SUMMARY
- The government work report to be delivered on March 5 will announce an ambitious GDP growth target but only modest stimulus support; this disconnect sets up growth to disappoint by mid-year, when Beijing will need additional stimulus to secure its target
- Fiscal stimulus will be restrained, as a mediocre outlook for revenue limits the scope for expenditure growth; there will be only an incremental boost in support for consumption, which faces macro headwinds from a weak labor market and falling housing prices
- The NPC is unlikely to announce a shift in property policies; China’s leadership is content with a nascent recovery in the largest cities, while the ongoing struggles of smaller cities will lead overall housing sales to continue to decline
China’s annual National People’s Congress begins on the morning of March 5 (Beijing time) and will last for approximately one week. The most important session starts at 10am on March 5 Beijing time (9pm ET on March 4), when Premier Li Qiang delivers the government work report. The work report announces key policies including the GDP growth target, fiscal deficit target, and economic priorities for the year.
BASE CASE: AMBITIOUS GROWTH TARGET, UNAMBITIOUS STIMULUS
We have been expecting the NPC’s stimulus announcements to underwhelm, and recent developments only reinforce this view. Our 2025 outlook report (link HERE) discussed why China’s leadership is content with only modest stimulus despite weak domestic demand and trade risks from the Trump administration. The main point is that Beijing is focused on maintaining stability rather than accelerating growth. Aggressively boosting growth would entail trade-offs for fiscal policy (increased government borrowing) and monetary policy (currency depreciation) that Beijing will only make under conditions of major urgency.
Political and economic conditions suggest that Beijing’s level of urgency is not high:
- Headline economic data has been noisy but points to a tentative stabilization of growth. Transitory factors – including a surge in exports to get ahead of Trump’s tariffs – are driving much of that improvement. Nonetheless, those numbers are decent enough for Xi to argue that China’s late September policy pivot has been effective in anchoring growth and confidence.
- Trump’s initial tariff moves against China have so far been lighter and more gradual than many expected. We are skeptical about the prospects for a trade deal and believe US-China economic tensions will remain high, especially after Trump’s recent memo targeting US-China investment flows (see our take HERE). But Beijing is not under immediate pressure to offset tariffs with stimulus.
- DeepSeek has provided a confidence boost to China’s leadership. DeepSeek, though not a product of Beijing’s industrial policy, has reshaped perceptions of China’s AI capabilities and investment potential, especially among foreign investors. Xi’s meeting with private tech leaders last week shows he is leveraging this positive narrative ahead of the NPC (see our write-up HERE), but also increases the risk of policy complacency.
There are two main implications of our subdued expectations for the NPC:
- Modest policy support from the NPC means that growth momentum will fade by mid-year, requiring additional stimulus in H2. We expect the NPC to announce an ambitious growth target of “around 5%” (the same as last year) but without the scale of policy support necessary to secure that target. Front-loaded fiscal stimulus will boost activity in Q1, so the gap will not be immediately obvious. The disconnect between the ambitious growth target and underwhelming fiscal stimulus will become more acute by the end of Q2, especially if the US has imposed or threatened additional tariffs on China. Investors will be left waiting to see how much additional stimulus Beijing implements in Q3 and Q4 to meet the target.
- In the near-term, an underwhelming NPC implies some downside risk – or at least limits the upside risk – for Chinese equities. Large-cap Chinese tech shares listed in the US and Hong Kong have surged due to DeepSeek and AI enthusiasm rather than high expectations for stimulus. Still, the NPC is unlikely to provide a strong signal that China’s weak economic recovery is about to kick into higher gear. Investors seeking a hedge or limited-risk bearish position on large-cap Chinese stocks could consider owning puts on the FXI (iShares China Large-Cap ETF) as recently suggested by 22V’s head of derivatives strategy Jeff Jacobson. With FXI’s latest move back to its highs, Jeff would now suggest buying the March 35 puts for ~0.58 (FXI 36.47 ref).
FISCAL POLICY WILL NOT DELIVER STRONG SUPPORT TO DEMAND
Fiscal stimulus is the most important tool that Beijing has to strengthen domestic demand. We expect the NPC to announce a fiscal package consisting of:
- An on-budget fiscal deficit of 3.8% of GDP (vs. 3% in 2024)
- Special central government bond issuance of 2 trillion yuan (excluding borrowing for bank recapitalization)
- And 4.5 trillion yuan in local government special bond issuance (vs. 4.3 trillion yuan in 2024)
Our expectations for these specific targets are broadly in line with other analysts. Where we differ is our emphasis that this translates to a very modest fiscal stimulus of only 0.4% of GDP. That outlook is guided by our forecast of mediocre fiscal revenue growth, which has been a frequent blind spot for analysts taking Beijing’s budget projections at face value:
- We expect total fiscal revenue to be flat this year, below the government’s likely bullish forecast. With weak economic activity and deflation, tax revenue will grow in the low single digits. Non-tax revenue (including fines and asset disposal), which grew 25% in 2024, will decline this year as the central government pressures local officials to reduce fines and asset confiscation levied against the private sector. Revenue from local government land sales to property developers will also continue to decline.
- Revenue underperformance will constrain growth in expenditure. Fiscal expenditure needs to grow by faster than 4% (our projection for nominal GDP growth) to be stimulative. Given the likely shortfall in revenue and limits on total borrowing, we expect it to be only slightly above the 4% rate.
- We estimate that total government borrowing of 1.6 trillion yuan will be required to maintain fiscal policy at a neutral level this year. We expect total borrowing of around 2 trillion yuan, leading to a modest net fiscal stimulus of 0.4% of GDP.
In terms of composition, we expect a very incremental shift in the degree of fiscal support for consumption. The budget will likely allocate 400 billion yuan to extend the consumer trade-in program (appliances, cars, and household electronics), and a similar amount to income support for civil servants and low-income families. This will not be powerful enough to produce a strong recovery in household spending given the macro headwinds of a weak labor market and the negative wealth effect from an ongoing decline in housing prices.
MONETARY AND PROPERTY POLICIES WILL STAY THE COURSE
The government work report will signal that monetary policy will remain loose. While we will be watching for signals of increased attention to deflationary risks, we do not expect a meaningful change in policy. In practical terms, Beijing’s desires to avoid rapid depreciation of the yuan and to protect banks’ net interest margins – both stemming from financial stability concerns – limits the scope for aggressively lowering interest rates, which remain restrictive.
We also do not expect Beijing to take significant new actions when it comes to property policies. The leadership is satisfied with a nascent and still relatively anemic recovery in housing sales and prices in the largest property markets (tier 1 and tier 2), implicitly abandoning efforts to revive the much weaker tier 3 and tier 4 markets. In practice, this means that Beijing will tolerate a single-digit decline in overall property sales in 2024, stepping up policy support only if the sales decline worsens beyond this level.
MUDDLING THROUGH TO MID-YEAR?
As noted above, the combination of an ambitious growth target and weak fiscal stimulus sets the stage for a disappointment once front-loaded government spending runs out. This slowdown is likely to come over the next 3-6 months (June-August) and will be more pressing if the US has imposed additional tariffs on China, which we see as likely. As has been the case in each of the last two years, investors will closely watch the quarterly Politburo meetings at end-July and end-October to see how much stimulus Beijing announces to catch up to the 5% target or get within tolerable range.
While still too early to anticipate how Beijing will increase stimulus later this year, easing constraints on borrowing by local government financing vehicles (LGFVs) is one likely tool. Such a loosening is a key condition for Beijing’s recapitalization of the largest state banks – likely to be funded with 1 trillion yuan in special bond issuance announced at the NPC – to be effective in boosting lending growth. But we only expect that loosening to come once the weakness in growth becomes apparent.
We will have more to say once the government work report is out, but for now our full-year outlook calls for real GDP growth (in official terms) of around 5%, the same as 2024. Ongoing deflationary pressure will mean that nominal growth – which we see as a more accurate reflection of the state of the economy – will be around 4%, weaker than the 4.2% nominal growth rate in 2024.
As we noted in our outlook report (link again HERE), we do not rule out a strong pro-growth policy pivot in the second half, more powerful than the partial pivot in September. We do not view Beijing’s current incremental approach as sustainable for much longer than a year, and the incentives to boost growth are likely to increase as a political transition in 2027 approaches.
