The head of the People’s Republic of China, Xi Jinping, is gradually approaching one of the main political huddles of the current year against a favorable background based on the gradual improvement of the situation in the economic system of the Asian country.
China’s economy is gaining momentum, but the increase in tariffs on Chinese goods imported by the United States will be a serious test. In this case, Beijing will have to demonstrate its ability to maintain the upward dynamic of gross domestic product (GDP) growth.
The breakthroughs in China’s artificial intelligence industry and Xi Jinping’s embrace of private entrepreneurs such as Alibaba’s Jack Ma have formed a platform of sorts for enthusiasm for the Asian country’s economic prospects ahead of the National People’s Congress. However, this optimism has already weakened. The day before Chinese Premier Li Qiang lays out the Asian country’s economic blueprint for the year, the latest 10% tariff on goods shipped from China to the United States will take effect. The decision on the corresponding measure to tighten Washington’s trade policy was made by US President Donald Trump.
On Wednesday, March 5, thousands of delegates will gather in Beijing for the parliamentary conclave, including heads of ministries and provinces of the Asian country. Most analysts polled by the media expect that on Wednesday, officials will set the official growth target for China’s economy at around 5%.
Among the experts interviewed by the journalists, the dominant view is that to achieve the mentioned goal, the policymakers to push the official budget deficit target of the Asian country to the highest level in the last three decades. In this case, it is envisaged that China will pump trillions of yuan into a system to combat deflation, measures to counteract the negative effects of the collapse of the real estate market, and efforts related to the trade war between Beijing and Washington.
About a month and a half after Donald Trump’s inauguration, the economies of the Asian country and the United States, which are the largest in the world, are on a collision course. Against this background, there is a growing need for Beijing to increase China’s population spending power. Currently, the Asian country has fewer objective reasons to rely on exports, which were actually the main driving force of economic growth last year. It is obvious that Washington’s tightening trade policy is forming a less favorable environment for the mentioned activities. Against this background, China’s leaders vowed to prioritize expanding domestic demand.
Yao Yang, a professor of economics at Peking University, said that the Asian country is poised to change its policy quite a lot in the current year. At the same time, the expert noted that the measures may still not be bold enough. Yao Yang stated that one of the reasons for worry is that fiscal incentives are not large enough, especially when considering the local government debt. It was also noted that if Beijing and Washington could not agree on a settlement, the United States government would probably raise tariffs, which would mean a tit-for-tat trade war. Yao Yang assesses the relevant scenario as very bad.
Currency traders are closely monitoring the details of Beijing’s stimulus measures. This is because, as noted by the media, the authorities of the Asian country are more focused on maintaining the stability of the yuan than on easing policy. The People’s Bank of China has consistently set a fixed exchange rate above 7.2 per dollar. These actions by the financial regulator refute suggestions that the Asian country may devalue its currency to offset economic losses from the expected trade war, which, according to most experts, is an inevitable reality.
With the highest probability, the trade war will be one of the main components of the agenda behind the scenes of the parliamentary conclave scheduled for Wednesday. Given that the US tariff will take effect the day before the National People’s Congress, Beijing’s position on the budget is unlikely to change quickly. At the same time, increased external pressure, which generally corresponds to the paradigm of the recent growth in geopolitical tensions, can be perceived by the Chinese authorities as a sufficient argument in favor of accelerated delivery of stimulus measures. In a sense, Beijing is faced with a narrowing of the space of choice in the context of actions to ensure economic growth.
It will be difficult for China to maintain the previous pace of the upward dynamic of GDP while actively responding to the current challenges. It is theoretically possible to rely on exports as a driving force for growth in the context of the tightening of the United States trade policy, but in a practical sense, it will most likely be an action with minimal results that do not have a significant impact on the overall situation. Washington’s tariffs may become something like a paralyzing factor for Chinese exports. Analysts, including Nomura Holdings Inc.’s Lu Ting, predict that the growth of the mentioned shipments will stop after an almost 6% increase last year. This means that, most likely, the Chinese government will have to ramp up its own investments and encourage businesses and households to spend to pick up the slack.
David Li Daokui, an economics professor at Tsinghua University and a regular adviser on policy to Beijing, stated the way to deal with tariffs is the same as to deal with other issues in China’s economy, that is, to boost domestic consumption. The expert also noted that more policies to spur consumer spending will be implemented down the road. David Li Daokui also expects the Chinese government to combat the glut of production in sectors such as electric vehicles. According to the expert, in this case, one of the methods of action may be making new entrants buy a license from existing enterprises. It was noted that this would help to cope with the price war, which provokes deflation and puts pressure on the labor market.
The main gauge of the scale of Beijing’s stimulus measures in the current year will be the expansion of the government deficit. The average forecast of experts interviewed by the media predicts that in 2025, the Chinese authorities will raise the official budget deficit target to about 4% of GDP. It’s worth noting that last year, this figure was 3%. The increased deficit, a broad measure of the fiscal gap, is expected to reach approximately 12 trillion yuan. This should be enough to achieve GDP growth of about 5%. According to estimates by most analysts interviewed by media representatives, the mentioned result requires an increase in the broad deficit by 3 trillion to 4 trillion yuan.
According to experts surveyed by reporters, the Chinese authorities’ package of measures will include a quota for new special sovereign bonds worth 2 trillion yuan, which is twice as much as last year, and new special local government bonds worth up to 4 trillion yuan. It is worth noting that these estimates do not take into account borrowings to pay back hidden debt.
China’s sovereign bonds sold off last month amid improving sentiment towards stocks. It is also worth noting that traders have lowered expectations of monetary easing by the central bank of the Asian country in the short term. The yield on 10-year government bonds bounced off a record low and reached its highest level since December.
The fiscal parameters set at the National People’s Congress should leave open the possibility of top-ups later in the current year. It is highly likely that Beijing will initially begin to act within the framework of a measured approach, since there is currently considerable uncertainty related to Washington’s policies, despite the fact that specific measures have already been officially stated. Another reason for the Chinese government’s caution may be a kind of legacy of costly cleanups undertaken to contain local debt risks and rein in asset bubbles.
Yuan Haixia, executive director of the research institute at China Chengxin International Credit Rating, said that the size of the increasing deficit should be adjusted in a dynamic and precise manner. The expert also noted that Beijing should save some scop and backup tools to handle foreign trade risks, given the unpredictable and capricious trade policy of Donald Trump.
It is also highly likely that the parliamentary conclave will pay special attention to the annual inflation target. In this context, it is worth noting separately that, according to media reports, China is approaching the longest streak of deflation since the time of Mao Zedong. The majority of economists polled by journalists expect that the mentioned figure will be lowered to 2%. If the corresponding assumption turns out to be correct, then the annual inflation target will be below 3% for the first time in the last two decades. Such a decision would signal that Beijing is beginning to adjust to the reality of subdued prices. Also, the mentioned solution could result in greater efforts to heat up demand.
The Chinese authorities currently have a delicate balancing act to maintain the right portion of incentives to achieve growth targets and provide aid to those sectors of the economy that need it most.
The success of DeepSeek’s artificial intelligence-powered chatbot could potentially be interpreted by China’s officials as an argument in favor of focusing on a model of economic growth based on high-tech manufacturing. In this context, it is worth noting that Beijing has recently been increasingly asserting the importance and necessity of technological sovereignty at the level of official rhetoric. It is worth mentioning that this is a logical position in the context of geopolitical tensions, which already have consequences in the form of restrictive measures in the economy in general and in production in particular. The United States and some of its allies have restricted the export of advanced chips and equipment for making microcircuits of the appropriate category to China. At the same time, chips are necessary for training and ensuring the subsequent functioning of artificial intelligence systems. Microcircuits are also currently used in almost all technology-based products, including smartphones and cars.
Goldman Sachs predicts that artificial intelligence will start contributing to China’s economic growth by 2026. AI is also expected to increase annual GDP by as much as 0.3% by 2030. Before the emergence of DeepSeek, the corresponding forecasts were more moderate.
The boom in emerging industries is well aligned with the Chinese authorities’ plan to wean the economy off the reliance on property and infrastructure development for growth. At the same time, Beijing is showing increasing caution about the potential waste of investments in the mentioned industries to curb overly fierce competition, which is weighing down prices.
Household spending in China remains at a low level. This situation is largely because the crisis in the Asian country’s real estate sector is having a negative impact on confidence. Also in China, the outlook for incomes and job outlook continues to be gloomy.
Consumption contributed less than 45% to the Asian country’s GDP growth last year. This indicator is the lowest since 2006, except for 2020, when the economic situation worsened amid the coronavirus pandemic.
Beijing is clearly striving to minimize the consequences of the expected trade war with Washington. It is unlikely that it will be possible to completely avoid the impact of the expected confrontation between the two largest economic systems in the world.
Xu Qiyuan, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said that while Donald Trump is increasing short-term risks for China, long-term favorable conditions are growing. In this context, it was noted that the Asian country is currently facing both challenges and opportunities, and what matters is not what outweighs, but how to deal with it. China does have significant potential to cope with the circumstances of the current reality, but such statements are more a description of theoretical probabilities rather than practical inevitability.
As we have reported earlier, China’s Tech Stocks Demonstrate Growth.
