The majority of economists questioned by Bloomberg predict that officials would set a bullish growth objective of about 5% during the parliamentary conclave, which will bring together thousands of delegates, including ministry chiefs and province leaders, in Beijing on Wednesday.
With his economy finally regaining its momentum, President Xi Jinping enters China’s largest political summit of the year. Beijing’s capacity to maintain that momentum will be put to the test by Donald Trump’s increasing tariffs.
Ahead of the National People’s Congress, Xi’s recent embrace of private entrepreneurs like Jack Ma of Alibaba and advancements in artificial intelligence have fuelled a ferocious market surge. Trump’s most recent 10% tariff is scheduled to go into effect only one day before Premier Li Qiang unveils China’s economic plan for the year, casting doubt on that confidence already.
The majority of economists questioned by Bloomberg predict that officials would set a bullish growth objective of about 5% during the parliamentary conclave, which will bring together thousands of delegates, including ministry chiefs and province leaders, in Beijing on Wednesday.
Policymakers are expected to inject trillions of yuan into a system struggling with deflation, a real estate crash, and now a trade war with the United States in order to reach China’s official budget deficit target, which is likely to be the largest in more than thirty years.
Nearly two months into Trump’s administration, the biggest economies in the world are headed towards conflict, which makes it more crucial than ever for the Communist Party to release the purchasing power of its people. Beijing’s authorities have pledged to put increasing local demand first, and unlike last year, there is little likelihood that the country can rely on an export boom.
According to Yao Yang, an economics professor at Peking University, China is set to make “quite a lot” of policy changes this year, but he warned that the actions might not be bold enough.
“The fiscal stimulus isn’t large enough, especially when we take local government debt into account,” he stated. Second, the US government is likely to raise tariffs if it is unable to reach a resolution with China. After then, we will engage in a tit-for-tat conflict. That will be really awful.
Since authorities have been concentrating more on maintaining the yuan’s stability than on easing policy, currency speculators are keeping a careful eye on stimulus details. The People’s Bank of China has resisted rumors that it would weaken its currency to make up for economic losses from the trade war by continuously setting the fixing rate above 7.2 per dollar.
What Bloomberg Economics Says: “The trade battle will undoubtedly be a top priority for the NPC behind closed doors. China’s attitude on the budget is unlikely to change very soon, as the most recent tariffs were imposed just one day before the NPC opens. However, when external pressures increase, officials may expedite the stimulus delivery.
Chang Shu, head economist for Asia.
Given that US tariffs have the potential to halt China’s export engine, maintaining the same growth rate this year while overcoming those obstacles will necessitate higher fiscal spending. Lu Ting of Nomura Holdings Inc. and other analysts predict that export gains, which increased by about 6% in 2024, will come to a standstill.
In order to make up the difference, the government will need to increase its own investment and incentivize people and businesses to spend. The growth of the government deficit will be a crucial indicator of the size of this year’s stimulus.
According to the consensus estimate in the Bloomberg survey of experts, authorities will raise the official budget deficit target for this year from 3% of GDP in 2024 to almost 4%. It revealed that the enhanced deficit, a general indicator of the fiscal gap, would come to about 12 trillion yuan.
That ought to be sufficient to attain GDP growth of about 5%, which most analysts predict necessitates a rise in the wide deficit of 3–4 trillion yuan.
According to Bloomberg’s poll of experts, the package would include up to 4 trillion yuan in new special local government bonds and a 2 trillion yuan quota for new special sovereign bonds, which is double the amount from the previous year. These figures do not include borrowing to settle unreported debt.
As traders reduced their expectations for short-term monetary easing and sentiment towards stocks improved, China’s national bonds saw a selloff last month. The 10-year government yield reached its highest level since December after rising from a record low.
Walking With Caution
Beijing is expected to begin by favoring a measured approach as it navigates the uncertainties unleashed by Trump, but the fiscal limitations set at the NPC should leave open the option of top-ups later in the year. The government’s cautious approach may also be influenced by the expensive cleanups it has carried out in the past to control asset bubbles and local debt problems.
Yuan Haixia, executive director of the research institute of China Chengxin International Credit Rating, who attended an economic seminar hosted by Premier Li in 2023, stated that the size of the enlarged deficit must be adjusted in a dynamic and accurate manner.
“Given Trump’s erratic and irrational trade policy, China should also save some scope and backup tools to handle foreign trade risks,” Yuan added.
With China on the verge of its longest run of deflation since the Mao Zedong period, the annual inflation target will be another highly anticipated figure at this year’s conclave. The majority of economists predict that number will be cut to 2%, the first time it has been lowered below 3% in more than 20 years.
Such a move would indicate Chinese policymakers are reacting to the reality of muted pricing and could lead to increased measures to fire up demand, following advice given to Chinese analysts to refrain from using sensitive terminology like “deflation.”
The Chinese leader must strike a careful balance between ensuring that aid reaches the areas of the economy that most need it and giving just enough boost to meet the growth target.
With Morgan Stanley predicting that only a third of the stimulus will go towards consumption, the success of AI chatbot DeepSeek is one of the recent technological achievements that may guarantee policymakers continue to focus on the drive towards self-sufficiency and a growth model centered on high-tech manufacturing.
Goldman Sachs predicts that as AI adoption picks up speed, China’s potential growth will begin to increase by 2026. By 2030, the technology will increase yearly growth by up to 0.3 percentage points, which is three times what was predicted prior to DeepSeek’s appearance. However, the nation will need to carefully control the rate of labor replacement.
Due to China’s real estate crisis, low confidence, and a dismal outlook for income and employment, household spending has been obstinately low.
Despite an unusual policy to subsidize a consumer trade-in program with special sovereign bond issuance, consumption’s contribution to GDP growth dropped below 45% last year, the lowest since 2006 (excluding the pandemic year of 2020).
As officials attempt to shield the second-largest economy in the world from a trade war with its main adversary, halting that fall will be essential.
Longer term, “favourable conditions are growing,” according to Xu Qiyuan, deputy head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, even though Trump raises China’s short-term dangers.
“China is currently confronted with both opportunities and challenges,” he continued. “How we will handle them is more important than which of them is superior.”
