Chinese leaders agreed last week to raise the budget deficit to 4% of gross domestic product (GDP) next year, its highest on record, while maintaining an economic growth target of around 5%, two sources with knowledge of the matter said.
The new deficit plan compares with an initial target of 3% of GDP for 2024, and is in line with a “more proactive” fiscal policy outlined by leading officials after December’s Politburo meeting and last week’s Central Economic Work Conference (CEWC), where the targets were agreed but not officially announced.
More Stimulus, Growth Target Unchanged
The additional one percentage point of GDP in spending amounts to about 1.3 trillion yuan ($179.4 billion). More stimulus will be funded through issuing off-budget special bonds, said the two sources, who requested anonymity as they were not authorised to speak to the media.
These targets are usually not announced officially until an annual parliament meeting in March. They could still change before the legislative session.
The stronger fiscal impulse planned for next year forms part of China’s preparations to counter the impact of an expected increase in U.S. tariffs on Chinese imports as Donald Trump returns to the White House in January.
The two sources said China will maintain an unchanged GDP growth target of around 5% in 2025.
A state media summary of the closed-door CEWC said it was “necessary to maintain steady economic growth”, raise the fiscal deficit ratio and issue more government debt next year, but did not mention specific numbers.
Reuters reported last month that government advisers had recommended Beijing not to lower its growth target.
Wider Budget Gap to Counter US Tariffs
The world’s second-largest economy has stuttered this year due to a severe property crisis, high local government debt and weak consumer demand. Exports, one of the few bright spots, could soon face U.S. tariffs in excess of 60% if Trump delivers on his campaign pledges.
The U.S. President-elect’s threats have rattled China’s industrial complex, which sells goods worth more than $400 billion annually to the United States. Many manufacturers have been shifting production abroad to escape tariffs.
Exporters say the levies will further shrink profits, hurting jobs, investment and economic growth in the process. They would also exacerbate China’s industrial overcapacity and deflationary pressures, analysts said.
The summaries of the CEWC and the Politburo meetings also flagged that China’s central bank would switch to an “appropriately loose” monetary policy stance, raising expectations of more interest rate cuts and liquidity injections.
Bracing for Tariff Impacts
The previous “prudent” stance that the central bank had held for the past 14 years coincided with overall debt – including that of the government, households and companies – jumping more than five times. The economy expanded roughly three times over the same period.
China is likely to rely heavily on fiscal stimulus next year, analysts say, but could also use other tools to cushion the impact of tariffs.
Reuters reported last week, citing sources, that China’s top leaders and policymakers are considering allowing the yuan to weaken next year to mitigate the impact of punitive trade measures.
The CEWC summary kept a pledge to “maintain the basic stability of the exchange rate at a reasonable and balanced level”. Readouts from 2022 and 2023 also included this line.
(With inputs from Reuters)
