Introduction
Following the 2008 global financial crisis, China successfully recovered with bold stimulus measures. However, since then, the Chinese government has maintained generally neutral macroeconomic policies. To achieve its 2025 growth target, China must shift from this approach.
Current Economic Landscape
Two primary indicators determine whether a government should implement expansionary or contractionary policies: economic growth (or employment rates) and inflation. With weak growth and low inflation, China currently requires expansionary policies. The Producer Price Index (PPI) has been negative for most of the past 13 years, and the Consumer Price Index (CPI) average annual inflation has been minimal (0.2% in 2024). Meanwhile, the GDP growth rate has dropped from 10.6% in 2010 to 5% the previous year.
Government Hesitation
The Chinese government has been hesitant to adopt expansionary fiscal policies due to concerns about worsening the fiscal situation. By the end of 2023, China’s debt-to-GDP ratio approached 61%, and the “debt-to-GDP increased” ratio (including local government financing tools) reached nearly 117%. Although these levels are low compared to most developed economies, they are high for China’s standards. Consequently, the government is reluctant to raise the fiscal deficit-to-GDP ratio above 3%.
Policy Shift
However, by the end of 2024, China’s finance ministry acknowledged that the central government has “considerable room” for debt issuance and increasing fiscal deficit, marking a significant change from previous rhetoric. High-ranking Communist Party of China (CPC) officials committed to strengthening countercyclical adjustments in fiscal and monetary policies, deploying necessary fiscal spending to meet growth targets.
Shifting Priorities
Many in China have shifted their focus from economic growth to eliminating excess capacity, fearing that another round of stimulus (with increased investment) might hinder their goal. However, excess capacity is a structural issue that requires market-based mechanisms for resolution, though some supportive policies may also be helpful.
Growth Target Challenges
Despite the importance of GDP growth, achieving the 5% growth target for this year will be challenging. A significant portion (1.5 percentage points in 2024) of this growth comes from net exports, which is likely to be negatively affected by ongoing trade tensions with the US.
Export and Consumption Concerns
While the US General Administration of Customs reported a 50% annual growth in net exports in Q1 2025, this is a temporary phenomenon due to US importers stockpiling Chinese products before tariff increases. A drastic reduction in this indicator throughout the year could subtract at least one percentage point from Chinese GDP growth, according to some estimates.
Consumption and Growth
Household consumption is a function of income, expected income, and wealth. The slowing growth in income, falling housing prices, and stock market volatility make it difficult to boost domestic consumption needed to drive aggregate demand.
Growth Components
Based on available data, I estimate that by the end of 2024, final consumption accounted for 56.2% of GDP, and net exports contributed 3.4%. If retail sales of social consumer goods (a proxy for final consumption) grew 4.6% in Q1 2025, it’s reasonable to assume that combined final consumption and net exports will contribute around 2.8 percentage points to Chinese GDP growth this year.
Capital Formation and Growth
To reach the 5% growth target, capital formation (40.4% of GDP in 2024) must contribute 2.2 percentage points, requiring a 5.4% growth rate this year. Given the lack of direct data, we can use fixed asset investment as a substitute for capital formation, comprising industrial investment (48.3% in 2024), real estate investment (19.5%), and infrastructure investment (32.2%).
Investment Growth
Industrial investment grew 9.2% in 2024, while real estate investment declined 10.6%. If industrial investment maintains its growth rate (9.2%) and real estate investment slows its decline (-0.5%) in 2025, they will collectively contribute 3.5 percentage points to total fixed asset investment.
Infrastructure Investment
To achieve 5.4% growth in fixed asset investment, infrastructure investment must grow by 6%, a substantial increase compared to 2024’s rate (4.2% in Q1). Although these are approximate figures due to insufficient data, they illustrate China’s challenge: achieving a significant acceleration in infrastructure investment growth, primarily through increased public bond issuance.
Promising Signs
China aims for a fiscal deficit-to-GDP ratio close to 4% by 2025, the highest since the 2008 financial crisis. However, the planned expansion by the Chinese government is likely insufficient to achieve 5% growth; more substantial efforts are required.
Key Questions and Answers
- Q: Why has China been hesitant to adopt expansionary fiscal policies?
A: The Chinese government has been concerned about worsening its fiscal situation, with the debt-to-GDP ratio approaching 61% by the end of 2023.
- Q: What are the current growth target challenges for China?
A: Achieving the 5% growth target is challenging due to weak export growth amid US trade tensions and the need for increased domestic consumption.
- Q: How can China accelerate its infrastructure investment growth?
A: A significant increase in public bond issuance is essential to achieve the required growth rate in infrastructure investment.
