China’s Stimulus: Too Little, Too Late?

Beijing was abuzz last week. The start of March is a major fixture in China’s political calendar, with thousands of CCP delegates from across the country descending upon the capital to attend the “Two Sessions”: an annual meeting of China’s two legislative bodies, the Chinese People's Political Consultative Conference (an “advisory body”) and the National People’s Congress (the rubber stamp legislature). The event itself is entirely for show - a tightly choreographed piece of theatre for these largely impotent legislative bodies to demonstrate the country’s political unity. Neither have any political power, and the probability of them voting against the CCP’s agenda is precisely zero. 

However, it is an important forum for China watchers to see what that agenda actually is. Each year, the government issues a ‘work report’’, presented by Premier Li Qiang, that sets out key economic priorities, with specific targets for a range of metrics including GDP growth, unemployment and local government borrowing. 

Chinese Premier Li Qiang delivers his work report in a speech at the National People’s Congress in 2024 (photo taken by the author)

This year’s announcement did not shock to the upside. The government announced a GDP growth target of around 5% - the same as both 2023 and 2024 - and only a modest increase in the government budget deficit to 4% from 3%. 

Source: World Bank, Reuters

Textual analysis is a form of economic forecasting in China, and a big part of the hype around the Two Sessions is also around what specific words get emphasised in the work reports. The CCP speaks in its own vernacular, with significant policy changes coded behind dense jargon and turgid slogans. Last year, that meant “new productive forces” (high tech industries such as batteries and EVs) and “national security” (political repression). 

This year, the energy was around raising domestic consumption. Li Qiang’s report promised a “special action plan” for raising household consumption. The term “consumption” received 31 mentions this year, up from 21 last year. 

Delegates from one of China’s ethnic minority groups pose for a photo at the 2024 NPC (photo taken by the author)

China has a long-term, structural problem with low household spending in its economy - the result of a development strategy that has focused on the supply side of the economy, rather than raising household incomes and stimulating domestic demand. China invests extensively in infrastructure and manufacturing capacity, but state welfare provision remains low. In 2022, social spending by the government amounted to around 10% of GDP in China, versus nearly 29% of GDP in Europe. Many households undertake precautionary saving as a result, hiding money away for a rainy day in case they need to foot the bill for an emergency surgery or lose their job. 

Source: World Bank

China’s property slump is also a major factor in this, and has come alongside already weak consumer sentiment following China’s botched pandemic response, during which blanket lockdowns hammered the economy. With few other avenues for investing their savings, Chinese households overwhelmingly put their money into property investments, which means that falling house prices have a strong negative wealth effect. Real estate accounts for around 70% of household wealth in China. 

But despite the talk, the measures the government has outlined for 2025 to stimulate consumption remain limited. The government announced a 300 billion RMB ($41.5bn) extension to a subsidy package for consumer trade-ins of vehicles and appliances for new high-tech goods. That scheme added 1% to total retail sales last year. Beyond that, authorities raised the minimum state pension by 20 RMB to 143 RMB, which represents a measly $20 payout per month. 

Source: Rhodium Group

Incremental tweaks to these schemes will not rebalance the Chinese economy toward consumption. Doing so will require deeper reforms to the country's welfare system to channel more cash to households and labour market reforms to allow wages to rise. This, however, will entail political compromises that Xi appears unwilling to make: moving resources away from favoured state sectors, or dismantling institutions such as the hukou system, which limits access to welfare to people outside their ‘home’ cities. Xi has long criticised “welfarism”, in which generous state benefits make society “lazy”. 

And while the Trump administration’s additional 10% bilateral tariffs on Chinese goods are unlikely to resolve the US trade deficit with China or transit countries such as Vietnam, a weakening international trade environment will place more pressure on firms and households in the export-focused economy. 

The concept of GDP as a statistic is fundamentally different in China. In most countries, it is an output - a measurement of what has happened in the economy over the course of the year. But as Peking University economist Michael Pettis argues, GDP in China is an input, with a target determined at the start of the year and the economy stimulated accordingly to meet it. If the private sector and household consumption do not grow, more capital will have to be moved to the state and favoured manufacturing sectors in order to meet the target. The upshot of this is that despite the talk of household consumption, China’s 5% growth target means that the country will likely continue to depend on the very state-led model it is trying to leave behind.