SUMMARY
- We anticipate China’s 2025 fiscal stimulus will be around 0.5% of GDP in a baseline scenario without major US-China tariff escalation (such as if Harris wins the US election); this modest stimulus push would result in projected nominal GDP growth of around 4% next year, with China’s economy recovery remaining subdued and under deflationary pressure
- If Trump wins the election, the National People’s Congress Standing Committee may look to shore up confidence by frontloading 2025 debt issuance when it meets on November 8; however, Beijing’s economic response to Trump will not come until the March 2025 annual National People’s Congress, when Beijing has more time to gauge whether Trump is headed for major tariff escalation
- Beijing’s 2025 fiscal support package would increase in size to respond to rising tariffs but only enough to partially offset the growth impact of a renewed trade war
News on China’s coming fiscal package has been closely followed by investors. In this note, we aim to put the size of China’s likely fiscal stimulus into perspective, with a focus on its implications for China’s 2025 growth. US elections are the wild card for our analysis and for China’s policymakers.
What we expect in the overall 2025 fiscal package
To set an initial baseline, our forecast first leaves aside a scenario of major tariff escalation in 2025 under a Trump administration, which we examine further below.
In the baseline scenario we assume that the Chinese government (including both central and local authorities) will run a 11.4 trillion yuan total fiscal deficit in 2025. The composition is: a 5.4 trillion yuan official budget deficit (4% of GDP), 2 trillion yuan in issuance of special central government bonds (which is not included in the official budget), and 4 trillion yuan of local government special bonds for stimulus spending (not including an additional amount to be spent on debt refinancing).
Our expectations for the central government fiscal deficit are broadly consistent with recent media reports. Caixin, Bloomberg, and Reuters have all cited an expectation of 6 trillion yuan in central government special bond issuance over three years, or 2 trillion yuan per year.
Expectations for local government special bond issuance are more varied and are complicated by the fact that many of the figures cited in the media include amounts to be spent on refinancing local government debt, which we do not consider direct stimulus. We expect local debt refinancing of around 4 trillion yuan primarily funded by local government bonds.
What it means in terms of stimulus
Although the 11+ trillion yuan deficit figure looks impressive, it will not contribute very much to growth. By our estimate, the 2025 fiscal stimulus will be around 0.5% of GDP.
Three factors explain why a large-sounding deficit translates to less than 1% of additional GDP growth:
- Fiscal revenue growth will be lackluster: The continued headwinds facing property and industrial sectors, two main sources of revenue, will continue to drag down revenue growth in 2025. We assume fiscal revenue will be flat in 2025 (vs. -2% ytd in 2024). The result is that some increase in the deficit will be necessary just to offset the fact that revenue will grow more slowly than GDP.
- The 2024 fiscal deficit is already elevated: China’s 2024 deficit is already more than 10 trillion yuan, which creates a high base for the 2025 fiscal deficit.
- Growth in fiscal expenditure must be measured against growth of nominal GDP. We assume China’s NGDP will grow at 4% in 2025. This means that fiscal expenditure, which equals to the sum of revenue and deficit, must grow by 4% just to be neutral.
What it means for the growth outlook
We assume a fiscal multiplier of 1.5, which means that the 0.5% of GDP in fiscal stimulus above will increase China’s real GDP in 2025 by close to 0.8%. This must be set against a challenging macro backdrop:
- We expect ongoing weakness in construction and property activity to drag down GDP by around 1.2% in 2025 (which is marginally smaller than the drag in 2024)
- Household consumption and exports will also face stiff headwinds in 2025, even without the risk of increased US tariffs
- Beijing will provide additional monetary stimulus, but its size is likely to be even more modest than fiscal stimulus
- On the upside, next year’s expected 4 trillion local government debt refinancing will ease local governments’ debt servicing burden and improve cashflows for government contractors/suppliers. But the impact will be primarily in the form of reducing default risk and only trickle down to boosting activity. This is because current fiscal difficulties for local governments have more to do with the decline in land sales (which is expected to continue) than with debt burdens.
This combination of major growth headwinds and modest stimulus means that the upside for growth is limited. Our base case is nominal GDP growth of around 4% in 2025 (roughly in line with this year), with risk tilted to the downside. Deflationary pressures will persist. We continue to view nominal GDP growth as a better barometer for the economy than official figures for real GDP growth, which we expect to show growth of around 4.5% in 2025, compared to around 5% this year.
What a real “fiscal bazooka” would entail
Another way of putting our modest stimulus expectations into context is to ask what a true “fiscal bazooka” would entail. We define the bazooka as the amount necessary to lift China’s nominal GDP growth to 6% next year, putting growth back to potential and breaking out of deflationary dynamics. We estimate that this would require fiscal stimulus of 2% of GDP, such as through 4 yuan in central government special bond issuance next year rather than the 2 trillion yuan we expect.
What happens if the US escalates tariffs
China’s fiscal plans will come after the US election, with an initial announcement on special government bond issuance to come on November 8 at the conclusion of a meeting by the National People’s Congress Standing Committee. Details on the full fiscal package (such as the size of the official budget deficit) will not come until the March 2025 annual National People’s Congress.
Our baseline scenario outlined above holds in the event of a Harris victory. A Trump victory would be much more of a wild card given the uncertainties around his tariff plans and the timing. Beijing may increase the size of its announced special government bond issuance on Nov. 8 if Trump wins the election (see further below) from our basecase of 1 trillion yuan (which would represent the first tranche of total issuance of 2 trillion yuan next year) to 2 trillion. This would primarily be to reinforce confidence by front-loading the debt issuance package. But the more comprehensive economic plan to respond to Trump will come at the March 2025 NPC, when Beijing has a better picture of Trump’s tariff plans.
We will have more to say about these dynamics post-election if Trump wins. If Trump is headed for major tariff escalation in 2025, the Chinese government will use a combination of additional fiscal spending and tax cuts (including personal income tax cuts and export VAT refunds) to cushion the economy. The fiscal mix will likely continue to favor investment, while the household portion will be primarily in the form of tax cuts instead of spending to consumption. The size of the fiscal package would increase but only partially offset the impact on China’s growth. With China’s leadership still averse to major fiscal stimulus that increases long-term debt risks, investors should not expect a fiscal bazooka that fully offsets the damage from a renewed trade war.
What to watch for next
- November 8: announcement on 2024 central government debt issuance by the. The NPCSC could announce debt issuance plans that cover only the next several quarters or outline a multi-year package (e.g., 6 trillion over 3 years). If Harris wins we expect an announcement of 1 trillion in special bond issuance for spending in 2025, likely representing the first tranche of an eventual 2 trillion yuan in total for next year. If Trump wins the initial announcement may go up to 2 trillion, though it will not be clear until the March 2025 NPC is this is just a front-loading of a 2 trillion yuan annual package or an increase in size to mitigate expected tariffs. There may also be announcements on local government debt refinancing, advance issuance of local government bond quotas (a routine operation), and recapitalization of state banks.
- Early/mid-December: annual Central Economic Work Conference. The CEWC will provide initial high-level signals on the broader fiscal package in 2025, which will be announced at the March 2025 annual National People’s Congress. A meeting of the Politburo in late November/early December will come a few days in advance of the CEWC and preview its messages.
