China Securities Co., Ltd. Interprets Central Economic Work Conference: Proactive Policy Stance Unchanged, Expanding Domestic Demand Tops Priority Tasks

Key Takeaways from the Central Economic Work Conference

1. **Assessment of Economic Conditions** The conference addressed widespread concerns about China's economy, concluding that most challenges are transitional and solvable through concerted efforts.

2. **2026 Economic Outlook** Key priorities include expanding domestic demand, stabilizing investments, resolving local debt risks, curbing excessive competition ("involution"), steadying the property market, fostering new growth drivers, and advancing long-term reforms.

3. **Incremental Policy Measures** - **Fiscal Policy**: More proactive, with elevated deficit ratios, expanded debt issuance, local debt risk mitigation, and tax reforms. - **Monetary Policy**: Maintains "moderate easing," targeting reasonable price recovery, with easing measures expected to match or exceed 2025 levels.

4. **Sectoral Focus** Emphasis on new growth drivers, AI, services, new energy, marine economy, and anti-involution measures.

**Event Details** The Central Economic Work Conference was held in Beijing from December 10–11.

**I. Proactive Policy Stance Supports Economic Recovery** The conference reaffirmed 2025’s "more proactive" fiscal and "moderately easy" monetary policies, signaling continuity in supportive measures. This stance aids economic recovery, unlocks growth potential, and reduces asset price volatility risks. Past policy tightening (e.g., post-2020 monetary adjustments and 2021 fiscal pullbacks) had pressured bonds and equities.

**II. Fiscal Expansion and Accelerated Debt Resolution** The conference stressed maintaining "necessary fiscal deficits, debt levels, and expenditure," alongside addressing local fiscal strains. Expectations for 2026: - Deficit ratio to remain at a historically high 4%. - Special long-term bonds (excluding capital replenishment bonds) to rise to at least ¥1.5 trillion. - Special-purpose bonds to expand sharply to ¥5 trillion, addressing local funding gaps and debt resolution needs.

Tax reforms may shift consumption taxes from production (central revenue) to wholesale/retail (shared with localities), alongside adjusted VAT and income tax splits to favor local governments.

**III. Monetary Easing and Targeted Support** Policymakers pledged to "promote stable growth and reasonable price recovery" via RRR cuts, rate reductions, and liquidity injections. Structural tools will prioritize domestic demand, tech innovation, and SMEs.

**IV. Domestic Demand as Top Priority; Property Market Stabilization** With "weak demand overshadowing strong supply," expanding domestic demand leads 2026 priorities: - **Consumption**: Focus on income growth (urban/rural household plans) and fiscal subsidies, potentially shifting from durable goods to services. Supply-side measures include boosting high-quality goods/services and removing consumption barriers. - **Investment**: Aims to halt declines via central budget increases, policy-backed financial tools, and urban renewal projects. Infrastructure investment may rebound with reduced debt-resolution pressures on project bonds. - **Property**: Policies will stabilize markets through city-specific measures, inventory absorption (e.g., state purchases for affordable housing), and公积金reforms. Demand-side support (tax cuts, relaxed home-buying rules) may continue, but investment is likely to remain negative amid "controlled new supply."

**V. Sectoral Highlights: New Growth Engines and Anti-Involution** Innovation and industrial upgrades rank second among priorities, with AI integration and key supply chain upgrades emphasized. Other focal areas: - Services: Capacity and quality expansion plans. - New Energy: Accelerated green power systems. - Marine Economy: Integrated planning for bay areas. - Anti-Involution: Nationwide market integration rules to curb cutthroat competition, potentially lifting PPI.

**Uncertainties Ahead** - **Consumption Recovery**: Current rebound remains fragile; sustained weakness could limit growth momentum. - **Property Market**: Short-term improvements face headwinds from persistent negative indicators. - **Global Risks**: Potential drags from prolonged Western monetary tightening and geopolitical conflicts.