritized over technological innovation, emphasizing "to vigorously boost consumption, improve investment efficiency, and comprehensively expand domestic demand." Consumption focuses on the service industry. The 2025 holiday will increase by 2 days, opening up offline consumption scenarios, and more substantial subsidy policies for service consumption can be expected. According to the "Opinions on Promoting High-Quality Development of Service Consumption," the focus will be on catering, accommodation, tourist attractions, cultural entertainment, and sports consumption. Under the backdrop of an aging population, policies for service consumption such as elderly care and childcare will continue to be strengthened, bringing new increments. The effect of subsidies for replacing old durable goods with new ones is significant and may continue into 2025. In terms of investment, "two 重，" "two 新，" and major projects of the 14th Five-Year Plan are the main focuses, with key attention on railways, high-standard farmland, underground pipelines, and energy-saving and carbon-reduction transformations.

8. Industry: Technological Innovation, Regional Development

Technological innovation remains a top priority in industrial policy. This meeting emphasized "leading the development of new quality productivity with technological innovation and building a modern industrial system." Under the new Sino-U.S. relationship, the importance of internal security has increased, especially in core technology breakthroughs represented by semiconductors and basic software, which may become key links in ensuring the supply of industrial and supply chainsAfter the debt resolution is implemented, local governments can lighten their burdens and free up more resources and energy to develop technology. From 2015 to 2018, Guizhou established a big data industry fund after completing a series of debt resolution measures to promote the development of the big data industry in Guizhou Province. In terms of specific directions, on one hand, referring to the 24th issue of "Qiushi" in 2023, which focuses on adhering to innovation, traditional Chinese medicine, agriculture, energy, and industrial internet may be key areas; on the other hand, referring to the 20th Central Committee's Third Plenary Session, attention should be paid to: new quality productivity, digital economy (computing power, data elements, etc.), modern infrastructure, and new industrialization. Focus on the development of the Yangtze River Delta, Guangdong-Hong Kong-Macao, Northeast ice and snow economy, Hainan Free Trade Zone, and other regional developments. This meeting requires "increasing the implementation of regional strategies and enhancing regional development vitality." The report from the 20th National Congress included promoting coordinated regional development as an important part of building a new development pattern and promoting high-quality development. The "Two Sessions" in 2024 require the continuous issuance of ultra-long special government bonds, with a focus on five major areas including regional coordinated development and urban-rural integration. We believe that regional development will receive greater support in the future. From recent policies, we will focus on themes such as the Yangtze River Delta, Guangdong-Hong Kong-Macao, Northeast ice and snow economy, and Hainan Free Trade Zone.

Nine, Stabilize the Real Estate and Stock Markets

Stop the decline and stabilize; real estate is an important part of residents' balance sheet repair. This meeting emphasized "stabilizing the real estate and stock markets," continuing the statement from September 26 to "promote the stabilization of the real estate market." We believe that the economic work meeting's statements regarding real estate and next year's policies are expected to be more proactive. In terms of specific policies: ① For undeveloped land, support special bonds for the acquisition of existing land, with current policies still under research; ② For inventory of completed but unsold properties, stimulate demand through demand-side measures, including urban village renovations and the renovation of dilapidated houses; acquire existing homes for affordable housing; relax demand-side policies based on city-specific measures; ③ For sold but unfinished projects, promote housing delivery through a financing whitelist to stabilize residents' delivery expectations. More innovative policies to stabilize the stock market can be expected. This meeting emphasized stabilizing the stock market, marking the first mention of the stock market in the Politburo meeting in December in the past 10 years. The economic work meeting is expected to make more detailed arrangements for the capital market. We believe this meeting continues the supportive attitude towards the capital market since the September 24 press conference. In terms of policy tools, innovative monetary tools such as swap facilities and increased repurchase loans are expected to enhance effectiveness, with support policies for market value management, mergers and acquisitions, and medium to long-term capital entering the market being implemented. Additionally, under the tone of adhering to innovation, more innovative policy tools to support the stock market can be anticipated.

Ten, Investment Simulation: Focus on the Transition Between the Bull Market's Two Halves

M1 & PPI turning positive determines the transition between the two halves of the bull market; the first half is characterized by financial re-inflation, with small-cap growth outperforming; the second half is expected to see a return of dividends, expanding from low volatility to domestic consumption & cyclical resource products. This meeting clarified the demand and determination for stable growth, laying the foundation for the dual easing signal in 2025. We maintain our annual strategy [Hua Chuang Strategy, Yao Pei] of a re-inflation bull market—2025 investment strategy view, where dual easing tools first guide the re-inflation of financial assets and then gradually transmit to the re-inflation of physical assets. Attention should be paid to the policy details from the economic work meeting and the "Two Sessions" in March next year, with M1 and PPI turning positive focusing on fiscal implementation, which will also influence the timing of the transition between the two halves of the bull marketFrom the perspective of allocation direction, the financial re-inflation under ample liquidity in the first half favors small-cap growth, focusing on the TMT (Technology, Media, and Telecommunications) sector, as well as themes such as low-altitude economy, artificial intelligence, and mergers and acquisitions. In the second half, physical re-inflation is expected to lead to a strong return of dividend value, expanding into three major sectors: domestic consumption (leading companies in liquor, home appliances, and pharmaceuticals), cyclical resource products (non-ferrous metals, coal, transportation, and construction), and dividend low volatility (banks and public utilities).

Author of this article: Yao Pei S0360522120004, Ding Yancheng, Source: Yao Pei Strategy Exploration, Original title: "Bullish on China: A Quick Read of the Ten Highlights from the Politburo Meeting"

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