China's Record Budget Deficit: Fiscal Sustainability and Global Spillovers

China's economy is set to maintain its rebound momentum in 2025, with a planned budget deficit of 4% of GDP, according to sources. This proactive fiscal policy aims to stimulate economic growth, but it raises concerns about long-term fiscal sustainability and debt levels. This article explores the potential impacts of China's increased deficit on its fiscal sustainability, global financial markets, and emerging economies.

China's planned deficit of 4% of GDP in 2025 signals a more proactive fiscal policy to boost economic growth. However, this increase from the current 3% target may exacerbate the country's public debt-to-GDP ratio, which stood at 69.6% in 2020, according to the IMF. A higher deficit could lead to increased borrowing costs and reduced fiscal space for future crises. To mitigate these risks, China should focus on enhancing fiscal discipline, improving debt management, and promoting sustainable growth.

China's increased deficit may have significant spillover effects on global financial markets and emerging economies. A study by the ECB (2022) found that Chinese macro risk shocks can affect global equity prices, with a noticeable impact on commodity markets. China's higher demand for commodities could drive up prices, exposing firms in related industries to higher financing costs. Emerging economies with high trade exposure to China, such as Mongolia and Vietnam, may experience increased volatility in their financial markets.

To balance its increased deficit, China will likely focus on increasing revenue through tax reforms and optimizing public spending. The country can also leverage its vast savings and investment pool to fund infrastructure projects, fostering economic growth and generating additional revenue. Additionally, China may explore innovative financing methods, such as green bonds, to tap into global capital markets and fund sustainable development.

China's record budget deficit of 4% of GDP in 2025 could have significant implications for its creditworthiness and borrowing costs. The increased issuance of ultra-long special treasury bonds and local government special-purpose bonds may lead to higher borrowing costs, as investors may demand higher yields to compensate for the increased risk. A higher deficit-to-GDP ratio may negatively impact China's creditworthiness, potentially leading to a downgrade by international credit rating agencies. This could further increase borrowing costs and make it more challenging for China to finance its debt.

In conclusion, China's planned record budget deficit of 4% of GDP in 2025 signals a proactive fiscal policy to stimulate economic growth. However, this increase raises concerns about long-term fiscal sustainability and debt levels. To mitigate these risks, China should focus on enhancing fiscal discipline, improving debt management, and promoting sustainable growth. The potential spillover effects on global financial markets and emerging economies highlight the importance of monitoring China's fiscal policy and its impact on the global economy.