China Plans Record Stimulus, as Budget Deficit Raised to Unprecedented Level to Spur Growth

Chinese leaders have agreed to raise the budget deficit to 4% of gross domestic product (GDP) next year, its highest on record, while maintaining an economic growth target of around 5%, according to Reuters.

This new deficit plan, compared to an initial target of 3% of GDP for 2024, aligns with the more proactive fiscal policy outlined by leading officials after December's Politburo meeting and the recent Central Economic Work Conference (CEWC), where these targets were agreed upon but not officially announced.

The additional one percentage point of GDP in spending amounts to approximately 1.3 trillion yuan ($179.4 billion). More stimulus will be funded through the issuance of off-budget special bonds, said the sources, who requested anonymity as they were not authorized to speak to the media. These targets are typically not announced officially until the annual parliament meeting in March.

This commitment comes after China vowed a major policy shift, promising more proactive fiscal stimulus and moderately looser monetary policy to support its sluggish economy. The authorities aim to stabilize property and stock markets while enhancing unconventional counter-cyclical adjustments, and also counter the impact of an expected increase in U.S. tariffs on Chinese imports as Donald Trump returns to the White House in January. The sources indicated that China will maintain an unchanged GDP growth target of around 5% in 2025.

Morgan Stanley expects the quota for off-budget bonds to expand modestly, which, combined with an expansion in the official deficit, could lead to around 2 trillion yuan in augmented fiscal expansion. The 5% GDP target does not imply aggressive and balanced stimulus. We think the high growth target aims to guide expectations and boost confidence, rather than act as a binding constraint, the bank stated.

Also on Tuesday, Chinese Premier Li Qiang urged government officials to swiftly carry out key economic tasks for the coming year, following top leaders' signals of stronger stimulus for 2025. Li emphasized that ministries must be proactive and act "as early as possible" in executing plans set out at the central economic work conference, according to the official Xinhua News Agency, following a cabinet meeting he chaired on Monday.

Retail sales, a gauge of consumption, grew at its weakest pace in three months at 3.0% last month, significantly slower than the 4.8% rise seen in October. Analysts had predicted a 4.6% expansion, highlighting the challenges ahead for China's economic recovery.