Published by Global Banking and Finance Review
Posted on March 5, 2025
By Antoni Slodkowski, Laurie Chen, Jing Xu and Eduardo Baptista
BEIJING (Reuters) - China unlocked more fiscal stimulus on Wednesday, signalling greater efforts to boost consumption as a means to ring-fence the economy's path towards this year's roughly 5% growth target amid an escalating trade war with the United States.
Premier Li Qiang, in a speech at the opening of the annual meeting of China's parliament, warned that "changes unseen in a century are unfolding across the world at a faster pace."
"An increasingly complex and severe external environment may exert a greater impact on China in areas such as trade, science, and technology," Li said.
The trade war with U.S. President Donald Trump's administration is threatening to crimp China's economic jewel, its sprawling industrial complex, at a time when persistently sluggish household demand and the unravelling of the debt-laden property sector are leaving the economy increasingly vulnerable.
Trump has also dangled tariffs at a long list of countries, including some which would consider themselves staunch U.S. allies, threatening a decades-old global trade order that Beijing has built its economic model around.
Pressure has been building on Chinese officials to introduce policies that put more money into consumers' pockets to fend off deflationary pressures and reduce the world's second-largest economy's reliance on exports and investment for growth.
Supporting consumption was more prominent in Li's speech than in previous years, some analysts said, noting less emphasis on "new productive forces," China's short-hand for investing in advanced manufacturing and technological progress.
"For the first time, boosting consumption has been elevated to the top priority among 2025's major tasks, displacing technology from its usual leading position," said Tilly Zhang, technology analyst at Gavekal Dragonomics.
"It’s not a pivot from the previous industrial policy, but pursuing a more balanced" macroeconomic framework, Zhang said.
Li acknowledged "consumption, in particular, is sluggish," noting "pressures on job creation and income growth" in a speech which also laid out key economic goals for 2025.
The roughly 5% growth target and a budget deficit plan of around 4% of economic output confirmed a December Reuters report.
Li also said Beijing plans to issue 1.3 trillion yuan ($179 billion) in ultra-long special treasury bonds this year, up from 1 trillion yuan in 2024. Local governments will be allowed to issue 4.4 trillion yuan in special debt, up from 3.9 trillion yuan.
Separately, Beijing plans to issue special debt of 500 billion yuan to re-capitalise major state banks.
Analysts say the numbers suggest officials may be saving ammunition for later in the year.
"These policy goals suggest that policymakers will use stimulus to offset tariffs," said Larry Hu, chief China economist at Macquarie.
"That said, March is too early for any major policy stimulus, as policymakers need more time to see the actual impact of the trade war," he added. "At this point, they will keep their cards close to the chest."
CONSUMER PLEDGES
Of the funds lined up at the NPC, 300 billion yuan will support a recently-expanded consumer subsidy scheme for electric vehicles, appliances and other goods.
Economists have been urging Beijing to go beyond subsidies and bolster its feeble welfare system, while engineering a long-term restructuring of resource allocation in the economy with more profound measures that reimagine its taxation, land and financial systems.
China's household spending is less than 40% of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above.
Li pledged to address the supply-demand gap and implement fiscal reforms that improve local government revenues and help stimulate consumption. He did not give a timeline.
Welfare benefit hikes appeared meagre.
Li flagged an increase of 20 yuan to 143 yuan to the minimum pension, which mainly benefits farmers, an extra 30 yuan per person in the medical insurance subsidy, and a 5 yuan increase in subsidies for basic healthcare services.
Without giving details, Li also pledged to provide childcare subsidies and develop elderly care, in a nod to China's deepening demographic crisis.
'THEN ANOTHER 10%'
Chinese producers, facing weak demand at home and harsher conditions in the United States, where they sell more than $400 billion worth of goods annually, are rushing to alternative export markets all at the same time.
They fear this would intensify price wars, squeeze profits, and raise the risk that politicians in those new markets will feel compelled to erect higher trade barriers against Chinese goods to protect domestic industries.
Washington has so far added an extra 20 percentage points on existing tariffs for Chinese goods, with the latest 10-point increment enforced on Tuesday, drawing Beijing's retaliation.
"We worry that they will add another 10% and then another 10%," said Dave Fong, who manufactures school bags, talking teddy bears, stationery and consumer electronics in China. "That’s a big problem.”
China's 5% growth rate last year, which it only reached with a late stimulus push, was among the world's fastest, but it was hardly felt at street level.
While China runs a trillion dollar annual trade surplus, many of its people are complaining of unstable jobs and incomes as their employers cut prices - and business costs - to stay competitive abroad.
"Further expanding the trade surplus is no longer a good strategy, so we need to rely on internal demand for growth," said Andrew Xia, chief economist at Shangshan Capital Group.
($1 = 7.2651 Chinese yuan renminbi)
(Additional reporting by Liz Lee, Kevin Yao, Ethan Wang, Ellen Zhang, Joe Cash, Qiaoyi Li, Liangping Gao, Yukun Zhang, Ziyi Tang, Liam Mo and Yuhan Lin in Beijing and David Kirton in Shenzhen; Writing by Marius Zaharia; Editing by Kim Coghill and Shri Navaratnam)
