Xi prepares to unveil China stimulus plan as trade war heats up

Xi Jinping, China's president, during a news conference with Luiz Inacio Lula da Silva, Brazil's president, not pictured, at the Alvorada Palace in Brasilia, Brazil, on Wednesday, Nov. 20, 2024. In roughly a dozen meetings with world leaders over a week in South America, Xi repeatedly sought to win assurances that nations would uphold the international free trade system as US President-elect Donald Trump threatens to put 60% tariffs on Chinese goods.

President Xi Jinping heads into China’s biggest political huddle of the year with his economy finally getting back some swagger. Donald Trump’s rising tariffs will test Beijing’s ability to sustain that momentum.

Breakthroughs in artificial intelligence and Xi’s recent embrace of private entrepreneurs such as Alibaba’s Jack Ma have driven a blistering equity rally ahead of the National People’s Congress. But that optimism is already being tainted, with Trump’s latest 10% tariff set to take effect just one day before Premier Li Qiang lays out China’s economic blueprint for the year.

Thousands of delegates including ministry chiefs and provincial leaders will gather Wednesday in Beijing for the parliamentary conclave, where officials will set a bullish growth goal of around 5%, according to most analysts surveyed by Bloomberg.

To get there, policymakers are expected to push China’s official budget deficit target to the highest in over three decades, pumping trillions of yuan into a system battling deflation, a property crash and now a trade war with the US.

Almost two months into Trump’s new presidency, the world’s largest economies are on a collision course that makes it increasingly urgent for the Communist Party to unleash the spending power of its population. Unlike last year, there’s little chance Beijing can bank on a boom in exports, and leaders have instead vowed to prioritize expanding domestic demand.

China is poised to change its policy “quite a lot” this year, said Yao Yang, a professor of economics at Peking University, who cautioned the measures still might not be sufficiently bold.

“My first worry is the fiscal stimulus isn’t big enough, particularly when we consider local government debt,” he said. “Secondly, if China and the US cannot negotiate a settlement, the American government probably will increase tariffs. Then we are going to get into a tit-for-tat war. That’s going to be very bad.”

Currency traders are watching closely for stimulus details as authorities have been focusing more on keeping the yuan stable than on easing policy. The People’s Bank of China has consistently set the fixing rate above 7.2 per dollar, pushing back against speculation that China might devalue its currency to offset economic losses from the trade war.

What Bloomberg Economics Says ...

“The trade war will no doubt be high on the agenda behind closed doors at the NPC. With the latest tariffs landing just one day before the NPC opens, China’s budget stance is unlikely to shift immediately. But with external pressures increasing, policymakers could accelerate the delivery of the stimulus.”

— Chang Shu, chief Asia economist.

Clocking the same growth rate this year while grappling with those challenges will require greater fiscal expenditure, given US tariffs could stall China’s export engine. Analysts including Nomura Holdings Inc.’s Lu Ting forecast export gains will grind to a halt after a nearly 6% rise in 2024.

That means the government will have to ramp up its own investment and encourage businesses and households to spend to pick up the slack. A key gauge to watch for the magnitude of this year’s stimulus will be the expansion of the government deficit.

Authorities will lift this year’s official budget deficit target to around 4% of gross domestic product from 3% in 2024, according to the median projection in the Bloomberg survey of economists. The augmented deficit — a broad measure of the fiscal gap — will reach around 12 trillion yuan, it showed.

That should be just enough to achieve GDP growth of around 5%, which most analysts estimate requires an increase of 3-4 trillion yuan in broad deficit.

The package envisaged by economists polled by Bloomberg will feature a 2 trillion-yuan quota for new special sovereign bonds — double last year’s volume — and up to 4 trillion yuan worth of new special local government bonds. These estimates exclude borrowing to pay back hidden debt.

China’s sovereign bonds sold off last month amid improving sentiment toward equities and traders trimming expectations for monetary easing in the short term. The 10-year government yield bounced off a record low to hit its highest since December.

Treading Carefully

The fiscal parameters set at the NPC should leave open the possibility of top-ups later in the year, with Beijing likely to start by favoring a measured approach as it navigates the uncertainty unleashed by Trump. Another reason for the government’s caution could be the legacy of costly cleanups it’s undertaken to contain local debt risks and rein in asset bubbles.

“The amount of the augmented deficit has to be adjusted in a dynamic and precise manner,” said Yuan Haixia, executive director of the research institute at China Chengxin International Credit Rating, who attended an economic seminar held by Premier Li in 2023.

“China should also save some scope and backup tools to handle foreign trade risks given Trump’s unpredictable and capricious trade policy,” said Yuan.

Another closely watched number at this year’s conclave will be the annual inflation goal, as China approaches its longest streak of deflation since the Mao Zedong era. Most economists expect that figure to be lowered to 2%, which would mark the first time in over two decades it’s been reduced below 3%.

After analysts in China were advised to avoid discussing sensitive terms including “deflation,” such a decision would signal Chinese leaders are adjusting to the reality of subdued prices and could result in greater efforts to heat up demand.

The Chinese leader has a delicate balancing act to maintain in providing the right dose of stimulus to hit the growth target while ensuring aid goes to the parts of the economy that need it most.

The success of AI chatbot DeepSeek is among the recent tech feats that may ensure the focus of officials stays on a push toward self-sufficiency and a growth model centered around high-tech manufacturing, with Morgan Stanley expecting only a third of the stimulus to go toward consumption.

AI will start raising China’s potential growth by 2026 as adoption gains speed, according to Goldman Sachs. The technology will lift annual expansion by as much as 0.3 percentage points by 2030, triple its estimate before DeepSeek’s emergence, although the country will have to manage the pace of labor replacement carefully.

Household spending has been stubbornly weak as China’s real estate slump weighs down confidence and the income and job outlook remains bleak.

Consumption’s contribution to GDP growth fell under 45% last year, the lowest since 2006 excluding the pandemic year of 2020, despite an unprecedented policy to subsidize a consumer trade-in program with special sovereign bond issuance.

Stopping that decline will be crucial as leaders try to insulate the world’s No. 2 economy from a trade war with its top rival.

While Trump increases the short-term risks for China, in the longer run “favorable conditions are growing,” said Xu Qiyuan, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

“China is facing both challenges and opportunities at this point,” he added. “What matters is not which of them outweighs the other, but how we will deal with them.”