China raised its fiscal deficit target from 'around 3%' to 'around 4%' for the first time in 30 years. The funds secured through borrowing will be prioritized for domestic demand stimulation and industrial support. U.S. President Donald Trump's repeated tariff attacks on China have led to a shift in China's stance, which has been wary of expanding deficits. However, evaluations suggest this is insufficient for achieving the 'around 5%' growth that China aims for this year, and it is analyzed that this indicates a reserve of resources in preparation for an all-out trade war with the U.S.
Li Qiang, the Premier of the China State Council, noted on the 5th during the National People's Congress held at the Great Hall of the People in Beijing that the fiscal deficit ratio target for this year has been set at 'around 4%' of gross domestic product (GDP). This figure, adjusted upward by 1 percentage point from last year, is the highest level in 30 years since 1994. Bloomberg reported, "China, which has strived to keep the official fiscal deficit rate below 3% for decades, has crossed an unspoken 'red line.'" This year's projected deficit is expected to amount to 5.66 trillion yuan (approximately 1.13 quadrillion won), increasing by 1.6 trillion yuan (approximately 319.7 trillion won) from a year ago.
Raising the fiscal deficit ratio means that the government intends to spend more money. The influence of the trade war led by Trump has significantly prompted China to reach out to the market. According to the General Administration of Customs of China, last year, China's annual export growth rate (in yuan) recorded 7.1%, achieving an all-time high. The trade surplus surged by 21% from the previous year, reaching 7.06 trillion yuan. This contributed to achieving an overall economic growth rate of 5.0%. However, as Trump imposed an additional 20% tariff on Chinese imports twice from the 4th of last month to the 4th of this month, it has become increasingly difficult to rely on exports.
The next growth driver identified by China is domestic demand. The country aims to fully utilize the advantages of its massive market of 1.4 billion people. However, simply increasing the money supply is insufficient to benefit from domestic demand. According to China's National Bureau of Statistics, last year's retail sales totaled 48.3345 trillion yuan (approximately 966.45 trillion won), showing an increase of only 2.5% compared to the previous year. This is the lowest growth rate since 2022 (-0.3%). The drop in the consumer price index (CPI) target from 'around 3%' to 'around 2%' also reflects this demand slowdown. The Asia Society Policy Institute stated, "This implicitly acknowledges the sluggishness of domestic demand." Last year's CPI growth rate in China was only 0.2%.
The backdrop for setting a higher fiscal deficit target than during the COVID-19 pandemic period from 2020 to 2023 (2.8% to 3.8%) is notable. China plans to utilize this expanded fiscal deficit space to promote a virtuous cycle of consumption and investment. To expand consumption, it will introduce tax benefits and various policies and support technology innovation and upgrading in the manufacturing sector. It will strengthen investment and support for key national industrial innovation projects while also allocating resources for educational and scientific research innovation. Additionally, it plans to create 12 million new urban jobs, ensure employment stability, expand social welfare, and enhance healthcare insurance to create an environment where people can spend money more confidently.
However, there are evaluations that merely releasing the plans disclosed this time will not be sufficient to achieve the economic growth rate target of 'around 5%' that China has set for this year. Previously, organizations like the World Bank (WB - 4.5%), the Organization for Economic Cooperation and Development (OECD - 4.5%), and the International Monetary Fund (IMF - 4.6%) had projected China's economic growth rate for this year to be around 4%. Hui Shan, Chief Economist for Goldman Sachs in China, commented on the issuance amounts of special bonds set at 4.4 trillion yuan (approximately 879.8 trillion won) and 1.3 trillion yuan (approximately 259.9 trillion won) by local and central governments, calling them "disappointing levels" and stating, "For the growth rate target to be achieved, exports must deliver surprising results." The Financial Times also noted, "Specific stimulus measures like 300 billion yuan in subsidies for consumer goods transactions (replacing old products with new products) are smaller than expected."
There is also a perspective that China is conserving its ammunition. Because the U.S.-China trade war has only just begun, additional stimulus measures could be introduced depending on the situation. Last year, China continually faced calls for large-scale stimulus measures due to economic recession. However, it wasn't until the end of September, when the growth rate target became precarious, that a comprehensive package of fiscal and monetary policies was released. Larry Hu, Chief Economist for Macquarie in China, said, "March is too early to unveil major stimulus measures" and added, "More time is needed to confirm the actual impact of the trade war, and the Chinese leadership may be holding back its cards."