China’s Finance Minister Lan Fo’an announced Thursday (March 6) that Beijing will adopt a more proactive fiscal policy this year, including raising its deficit-to-GDP ratio and issuing more government bonds, to spur economic growth amid sluggish domestic spending and escalating U.S.-China trade tensions.
The government has set the deficit-to-GDP ratio at around 4 percent and the deficit scale at 5.66 trillion yuan ($781.6 billion) – a 1.6 trillion yuan increase from the previous year and the highest in recent years, Lan told a press conference during the ongoing annual session of the National People’s Congress, the country’s top legislature.
The world’s second largest economy will issue 4.4 trillion yuan in new local government special bonds and 1.3 trillion yuan in ultra-long-term special bonds. Along with treasury bonds issued to cover the deficit, China’s total new government bond issuance this year will reach 11.86 trillion yuan, a 2.9 trillion yuan increase from last year.
The issuance will help finance the country’s public expenditure, which is estimated at 29.7 trillion yuan, a 4.4% increase from last year, in areas including education, healthcare, housing and payments to local governments.
When asked about last year’s 6-trillion-yuan plan to address local government debt pressures through structured debt swaps, Lan said the plan aimed at providing debt relief to replace “hidden debts” by swapping high-interest debts with lower-interest options.
The “hidden debts” is a form of off-budget borrowings through local government financing platforms, government investment funds, and other channels.
There will be stricter supervision, and the principle of not allowing new hidden debts remains an “ironclad rule,” Lan said.
Chinese officials expressed confidence in reaching the government’s 5% GDP growth target for 2025, set by Premier Li Qiang.
“No matter the difficulties, we will overcome them,” said Zheng Shanjie, head of China’s National Development and Reform Commission, citing China’s institutional advantages, market potential and a vibrant private sector.
Meanwhile, People’s Bank of China Governor Pan Gongsheng said the central bank will adjust the reserve requirement ratio and interest rates as needed based on domestic and global economic conditions, adding that the bank has “sufficient space and tools to maintain ample market liquidity.”
Analysts cast doubts
However, analysts told Voice of America (VOA) that the officials may be overly optimistic.
Wong Chin-Yoong, an economics professor at Malaysia’s Universiti Tunku Abdul Rahman, noted that China’s consumer price index grew just 0.2% last year — borderline deflation — indicating weak domestic demand.
The government should address problems such as falling housing prices and rising unemployment, which are not mentioned in the government work report, Wong said.
Raising the fiscal budget deficit ratio from 3% to 4% of GDP alone will not push inflation to the 2% target from the current 0.2% by the end of the year, demonstrating that Beijing hasn’t fully grasped the severity of the economic slowdown, Wong said.
While aiming to push inflation back up, the government report raised its unemployment forecast to 5.5% from 5.1%, contradicting economic principles, as inflation and unemployment typically have an inverse correlation, Wong said.
Kelvin Lam, senior China economist at London-based Pantheon Macroeconomics, said the bond issuance plans, both the scales and their purposes, fell short of expectations.
“The issuance of ultra-long-term special bonds was smaller than anticipated, a ‘surprise’ that doesn’t excite the market,” Lam told VOA. “Investors expected 2 to 3 trillion yuan, but the government announced just 1.3 trillion yuan.”
Most of these funds will likely go to strategic infrastructure, environmental projects, consumer goods replacement subsidies and industrial equipment upgrades — not resolving local government debts, Lam said.
While China’s net public sector borrowing in this year’s budget reflects a 2% GDP increase from last year, Lam warned that with exports contributing roughly 1.5% to China’s economic growth, any decline due to an escalation in the U.S.-China tariff war could render the current fiscal support insufficient.
Insufficient to address domestic weakness
He-Ling Shi, a professor at Monash University’s Business School, said that ultra-long-term special bonds essentially shift local government debts onto the central government — merely replacing old debts with new borrowing, rather than being used in stimulating consumer spending.
Western nations are cautious about issuing such long-term debts due to hedging risks and high costs, Shi said. However, Beijing can order state-owned banks and financial institutions to purchase these bonds, making the approach viable.
But this strategy could lead to misuse of funds and even corruption in local governments when the pressure to repay debts is alleviated.
“They’re kicking the can down the road, but it could create bigger problems later,” Shi said.
More critically, China’s biggest challenge is boosting consumption, yet the government has introduced no measures to address this issue, he said.
“The Chinese government has finally admitted that weak consumption is a major problem. Previously, they would never admit to deflation,” Shi told VOA. “Unfortunately its solution is way too simple and won’t fundamentally solve China’s weak long-term consumer demand. Yet, they boasted that this simple policy is a very smart one.”
Can China fight to the end?
U.S.-China trade tensions also dominated media attention in addition to domestic debt concerns.
Chinese Commerce Minister Wang Wentao condemned the U.S. for imposing additional tariffs on Chinese goods under the pretext of the fentanyl issue, calling it “shifting the blame.”
The minister accused Washington of “bullying” and violating World Trade Organization rules, warning that tariffs would hurt U.S.-China relations, disrupt global supply chains, hinder global economic growth, and ultimately harm American businesses and consumers.
“If the U.S. continues down the wrong path, China will fight to the end,” he said.
However, China cannot win a tariff war because its large trade surplus makes it more vulnerable to countermeasures, Shi said.
China’s tough response is “public messaging,” as Beijing had Chinese people believe that “China is the only strong nation capable of confronting the U.S,” Shi said. “China is merely putting on a show. In reality, it won’t directly confront Washington.”
Stating that “trade wars have no real winners,” Lam said that China’s best strategy is not retaliation. Currently Beijing remains restrained, suggesting it wants to avoid escalation and push the U.S. back to the negotiating table, he said.
While some argued that China is less equipped to counter U.S. tariffs than during U.S. President Donald Trump’s first term due to its slowing economy, Wong suggested that Beijing may now be in a stronger position after years of economic decoupling.
“Two-thirds of China’s trade surplus used to come from the U.S., highlighting the close economic ties between the two countries. Now, only one-third does, with the rest coming from the Global South,” he said. “This shows that China’s market has already shifted.”
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