China’s government is planning to increase its budget deficit to 4% of gross domestic product (GDP) in 2025, marking the highest level on record, according to sources familiar with the matter.
The move comes as part of a broader strategy to counter potential US tariff increases and sustain economic growth.
The new deficit target, agreed upon during the recent Central Economic Work Conference (CEWC) and December’s Politburo meeting, represents a significant increase from the 3% of GDP target set for 2024. While the final figures will not be officially announced until China’s annual parliamentary session in March 2025, the decision reflects a shift toward a “more proactive” fiscal policy.
The increase amounts to approximately 1.3 trillion yuan ($179.4 billion) in additional spending. To finance this, the government will issue more off-budget special bonds, according to the two sources who spoke on condition of anonymity.
Despite the larger budget deficit, China’s leadership has opted to maintain its GDP growth target at around 5% for 2025 — the same as in 2024. This growth goal aligns with recommendations from government advisors who previously suggested Beijing should avoid lowering its economic target amid slowing growth and external challenges.
A key driver of the expanded deficit is the anticipated return of US tariffs on Chinese imports. Former US President Donald Trump is set to return to the White House in January 2025, and he has pledged to impose tariffs exceeding 60% on Chinese goods. The renewed threat of a trade war has unsettled Chinese exporters, many of whom have already shifted production abroad to avoid previous US levies.
China’s industrial sector, which ships over $400 billion worth of goods to the United States annually, faces mounting pressure from the potential tariffs. Analysts warn that higher US tariffs could squeeze Chinese manufacturers’ profit margins, reduce jobs, and weigh on investment and economic growth.
To cushion against these risks, China’s leadership is turning to fiscal and monetary support. The increased spending and bond issuance will fund domestic initiatives to support consumption, sustain industrial output, and maintain employment.
The shift in fiscal policy coincides with a change in China’s monetary policy stance. The People’s Bank of China (PBOC) is moving from a “prudent” stance, which it has held for 14 years, to a “moderately loose” approach. This shift raises the likelihood of interest rate cuts and increased liquidity injections to stimulate borrowing and investment.
The shift comes at a time when China’s economy is grappling with a severe property market crisis, weak consumer demand, and high local government debt. Analysts predict that fiscal measures will play a larger role in boosting growth next year, although China may also allow its currency, the yuan, to weaken to offset the impact of US tariffs.
The world’s second-largest economy has experienced a challenging year in 2024, with GDP growth under pressure from the struggling property sector, weak domestic consumption, and elevated local government debt. Although China’s policymakers have already taken steps to revive the economy, including stimulus measures rolled out in September, the latest trade threats have prompted further policy adjustments.
The CEWC summary emphasized the need to “maintain steady economic growth” and raise the fiscal deficit ratio, though no specific numbers were disclosed. The summary also stated that China would “maintain the basic stability of the exchange rate at a reasonable and balanced level,” hinting at efforts to stabilize the yuan amid external pressures.
China’s decision to raise its budget deficit to 4% of GDP for 2025 reflects a calculated effort to navigate a more uncertain global trade environment. With a potential escalation of US-China trade tensions on the horizon, the country is relying on fiscal and monetary tools to safeguard its growth targets and support its economy.
