Crowds of tourists gather in front of a colossal snowman at the Harbin Ice-Snow World in Heilongjiang Province on Dec. 17, 2024. Photo: IC PHOTO

Amid the complex and volatile global economic landscape, the Central Economic Work Conference emphasized vigorously boosting consumption and enhancing investment efficiency, identifying the comprehensive expansion of domestic demand as the top task for economic work in 2025. In the face of external pressures and internal challenges, vigorously boosting consumption and enhancing investment efficiency are not only urgent requirements for stabilizing economic growth, but also vital measures for safeguarding and improving people’s wellbeing, providing robust impetus for the sustained growth of China’s economy.

High interest rates, unstable expectations

First, real interest rates remain high, posing challenges to micro, small, and medium-sized enterprises (MSMEs) in their production and operations. Using the weighted average lending rate for enterprises as the nominal interest rate and the Consumer Price Index (CPI) as the inflation rate, calculations show that while the nominal interest rate has steadily declined—standing at approximately 3.7% in the third quarter of 2024—the low price index has prevented corresponding changes in real interest rates. As a result, real interest rates have been estimated at around 4%, creating an environment in which these smaller businesses face heightened vulnerability and limited resilience against risks.

At the same time, global price fluctuations in staple commodities and disruptions in supply chains have further increased production and operational costs for enterprises. Sluggish and uneven global recovery has caused external demand levels to remain volatile. Furthermore, the reliance of some MSMEs on narrow product categories and specific demand ecosystems has exacerbated their vulnerability.

Second, market expectations remain unstable, which has weakened the effectiveness of interest rate policies to a certain extent. Although loan conditions have eased in response to relatively weak demand, many enterprises hold a prudent attitude toward expanding investment and raising funds. Meanwhile, a stronger preference among residents for saving has led to shrinking demand for consumer credit, diminishing the stimulative impact of low-interest-rate policies on demand.

At the same time, persistently low or even negative inflation limits the potential for widespread price increases, reducing enterprises’ willingness to pursue cash flow growth through investment expansion. Insufficient enterprise investment directly affects employment and income levels, further eroding consumer confidence and suppressing the recovery of consumer demand.

Policy suggestions

First, the government, banks, and enterprises should pool strength to address financing problems faced by enterprises, particularly by lowering the real interest rate to stimulate business development. Key policy measures should be rolled out to bolster the real economy, including cutting the provision coverage ratio to quickly unleash additional credit resources and lowering financing thresholds for enterprises through tax cuts, fee reductions, and the establishment of guarantee funds. Simultaneously, efforts should be made to further optimize the business environment and reduce institutional transaction costs for enterprises.

More flexible financial services are also essential to support the real economy. Banks can reduce financing burdens on businesses by lowering lending rates, cutting non-interest income, and offering tailored financial services to meet the specific needs of MSMEs.

Enterprises, in turn, can leverage preferential policies such as low-interest loans to drive technological innovation and industrial upgrade, introduce new products, and create new demand, thereby spurring domestic demand growth through high-quality supply.

Second, equal emphasis should be laid on employment and distribution policies to promote stable income growth. Efforts are needed to increase job opportunities and strengthen the enthusiasm for employment, including implementing career guidance projects for university students and supporting entrepreneurship. These measures can help integrate those outside the workforce into the labor market. The policy toolbox should also be refined, with fiscal and taxation policies providing tax reductions and subsidies for employee training and benefits. This approach will encourage enterprises to expand hiring and offer better personal development opportunities for their employees.

Meanwhile, the income distribution system should be improved to properly balance the relationships among primary distribution, redistribution, and tertiary distribution. This would include raising the proportion of labor remuneration in primary distribution, optimizing redistribution through tax adjustments and transfer payments, and leveraging the role of tertiary distribution by improving laws and regulations governing voluntary donations.

Moreover, the investment environment should be optimized to boost investment willingness and invigorate overall investment by crafting low-risk, stable-return financial products for individual investors, refining the asset management system, and strengthening capital market regulation. Subsidies should also be increased to alleviate residents’ debt pressures, intensifying trade-in programs and repurposing underutilized credit stock through fiscal support.

Additionally, attention should be paid to innovating and diversifying consumption scenarios to expand and upgrade service consumption. Priority should be given to developing the silver economy, cultural tourism, ice and snow economy, and debut economy to drive growth in these emerging sectors.

Liu Chong is an associate professor from the School of Economics at Peking University.