Overview
Key takeaways
- China's administration is taking a cautious approach to policy so it has room to respond to any further trade tensions.
- Real GDP growth target remains at 5 per cent despite rising pressures.
- The fiscal package has expanded, raising the official deficit target to 4 per cent of GDP.
- Consumer confidence is the government's top priority, supported by a range of initiatives.
US President Donald Trump has wasted no time since taking office. His administration has imposed a total of 20 per cent additional tariffs on Chinese imports, moving trade policy forward at a much faster pace than in his first term. China also faces more domestic challenges than this time eight years ago, including sluggish consumer demand and a prolonged property slump.
Despite mounting challenges, Chinese leaders have adopted a gradual and cautious approach. Or, as former leader Deng Xiaoping would say, they are “crossing the river by feeling for the stones” – a phrase he used to describe the reform path he embarked on nearly five decades ago. As such, the economic targets Premier Li Qiang announced at the annual legislative meeting of the NPC earlier this month are mostly in line with expectations. But the real GDP growth target of 5 per cent – the same as last year despite the rising external pressures – shows policymakers intend to maintain growth momentum, leaving the door open for further stimulus.
Premier Li expanded the fiscal package, raising the official deficit target to 4 per cent of GDP, the highest in more than three decades and up from 3 per cent last year. There is policy room for more fiscal easing, should the economic environment worsen. The government’s pledge to give local authorities more autonomy in how they buy unsold homes shows its determination to support the property sector, and we could also see more concrete measures to stabilise house prices.
Boosting consumption by increasing households’ disposable income and hiring has become the government’s top priority. Measures announced at the NPC included creating more urban jobs and enhancing social benefits, as well as providing subsidies to childcare and offering free pre-school education. Beijing also doubled its budget for the consumer goods trade-in programme to 300 billion renminbi (USD 41.5bn). Altogether, these measures are likely to have a lasting impact on consumption, which bodes well for selected consumer names with robust business models and an ability to gain market share – particularly those in underpenetrated industries.
China continues to prioritise technological innovation, with a commitment to nurture high-end manufacturing and technologies such as AI and robotics. The government plans to set up the National Venture Capital Guidance Fund to support tech start-ups while the country’s central bank will also expand its relending quota for investments in technology and innovation. We believe a revitalised private sector could bolster industries like electric vehicles and related supply chains, AI-enabled devices, and humanoid robotics, and unlock long-term potential for other segments including biopharmaceuticals.
Unlike the sudden policy pivot in September, the lack of substantial positive surprises from the NPC means that investors will be encouraged to shift focus from policy-driven sentiment to company fundamentals, such as profit margins and earnings.
China lowered the inflation target from 3 to 2 per cent, an acknowledgement of deflationary pressures, increasing the likelihood of monetary easing down the line. The recent correction in China’s onshore debt market creates an attractive entry point for government and high-quality credit bonds in the medium to longer term.
The Chinese economy has seen some early signs of stabilisation after the slew of stimulus late last year. The rise of AI start-up DeepSeek has fuelled optimism about the country’s advanced tech sector and revitalised equity markets. But we think further policy support is required to achieve the ambitious growth target. We expect policy to become more reactive to help manage any further tariff announcements and the recovery in domestic demand. It’s likely that any additional easing will be announced and implemented swiftly.
Decades ago, the “crossing the river by feeling for the stones” approach helped turn China into an economic powerhouse. This time, arguably, the water is deeper and more turbulent. Policymakers are treading more carefully.
