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China Plans Record Budget Deficit of 4% of GDP in 2025 to Counter Economic Headwinds

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China’s leaders have agreed to raise the budget deficit to 4% of GDP in 2025, the highest on record, while maintaining an economic growth target of around 5%, according to two sources familiar with the matter. This decision, aligned with a “more proactive” fiscal policy, emerged from last week’s Central Economic Work Conference (CEWC) and December’s Politburo meeting, although the targets remain unofficial.

The proposed increase in deficit, up from the 2024 target of 3%, translates to an additional 1.3 trillion yuan ($179.4 billion) in spending. A significant portion of this fiscal stimulus will be funded by issuing off-budget special bonds, the sources noted. These plans, which could still change, are typically announced officially during the annual parliament meeting in March.

The ramped-up fiscal measures aim to cushion China’s economy from challenges, including a severe property crisis, mounting local government debt, and weak consumer demand. Analysts also point to the anticipated U.S. tariff hikes under a Trump administration as a key risk, with levies expected to exceed 60% on Chinese imports.

China’s exporters, who ship over $400 billion worth of goods annually to the U.S., fear the tariffs could shrink profits, hurt job creation, and amplify economic woes. Analysts warn this could exacerbate industrial overcapacity and intensify deflationary pressures. Some manufacturers have already started relocating production abroad to sidestep trade penalties.

Fiscal Stimulus and Monetary Policy
The CEWC emphasized “steady economic growth” through increased fiscal spending and further issuance of government debt. China’s central bank is expected to adopt an “appropriately loose” monetary policy stance, replacing its 14-year-long “prudent” approach. This shift raises expectations for interest rate cuts and liquidity injections, signaling a dual focus on fiscal and monetary easing.

Morgan Stanley predicts a 2-trillion-yuan fiscal expansion, combining a modest increase in off-budget bonds and a wider deficit. Analysts suggest the 5% GDP target is more about guiding economic expectations and restoring business confidence than imposing a hard constraint.

Yuan Strategy
To mitigate the impact of U.S. tariffs, China may consider allowing the yuan to weaken in 2025, as reported last week. While this move could support exporters, China has reiterated its pledge to maintain the currency’s “basic stability at a reasonable and balanced level,” consistent with CEWC statements from previous years.

Facing external and domestic headwinds, China’s record fiscal expansion highlights its commitment to propping up growth and stabilizing the economy amid rising geopolitical uncertainties and structural challenges.

 

Alibaba Shares Rise 3% Following 58% Profit Surge in September Quarter

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Chinese e-commerce giant Alibaba reported a substantial 58% increase in net profit for the September quarter, outpacing market expectations. The strong earnings performance drove a 3% premarket surge in the company’s U.S.-listed shares, underscoring growing investor confidence.

Key Financial Highlights

  • Net Income: 43.9 billion Chinese yuan ($6.07 billion), significantly exceeding the forecasted 25.83 billion yuan (LSEG).
  • Revenue: 236.5 billion yuan ($32.72 billion), slightly below analyst projections of 238.9 billion yuan.
  • Share Performance: Alibaba’s New York-listed shares have gained nearly 17% year-to-date and climbed 3% in premarket trading following the earnings announcement.

Drivers of Growth

  • Cloud Business Acceleration: A key contributor to Alibaba’s improved profitability, reflecting the company’s diversification beyond traditional e-commerce.
  • Singles’ Day Success: The company reported strong gross merchandise volume (GMV) for its Taobao and Tmall platforms during the annual shopping event, along with a record number of active buyers.
  • Improved Retail Metrics: October retail sales in China rose 4.8% year-on-year, surpassing expectations and indicating a rebound in consumer spending.

Challenges in the Chinese Economy

Alibaba’s results come amid broader economic sluggishness in China, including a protracted real estate market slump and a tepid retail environment. However, recent government stimulus measures — including a five-year, 1.4-trillion-yuan package — aim to revive growth.

Market Outlook

  • Analysts are closely watching Alibaba as a barometer for China’s economic recovery. ING analysts noted that the company’s trajectory remains tightly linked to the broader Chinese economy and regulatory landscape.
  • With a focus on its cloud division and increasing consumer engagement through platforms like Taobao and Tmall, Alibaba appears well-positioned to leverage improvements in domestic economic conditions.

Conclusion

Alibaba’s strong September quarter performance highlights the resilience of its diversified business model, particularly in the cloud computing sector, and signals cautious optimism amid ongoing economic challenges in China. The company’s future growth will likely hinge on the effectiveness of government stimulus measures and the pace of recovery in consumer sentiment.

 

China’s Exporters Brace for U.S. Election Impact

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As the U.S. presidential election draws near, Chinese exporters are preparing for a potential shift in trade policies, particularly if Donald Trump returns to the White House. Mike Sagan, vice-president of supply chains at KidKraft, a toy-making company, plans to halve his China-based supply chain within a year if Trump wins, in response to the potential imposition of 60% tariffs on Chinese goods. This significant increase in tariffs is seen as a game-changer for many companies reliant on Chinese manufacturing.

Trump’s initial tariffs in 2018, which ranged from 7.5% to 25%, already prompted some firms, including KidKraft, to move production to countries like Vietnam and India. However, a new round of tariffs could further disrupt supply chains, leading to higher production costs and prices for U.S. consumers. Sagan notes that moving production outside of China is costly and comes with concerns over quality control, but the need to diversify supply chains is becoming urgent.

The sentiment is echoed by many other Chinese exporters. Of the 27 Chinese companies Reuters interviewed, 12 plan to accelerate relocation if Trump is re-elected, while others are considering opening overseas factories. Higher tariffs are expected to negatively impact Chinese exporters by shrinking profits, disrupting supply chains, and exacerbating the country’s ongoing economic challenges.

Matt Cole, co-founder of m.a.d Furniture Design, also expresses concern about the potential tariff increases. Though he hasn’t yet moved his production out of China, he is contemplating relocating to Southeast Asia if Trump wins. Cole’s hesitation stems from the fact that even after moving, many components would still need to be sourced from China, making the shift less cost-effective.

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Tariff Impact and Global Supply Chains

The 2018 tariffs, though beneficial for Southeast Asia as an assembly hub, did not significantly damage China’s overall economic growth or global manufacturing dominance. In fact, China has grown its share of global manufacturing as it redirected resources into factory production. However, the looming threat of 60% tariffs could have a more profound impact, especially on exporters operating with thin margins.

For instance, Zeng Zhaoliang, head of Guangzhou Liangsheng, which exports 30-40% of its cookers to the U.S., says a 60% tariff would be devastating. Many companies, like GL Wholesale, which has already lost 40% of its business since Trump’s presidency, are scouting alternative suppliers in countries like India and Vietnam. But even these regions are raising their prices, further complicating the situation.

The potential tariffs would not only hurt Chinese industries such as electric vehicles, solar panels, and batteries, but they also pose a risk to global supply chains. Trump’s aggressive stance on trade has caused Chinese companies to rethink their production strategies, with some opting to build factories overseas in anticipation of further global trade challenges.

China’s Response and Economic Outlook

Should Trump implement a new wave of tariffs, economists predict it could reduce Chinese economic growth by 0.4-0.7 percentage points in 2025 due to decreased investment and output cuts. In response, Beijing could deploy stimulus measures, export controls, or currency devaluation, but these steps carry their own risks, including debt accumulation and potential capital flight.

Most Chinese exporters hope Trump would moderate his stance on trade if he wins the presidency again. However, they acknowledge that further tariffs could severely impact their ability to operate. For instance, Yang Qiong, an executive at Chongqing Hybest Tools Group, states that her company would expand its facilities in Vietnam if Trump returns to office.

Experts warn that a second Trump term could disrupt China’s near-term economic growth and further challenge the global economic order that has benefited China. In contrast, Kamala Harris’s approach, while still expected to confront China on trade issues, is perceived as potentially less aggressive, allowing for a more measured response.

Conclusion

As the U.S. election nears, Chinese exporters are bracing for a potentially turbulent trade environment. While Trump’s return to power could lead to higher tariffs and significant supply chain shifts, a Harris presidency may offer a more tempered approach. Regardless, the prospect of further trade conflict underscores the need for companies to diversify their supply chains and adapt to an increasingly volatile global economic landscape.