China keeps record-high budget deficit target to spur growth

CHINA will keep fiscal stimulus flowing to support growth as domestic challenges stalk the economy with geopolitical risks on the rise.

The budget deficit will stay at around 4 per cent of gross domestic product this year, unchanged from the record set in 2025, according to an annual work report of the Ministry of Finance seen by Bloomberg on Thursday (Mar 5).

That means the government is planning to spend 5.9 trillion yuan (S$1.1 trillion) more than it expects to earn under the general public account, the biggest among China’s four budgets that covers tax income and expenditure in everything from education and social security to transport and environmental protection.

Fiscal policy is taking the lead in spurring the economy as shrinking bank profit margins and subdued demand for credit constrain the scope for monetary easing. Keeping the deficit-to-GDP ratio at the record high signals the government’s willingness to keep the fiscal taps open to safeguard growth, which the authorities are targeting at 4.5 to 5 per cent this year.

“Despite the large amount of unused funds carried over from last year, the fiscal deficit ratio is kept unchanged at 4 per cent, reflecting lingering concerns about fiscal revenue, and the need to preserve policy space to respond to the uncertainties of this year’s international trade and economic tensions,” said Zhaopeng Xing, senior China strategist at ANZ Bank China.

Yields on China’s 10-year government bonds drifted lower in morning trading as investors reacted to the fiscal plan. Meanwhile, the offshore yuan rose 0.2 per cent against the US dollar, extending a rally from the previous session.

In addition to the official deficit, the government also plans to raise 1.3 trillion yuan from the issuance of ultra-long sovereign bonds to fund key national infrastructure and security projects and a programme of subsidies to encourage spending by consumers and companies. Another 300 billion yuan of special sovereign debt will be sold to raise funding to boost state banks’ capital.

Some 250 billion yuan in the ultra-long sovereign bonds is earmarked for providing subsidies for consumers to upgrade to new smartphones, cars and home goods, as part of the government’s flagship programme to bolster household spending.

Local governments received a total of 4.4 trillion yuan in this year’s new special bond quota – the first time since 2022 that the annual allowance did not increase. The notes are a key source of funding for investing in infrastructure, buying unsold homes from real estate developers and reducing off-balance-sheet debt.

SEE ALSO

China sets lowest growth target since 1991 as old model falters

China targets ways to boost domestic demand for economic growth

China’s factory activity contracts for second month in February

Chinese trade volumes were on record path before Iran war shock

Xi eyes consumers to lead new era for China’s unbalanced economy

More

In total, the bond allowance comes in at six trillion yuan, versus 6.2 trillion yuan set in last year’s budget.

Separately, China plans a total of 800 billion yuan in new policy financing tools to drive investment, according to the Government Work Report seen by Bloomberg. The instruments could be supported by the central bank through cheap credit, alongside debt issuance by state-run policy lenders.

The instruments underscore “a clear commitment to stabilising investment and arresting its decline”, ANZ’s Xing said. He expects the central bank to support the funding with Pledged Supplemental Lending, a tool it used to bolster the slowing property market a decade ago.

China has now set the official deficit at above 3 per cent of GDP five times since 2020, first breaching that implicit ceiling to absorb the pandemic shock and then to cope with intensified trade tensions. While frictions with the US have eased after a tariff truce in October, Beijing is still having to contend with threats to reaching its growth goal this year.

Consumer and business confidence has stayed weak and investment is contracting under pressure from deflation and a years-long property slump. Even though exports showed surprising resilience last year, the widening military conflict in the Middle East risks causing a new disruption to trade and endangering supply chain stability.

Combining the general public account and the government-managed fund budget, spending planned for this year is set to exceed revenue by nearly 14 trillion yuan, or 9.5 per cent of GDP if growth reaches 5 per cent, according to Bloomberg calculations based on data in the Ministry of Finance report.

Implementation of the budget will be key to watch throughout the year for its actual impact on the economy.

In recent years, Chinese authorities have indicated a preference for delivering just enough stimulus to reach their growth target. Shrinking budget income is constraining the scope for more aggressive easing, with the government’s broad revenue failing to meet the official target for the fourth straight year in 2025. BLOOMBERG