China’s Premier Li Qiang in early March used the annual Government Work Report to the National People’s Congress (NPC) to place a new emphasis on boosting the country’s domestic consumption – a lackluster 40 percent of gross domestic product (GDP) compared with a little over 50 percent in the EU and 70 percent in the US. Only days before, party and state leader Xi Jinping declared increasing consumption essential for economic security and so, by implication, for national security. These moves upped the pressure on local governments – which are responsible for 85 percent of public spending – to restore consumer confidence through social security and welfare provision.
Li acknowledged a host of other issues facing the country, from geopolitical tensions, tech rivalry, and security challenges in the international environment to structural issues in the domestic economy, including China’s financial and fiscal systems. But he also pledged a GDP growth target of five percent for 2025, the third year in a row, a sign that Beijing expects domestic consumption to drive growth as US President Donald Trump’s tariff policies threaten a trade war between the world’s biggest trading nations. Years of economic uncertainty and weak stock and property markets have made consumers cautious, but the Chinese leadership now seems intent on reversing this trend.
This will not come cheaply, however. Beijing has significantly raised the allowable debt ceiling, setting the deficit ratio at around four percent, one percentage point higher than in 2024, and bringing the total projected new government debt to CNY 12 trillion (1.5 trillion EUR). China will issue 1.3 trillion CNY in special treasury bonds (including 300 billion CNY to subsidize trade-in of old consumer goods) and 4.4 trillion CNY in local governments bonds. Compared to 2024, this means an extra 2.9 trillion CNY (370 billion EUR) to boost public services and rural development, help localities refinance public debt, boost investment in infrastructure projects, and support research and development in critical sectors. It will also buy back properties in the slumping real-estate sector.
Boosting the private economy, consumption and technology development, ensuring employment and welfare, maintaining social stability, while cleaning up the balance sheets and restructuring public debt are now on the to-do lists of local governments. But they will still have a huge incentive to channel spending into tech policy given its prominence in policy plans and the ongoing AI hype. Also, with the Private Economy Promotion Law not put to a vote before NPC, local governments may feel they can continue offsetting their budgetary shortfalls by arbitrarily fining private companies.
Katja Drinhausen, Head of Program Politics and Society at MERICS: “The five percent growth target is a signal of confidence from Beijing, even though the state of the economy remains a sensitive issue in China. Given the policy wish list, geopolitical headwinds and domestic challenges, China’s new fiscal space provides room to maneuver. But the lack of revenue sources for local governments to fund their to-dos means that boosting domestic consumption remains a long-term endeavor.”
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