Beijing’s domestic and foreign policy plans underscore economic pressures amid trade tensions with the United States
The National People’s Congress (NPC) last week concluded the annual Two Sessions meetings, revealing weak budget revenue expectations as China’s property sector crisis persists. Beijing omitted environmental targets even as it seeks to present itself globally as a responsible power compared to the United States. It also softened its diplomatic approach to third countries, hedging against an intensifying China-US trade conflict recently culminating in DeepSeek.
What next
Subsidiary Impacts
- A projected budget revenue decline in 2025 reveals weak expectations for the property market and business performance.
- The government may need to make sharper emissions cuts in 2026-30, potentially resulting in tighter business oversight.
- Beijing signalled willingness to negotiate with Washington to stabilise relations but also to retaliate in the event of further tariffs.
- Financial regulators announced new funds for science and technology innovation, creating new opportunities for venture capital.
Analysis
The NPC passed the Government Work Report, the budget and economic and social development plan, which together laid out the policy direction for 2025 (see CHINA: Beijing will store fiscal firepower – March 10, 2025).
Having targeted inflation of about 3% and GDP growth of around 5% in recent years, this year’s growth target is unchanged but the government anticipates inflation of around 2%, implying demand growth will remain weaker than historic rates.
Revenue expectations
The finance ministry confirmed expansionary fiscal plans for 2025 in the budget, which are designed to shore up market confidence and economic growth as the China-US trade war intensifies. The general public deficit will reach CNY5.66tn (USD783bn), equivalent to 4% of nominal GDP, up from 3% in 2024.
However, fiscal spending will be less expansionary than official messaging suggests. Consolidated fiscal expenditure will grow by 5.5% in 2025, not much higher than the 5.3% increase recorded in 2024 — which was unable to overcome widespread economic weakness.
When calculating expenditure as a share of nominal GDP, the ratio will remain relatively flat at 38.9%, as the authorities seek to manage rising debt levels.
Decisionmakers could pass an emergency amendment to the budget later in the year if the trade war escalates, as they did when there was severe nationwide flooding in 2023 (see CHINA: Greater policy support will boost economy – November 30, 2023).
An emergency budget amendment may be in store if trade tensions with the United States worsen
The widening budget deficit is attributable more to weak revenue growth than rising expenditure. The finance ministry projects consolidated fiscal revenue to edge up by 1.5% in 2025, a slowdown from 2.9% in 2024. The ratio of revenue to nominal GDP will fall to 35%, the lowest level since 2017, revealing expectations of further housing market malaise, which will continue to depress property income (see CHINA: Policy support will focus on property market – August 30, 2023).
Lower tax revenue projections could imply planned tax holidays, or, equally, that the government has weak expectations for business performance (see CHINA: Regional debt crisis will affect services – October 24, 2024).
The authorities will increasingly rely on the government-managed funds budget rather than the general public budget, making the official balance sheet look healthier than reality.
In 2025, the authorities will use the government-managed funds budget to issue:
- CNY1.3tn in ultra-long sovereign bonds;
- CNY4.4tn in local government special purpose bonds; and
- a CNY500bn programme to recapitalise state-owned banks.
Combined, these measures will be equivalent to 4.4% of nominal GDP, but none will be counted in the official deficit.
The authorities’ main priority for 2025 is to stimulate consumption, but the allocated funds are modest. CNY300bn will go to the consumer goods trade-in programme, but this will be equivalent to just 0.2% of GDP and so is unlikely to have a significant impact.
Environmental targets
The government will relinquish its decarbonisation goals for the current five-year period of 2021-25. Originally, the authorities planned to reduce carbon intensity and energy intensity by 18.0% and 13.5%, respectively, but so far, they have reduced carbon intensity by less than 10.0% after deprioritising environmental goals during the pandemic.
Realising that the carbon intensity target has become unfeasible, the government decided to omit it from the 2025 goals rather than doubling down with harsh energy restrictions that could damage the economy.
Beijing has relinquished environmental targets in favour of the economy
The authorities still set an energy intensity reduction target of around 3% for 2025. This figure will enable policymakers to meet their objective for 2021-25, but only because they changed the definition of energy intensity in 2024 to exclude everything apart from fossil fuels, enabling Beijing to claim a more substantial decrease (see CHINA: Energy policy will be both clean and dirty – March 21, 2024).
The government is still committed to ensuring that national carbon emissions start to decline before 2030. The 2025 economic and social development plan committed to completing the carbon statistics and accounting system, which will provide national standards to measure and track carbon emissions. The system will enable the authorities to shift from tracking energy intensity to total carbon emissions and carbon intensity in 2026.
Wolf warrior diplomacy
Facing turbulence in its relationship with the United States, China wants to shore up diplomatic capital with other countries in 2025, according to Foreign Minister Wang Yi at the annual foreign press conference.
Wang’s tone was conciliatory, including to countries such as Japan and India, with which China has territorial disputes. This contrasts with US President Donald Trump’s first term, when China took an aggressive “wolf warrior” approach that isolated even Beijing’s allies (see CHINA: ASEAN will overlook Chinese maritime expansion – September 23, 2019).
Speaking on the US-China relationship, Wang suggested that Beijing would prefer constructive negotiations with the United States to stabilise ties but still will retaliate if Washington takes further trade or economic actions.
Central government expenditure on diplomacy will remain stable as a share of nominal GDP in 2025. Meanwhile, the steady increase in defence spending reflects long-term modernisation goals rather than a significant escalation in response to geopolitical tensions.
DeepSeek confidence
The annual economic press conference saw more discussion of technological innovation than any other issue (see CHINA: Support for innovation will drive growth – March 6, 2025).
The recent breakthrough of Chinese artificial intelligence (AI) company DeepSeek prompted questions on how the government planned to sustain innovation progress (see INT: DeepSeek may prompt tighter US restrictions – February 5, 2025).
Zheng Zhajie, the director of the National Development and Reform Commission, pledged to establish a national fund to guide venture capital, which will oversee CNY1tn, focusing on funding the long-term development of hard technology (see CHINA: Beijing will boost VC funding for key sectors – August 23, 2024).
People’s Bank of China (PBOC) Governor Pan Gongsheng pledged to increase a re-lending facility for small and medium-sized companies to CNY800bn-CNY1tn, from CNY500bn currently, which will provide loans for science and technology innovation. Pan said the PBOC would launch a technology board for the bond market, which will issue technology innovation bonds to technology companies, financial institutions and private equity investors.
DeepSeek’s success will encourage the government to double down on its approach to science and technology, and AI will be a major focus of policymaking this year. Central spending on science and technology is budgeted to remain relatively flat and lower than before the pandemic, suggesting that Beijing will rely more on bank financing, local subsidies and other off-budget methods to fund innovation goals.
