CF40 Expert: China Should Focus on Monetary Policy to Boost Domestic Demand

China should increase reliance on monetary policy to boost domestic consumption and drive the internal engines of economic growth, according to a leading researcher at the China Finance 40 Forum.

“2026 is an excellent year to strengthen counter-cyclical adjustments and expand domestic demand. It’s also a critical year, as the economy has already begun showing signs of recovery,” said Zhang Bin, who also serves as deputy director at the Institute of World Economics and Politics, Chinese Academy of Social Sciences, during a briefing on the macroeconomic policy report for the last quarter of 2025.

While there remains some room for government-backed public investment, further significant fiscal expansion is limited by concerns over rising public debt, a decline in overall financial strength, and increasing complexity in coordinating investment projects, Zhang explained.

In this environment, he recommends shifting the focus of economic recovery from a solely government-led effort to a dual approach that combines government guidance with market-driven forces, with monetary policy playing an especially vital role.

Fiscal strategies should be more structurally optimized, focusing not just on trade-in programs but also on addressing issues that the public finds hard to solve alone, Zhang added.

He believes a supportive monetary policy should be aimed at influencing expectations. By establishing clearer management of inflation expectations and lowering policy interest rates significantly, China could stimulate private sector investments and home purchases, thereby igniting internal growth engines for sustained economic improvement.

Despite facing substantial external shocks last year, China’s economy has demonstrated robust resilience and displayed several early signs of recovery, the report noted.

Indicators such as the stock market, the renminbi exchange rate, social financing growth, and corporate deposits have all improved noticeably. Corporate profits have halted the decline seen in previous years, and both consumer activity and the labor market are functioning well, according to the report.

The main drivers of last year’s economic rebound were fiscal policies, external demand, and previous price adjustments. However, investment and the housing market still face considerable challenges, and the internal growth momentum remains relatively weak.

Maintaining strong counter-cyclical policies this year will be critical, with monetary policy being the main tool to activate internal growth drivers, making it the top priority, the report emphasized.

If private investment and housing demand do not fully recover, overall social spending will stay low, which could limit income growth and undermine household income and consumption, the report warned.

With optimistic outlooks for overseas demand, fixed asset investment, household consumption, and policy support, and given the many limitations on interest rate reductions, overly aggressive monetary easing may not be necessary this year, according to Guo Kai, executive president of the China Finance 40 Forum.