Resident Senior Fellow
China’s overall macroeconomic policy stance is more supportive of short-and-medium term growth than at any time over the past decade, and is perhaps more robust than it has ever been since President Xi Jinping’s ascension to office.
China’s pivot from excess real estate investment-led growth to high-technology-intensive manufacturing-led growth is here to stay. In the leadership’s obsessive view of ‘new quality productive forces’, investment in technology-enabled growth will generate high-wage jobs and rising incomes that creates its own consumptive demand, as well as generates self-sufficiency in core technologies that will enable the country to surmount America’s technology chokehold.
The government has its ear close to the ground with bleak economic data leading to discernable shifts in the policy stance. Premier Li Qiang enjoys greater maneuvering space than his predecessor Li Keqiang had, and he has put this relative policy autonomy to use.
The fiscal side measures of China’s recent stimulus program are geared not so much towards stimulating consumption and boosting domestic demand as much as they are targeted, at least in the short term, at hitting the GDP growth target and derisking the government sector’s mammoth implicit debt load.
China’s leadership is failing to walk-the-talk on important fiscal framework and intergovernmental expenditure reassignment reforms that were announced at the Third Plenum, and which are critical to building out, both, a unified national market as well as a more balanced and dynamic economic structure.
At day’s end, it could be the failure to come to grips with macroeconomic challenges that are wholly within the realm of domestic economic policymaking, rather than the trade and technology war imposed by the United States, that may be determinative of China’s future economic prospects.
From March 4-11, China’s political establishment held its annual ‘Two Sessions’ meeting – the third session of the 14th National People’s Congress (NPC) and the third session of the 14th National Committee of the Chinese People’s Political Consultative Committee (CPPCC). On March 5, on the inaugural full day of the NPC session, China’s Premier Li Qiang delivered the 2025 Government Work Report (GWR), which reviewed economic developments in 2024 and set the government’s work plan and targets for 2025. The GDP target is set at “around 5%”, the same as last year, the budget deficit target is set at 4%, a full percentage point higher than last year, and the inflation target is set at 2%, a percentage point lower than last year in acknowledgement of the persistent deflationary pressures facing the economy. Targets were also announced for job creation, surveyed unemployment rate, grain output and a host of other indices. The ‘Two Sessions’ meeting followed on the heels of the December 11-12, 2024, annual Central Economic Work Conference (CEWC), which had set the broad outlines and priorities that fed into the 2025 GWR targets. And the December 2024 CEWC priorities were itself in keeping with the Resolution adopted at the Third Plenum of the 20th Central Committee of the CPC in July 2024 on ‘building a high-standard socialist market economy’.
Five important takeaways can be drawn regarding China’s near-and-medium term management of its economy from the emphases and outcomes across the three gatherings – the March 2025 Two Sessions meeting, the December 2024 CEWC, and the July 2024 Third Plenum.
Key Takeaway: China’s overall macroeconomic policy stance is more supportive of short-and-medium term growth than at any time over this past decade, and is perhaps more robust than it has ever been since President Xi’s ascension to office.
On September 26, 2024, the CPC Politburo finally flipped the stimulus switch, authorizing a staggered set of policy measures.
Monetary
Capital Market
Housing Market
At the Two Sessions Meeting in March, the government’s policy commitment to the September 2024 stimulus measures was reinforced. The central government’s budget deficit is set at 4% of GDP, entailing a projected 2025 expenditure increase to the tune of RMB1.6 trillion. As for the overall scale of government bond issuance, including a first batch of RMB500 billion of STB’s to replenish the core Tier 1 capital of large state-owned commercial banks, it is to increase by RMB2.9 trillion over last year’s totals. On the monetary front, meanwhile, a “moderately loose monetary policy” is to be adopted for the first time since 2011, when that policy stance was dropped following economic recovery in the aftermath of the global financial crisis.
Key Takeaway: China’s pivot from excess real estate investment-led growth to high-technology-intensive manufacturing-led growth is here to stay. In the leadership’s obsessive view, investment in technology-enabled growth will generate stable economic growth with high-wage jobs and rising incomes that creates its own consumptive demand, as well as generates self-sufficiency in core technologies that will enable the country to surmount America’s technology chokehold.
In Fall 2023, President Xi Jinping had coined the new buzzword ‘new quality productive forces’ to denote and emphasize China’s shift towards a more innovation and productivity-driven growth structure. Earlier that March at the Two Sessions meeting, the government had introduced a root-and-branch reorganization of the S&T policy sector to establish a “new innovation system” that was to be helmed by a new (Party) Central Science and Technology Commission (created at the 20th Party Congress in October 2022). The emphasis on support measures to foster tech breakthroughs, tech self-sufficiency, and industrial upgrading continues to permeate the government’s work program – despite being nominally listed as the #2 main task (after boosting consumption) in the 2025 GWR. Three financing mechanisms to be utilized to ramp up support for S&T innovation and upgrading are:
Key Takeaway: The government has its ear close to the ground and bleak economic data does lead to discernable shifts in the policy stance. Premier Li Qiang, furthermore, enjoys greater maneuvering space than his predecessor Li Keqiang had, and he has put this relative policy autonomy to use.
The decision on September 26, 2024, to overrule its own inclinations and inject a round of stimulus was the product of early 2024 third quarter data that showed the economy’s primary, and last remaining, domestic growth engine – fixed asset investment in industrial upgrading and high-tech manufacturing – losing steam. It was investment in manufacturing and infrastructure (plus net exports) that had essentially kept the economy afloat over the previous 12 months, compensating for the real estate sector’s drag on growth and consumption both in terms of construction and the provision of property-related services. With the early annualized growth rate number for the first three quarters of 2024 showing the economy falling short of the 5% target (it came in at 4.8%), the leadership pulled the trigger on stimulus.
Likewise, the disappointing 2023 second quarter numbers, when it had become clear that the post-COVID economic bounce-back was failing to materialize, was the trigger for the government’s earlier shift in policy stance. The rushed exit from the zero-Covid policy in December 2022 had led to a brief travel and consumption boom in early-2023 but which faded by mid-year as retrenchment in the property sector affected both investment and consumption. At the time, it was reasoned that rather than simply throw cheap stimulus money at the economy’s problem, a new reformist push was necessary, which in turn led to the initiation of a rolling set of business operating environment reforms during the second half of 2023. The key policy measures fell into three baskets:
Measure aimed at reigniting private sector (confidence and) investment
Measures aimed at optimizing the foreign investment environment
Measures aimed at relaxing data protection and data transfer restrictions
Key Takeaway: The fiscal side measures of China’s stimulus program are geared not so much towards stimulating consumption and boosting domestic demand as much as they are targeted, at least in the short term, at hitting the government’s GDP growth target and derisking the government sector’s mammoth implicit debt load.
The negative effects on consumption stemming from the downturn in the property sector continues to dominate China’s macroeconomic outcomes. Try as the government may, Chinese consumers remain tight-fisted in their spending patterns. “Expanding domestic demand in all directions” was the #1 priority at the December 2024 CEWC and, to this end, a number of measures were formalized at the Two Sessions meeting. The key proposed measures to support consumption in 2025 are:
The measures to put more money in consumers’ pockets are well-meaning and should not be dismissed off-hand. They will cushion consumer pocketbooks. That said, the government missed a golden opportunity at the Two Sessions meeting to strike a virtuous double blow towards building build out its transfer payments system to poorer households while simultaneously expediting one of the key reforms proposed in the July 2024 Third Plenum resolution – that being, the reassignment of intergovernmental expenditures with the central government bearing a greater share of expenditures on its books. With millions of poor rural retirees and migrant workers sitting at the base of China’s shallow three-tier basic pension and two-tier medical insurance pyramids, a material increase in central government-financed transfers – say, a doubling of pensions for rural and non-working urban residents from the meagre monthly RMB250 to RMB500 and exempting those above the age of 60 from medical insurance contributions – could have injected additional spending to the tune of almost 0.75% of GDP. Their marginal propensity to consume is higher than other groups and enhanced social protections could also play the role as a useful countercyclical consumption stabilizer. Instead, the pension payments and medical insurance subsidies are to rise by a mere RMB20 and RMB30 per person monthly, respectively.
More broadly, the top leadership appears more concerned with hitting its growth target and managing local government debt derisking than meaningfully reflating the economy and building out its demand side. Six consecutive quarters of nominal growth lagging real growth, symptomatic of deeply embedded deflationary pressures, should have been ground enough in Fall 2024 to inject aggressive stimulus to break the cycle of deflation and anchor inflationary expectations. In the event, while the September 2024 monetary policy loosening and capital market support-related measures were ambitious, the fiscal support measures, including expenditures outlined in the 2025 GWR, are underwhelming. They are primarily meant to pay down implicit debts so as to clear future balance sheet space of local governments to support consumption. Moreover, most of the funds are to be raised at the local government level (with central government blessing) rather than by the central government and transferred-on to the localities. Local government SPB issuance comes with self-financing requirements, i.e., the interest costs must be repaid from project revenues. Some of this funding will, no doubt, add to provinces’ debt burdens and might require a further central government bailout at some point, down the line.
Encouragement to local governments to hurtle into the venture capital space (as limited partners) as well as engage in inter-provincial competition on tax revenue growth (to promote ‘high quality development’) will do little to build-out the demand side of the economy either. And to the contrary, they could exacerbate the legacy problems of local protectionism, wasteful subsidies and excess capacity, and require yet another round of bailouts.
Key Takeaway: China’s leadership is failing to walk-the-talk on important fiscal framework and intergovernmental expenditure reassignment reforms that were announced at the Third Plenum, and which are critical to building out, both, a unified national market as well as a more balanced and dynamic economic structure.
Among the laundry list of 300 proposed reforms announced at the CPC Central Committee’s Third Plenum in July 2024, two measures related to China’s fiscal framework and inter-governmental relations stood out in particular. These were:
Both reforms are key to building out a more balanced and dynamic economic structure that is in tune with an advanced economy model that China aspires to construct.
With regard to placing more fiscal resources at the disposal of local governments, the Third Plenum Resolution had called for an “expan[sion of] the sources of tax revenue at the local level and grant[ing] greater authority for tax management to local governments.” The December 2024 CEWC readout had followed in this vein, calling for an “increase [in] local independent financial resources.” Expansion of the sources of tax revenue at the local level, such as a growth-friendly recurrent tax on immovable property, and the grant of greater autonomy for tax management will enable local governments to plug the structural revenue deficits that have pushed them to rely on opaque off-budget funding mechanisms as well as transition away from the land-based model of finance for urban development which is no longer sustainable after the property sector rout. The 2025 GWR however appears to have come up short in this regard. Substantively, it only provides for the collection of “excise taxes on some items further down the production-to-consumption chain, with the power of collection being passed to local governments.” Overall, excise taxes generate just over 10% of total tax revenues and are a much smaller component of central government general revenues compared to the value added tax and the corporate income tax. The extent to which the tax bolsters – or does not bolster – the independently available resources at the disposal of local governments will depend on how broad – or narrow – the (a) range of taxable items are, and (b) the transferred portion of the collections is.
Likewise, the Third Plenum Resolution had called for the reassignment of intergovernmental expenditures, with the central government bearing a greater share of expenditures, especially regarding transfer payments to households. The December 2024 CEWC readout had followed in this vein, calling for raising the basic pension of retirees and vulnerable populations as well as increasing the level of financial subsidies for basic medical insurance for urban and rural residents. Economists have long championed the case for the central government rather than cash-strapped provinces to bear a greater share of these transfer payments and to augment these transfers – if need be, by issuing general bonds given the ample fiscal headroom – so as to strengthen social protections and reduce households’ propensity for excess savings. Social insurance expenditures are best covered at the central government level, as is the case in advanced economies. In the event, and as noted earlier, the central government’s additional coverage is slated to rise by a mere fraction (RMB20 for pensioners and RMB30 for medical insurance) and will do little in terms of expenditure reassignment or boosting social protections and the consumptive capabilities of the vast majority of China’s poorer citizenry.
China’s post-Covid macroeconomic policy trajectory has broadly been one of gradual but deepening pro-market reform measures. The scale of retrenchment in the property sector and the disinflationary forces unleashed, has also impelled the top leadership to step out of its comfort zone and inject a welcome round of stimulus. Skewed as the package is towards various non-fiscal instruments to support growth, stimulus must not become an enduring feature of policymaking. Structural reform, rather, must pick up the slack, especially once the economy regains its growth momentum in 2025. On this reform front, particularly with regard to fiscal mechanisms – be it redistributive transfers to reduce inequality and boost consumption, streamlining subsidies and leveling the playing field for private enterprises, or improving the structure of government expenditure including their reassignment across the center and provinces, etc., – the government continues to make heavy weather of the task. Key Third Plenum reforms have been slow to launch. And deeper-seated challenges, such as placing pension finances on a sounder footing, aligning consolidated budget deficits with fiscal capacity, transitioning to an advanced economy revenue structure based predominantly on direct individual taxes, and imposing a hard budget constraint on government finances and more broadly within the financial sector, have not even begun to be broached.
At the end of the day, it is not the trade and technology war imposed by the United States that will be determinative of China’s future economic prospects. With effort, the country will surmount these challenges. Rather, it will be the failure to come to grips with macroeconomic challenges that are wholly within the realm of domestic economic policymaking, and which touch substantially on the health and solvency of the government sector, that could prove debilitating in the longer term.
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