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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.

 

China Flags More Fiscal Stimulus for Economy, Leaves Out Key Details on Size

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China announced plans to “significantly increase” debt to revive its economy, but withheld crucial information regarding the overall size of the stimulus package. This leaves investors uncertain about how long the recent stock market rally will last. At a press conference on Saturday, Finance Minister Lan Foan detailed measures aimed at alleviating local government debt, offering subsidies to low-income citizens, supporting the struggling property market, and replenishing state banks’ capital. However, no specific figures were provided.

Investors have been eagerly awaiting more aggressive action as the world’s second-largest economy faces mounting deflationary pressures, low consumer confidence, and a sharp property market downturn. The absence of a specific monetary figure for the stimulus prolongs market uncertainty. Economists and analysts are especially concerned as economic data in recent months has consistently underperformed, raising fears that China’s 2024 growth target of approximately 5% may be difficult to achieve.

Lack of Details Raises Investor Concerns

While Lan emphasized the government’s resolve to tackle the economy’s challenges, the lack of detailed numbers frustrated investors hoping for a comprehensive stimulus package to sustain the recent market rally. “The big bang fiscal stimulus that investors were hoping for… did not come through,” said Vasu Menon, managing director for investment strategy at OCBC in Singapore. The rally in Chinese stocks, which saw a 25% surge after the September Politburo meeting, has since slowed, and concerns about the absence of policy clarity are growing.

China’s property market remains a key issue, with falling demand and heavy debts hanging over local governments. In September, Reuters reported that China plans to issue special sovereign bonds worth around 2 trillion yuan ($284.43 billion), with half of the funds directed at local governments and the other half toward consumer subsidies and household benefits, such as an allowance of 800 yuan ($114) per child for families with two or more children. Meanwhile, Bloomberg reported China is considering injecting 1 trillion yuan of capital into state banks to stimulate lending, though demand for credit remains weak.

Central Bank Interventions and Structural Issues

The People’s Bank of China has already introduced its most aggressive monetary measures since the COVID-19 pandemic, including rate cuts and a liquidity injection of 1 trillion yuan. These measures have lifted market sentiment somewhat, but analysts argue that China needs more profound reforms to boost consumption and shift away from its reliance on debt-driven infrastructure investment.

Despite years of pledges to increase domestic consumption, household spending remains weak. Currently, consumption accounts for less than 40% of China’s annual GDP, significantly below the global average, while investment remains far higher than global norms. These imbalances highlight the need for structural reforms in policies and institutions if China is to achieve sustainable growth.

Lan’s press conference did little to quell concerns, with analysts warning that without targeted measures to boost demand and investment, China may struggle to ease deflationary pressures. “There is still relatively big room for China to issue debt and increase the fiscal deficit,” Lan said, noting that local governments have 2.3 trillion yuan left to spend in the final quarter of the year. However, deeper reforms are expected to be announced gradually.

Uncertain Path Forward

As markets await more concrete details, global investors are left speculating on China’s next moves. The upcoming meeting of China’s National People’s Congress, which is expected to approve additional debt issuance, may finally provide clarity. Until then, volatility in Chinese markets and global commodity prices is likely to continue, as investors try to gauge the impact of China’s fiscal policies.

China’s Industrial Profits Plunge in August, Deepening Economic Woes

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China’s industrial profits faced their steepest decline this year, contracting sharply by 17.8% in August after a brief recovery of 4.1% in July, according to the National Bureau of Statistics (NBS). This marks the biggest monthly slump in 2023, reflecting mounting economic pressures as business activity continues to slow. For the first eight months of the year, earnings grew by a mere 0.5%, compared to the 3.6% growth seen in the January-July period.

The NBS attributed the downturn to several factors, including weak market demand, the adverse effects of natural disasters like high temperatures, heavy rainfall, and floods, and a high statistical base from last year. Particularly impacted were the automobile and equipment manufacturing industries, contributing to the sharp contraction in profits.

According to Zhou Maohua, a macroeconomic researcher at China Everbright Bank, this slump underscores a growing imbalance in China’s economic recovery, exacerbated by weak domestic demand. The sluggish industrial performance is compounded by broader economic concerns, including uncertainty over job security, a faltering property market, and declining investment.

Earlier data in September highlighted weak consumer demand, which remains a significant bottleneck for the economy. Inner Mongolia Yili Industrial Group Co, a leading domestic dairy company, reported a 40% drop in net profit for the second quarter, underscoring the challenges businesses face in an increasingly cautious market environment. NBS spokesperson Wei Ning echoed these concerns, citing the complexity and volatility of external factors further clouding the economic outlook.

In an effort to revive the economy, China’s central bank introduced the most aggressive stimulus package since the pandemic, including a 50 basis point reduction in banks’ reserve requirements. However, analysts warn that more extensive fiscal support will be necessary to restore confidence and stimulate demand.

Chinese leaders responded with a pledge of “necessary fiscal spending” to meet the country’s growth target of 5% for 2024, which analysts have downgraded below the official forecast. A major component of this fiscal stimulus includes the issuance of $284 billion in sovereign debt, some of which will be used to provide a monthly allowance of $114 per child to families with two or more children, in a bid to boost household spending.

Despite these efforts, industrial sectors remain strained. State-owned firms saw profits decline by 1.3% from January to August, while foreign-owned enterprises recorded a modest 6.9% rise. Private companies fared slightly better, posting a 2.6% increase over the same period.

The NBS data tracks companies with annual revenues of at least 20 million yuan ($2.83 million) from their main operations, signaling that even larger firms are not immune to the broader economic challenges gripping China.