(Yicai) Dec. 13 -- China will adopt a more proactive fiscal policy next year, including a rare increase in the fiscal deficit ratio, according to the government’s annual two-day Central Economic Work Conference.

The fiscal deficit ratio is likely to be between 3.5 percent and 4 percent next year, analysts noted. It has been below 3 percent in most years, but was higher than that in 2020 to 2023 to help cushion the impact of the Covid-19 pandemic. It was set at 3 percent for this year.

The fiscal deficit ratio measures a government's spending relative to its revenue, expressed as a percentage of gross domestic product. A fiscal deficit occurs when a government's expenditure exceeds its income, requiring borrowing to cover the gap.

A higher ratio is crucial for stabilizing expectations and confidence, said Luo Zhiheng, chief economist at Yuekai Securities. If the ratio were set at 3.5 percent to 4 percent, that would equate to between CNY4.8 trillion and CNY5.5 trillion (USD659.4 billion and USD755.6 billion), he added.

The work conference, which sets the national economic agenda for the year ahead and which ended yesterday, emphasized more proactive and impactful macroeconomic policies to sustain growth, fulfill the goals of the 14th five-year plan through next year, and lay a solid foundation for the 15th five-year plan through 2030, Xinhua News Agency reported yesterday.

China will also optimize fiscal expenditure and expand the issuance of ultra-long special treasury bonds and local government special bonds, the conference decided.

Experts predict that China will issue between CNY1.5 trillion and CNY2 trillion in ultra-long special treasury bonds and around CNY4.5 trillion in local government special-purpose bonds next year. This represents a big increase from this year’s CNY1 trillion in ultra-long special treasury bonds and CNY4 trillion in local government special bonds.

The meeting also urged the implementation of a moderately loose monetary policy, with reductions in the reserve requirement ratio and interest rates at an appropriate time to ensure ample liquidity.

The People's Bank of China may cut the RRR by around 1 percentage point in 2025, potentially releasing more than CNY3 trillion in liquidity, according to Lian Ping, chief economist at the Guangkai Chief Industry Research Institute.

Lian predicts that next year's interest rate cuts will likely mirror this year's trajectory, with an estimated reduction of 40 to 50 basis points over the course of the year.

Furthermore, the conference called for better policy coordination, emphasizing alignment between fiscal, monetary, employment, industrial, regional, trade, environmental, and regulatory policies, alongside the country's ongoing reform and opening-up measures.

Editor: Emmi Laine