China’s most important annual gathering, the so-called Lianghui(两会), will end on March 11 after over a week of National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) meetings.
One of the key objectives of the so-called “two sessions” is to arrive at key economic targets for the year ahead.
This year, Premier Li Qiang guaranteed that the Chinese economy would be resilient to US President Donald Trump’s protectionist policies, including the 20% blanket tariffs imposed on Chinese goods since the latter took office on January 20.
Significantly, Li kept in place last year’s 5% gross domestic product (GDP) target, which China just barely achieved even while racking up a huge US$1 trillion trade surplus.
Three policy changes have been notable, namely expansionary and eased macroeconomic policies, a commitment to keeping prices low and a ramping up of manufacturing capacity.
The first aims to increase the official fiscal deficit from 3% to 4% of GDP, the largest ever on record, while also easing monetary policy through imminent interest rate cuts. To be sure, this is not a dramatically sudden shift in policy since the change in tone began in September last year.
But as has been the case so far, no bazooka-style stimulus should be expected since any massive fiscal expansion would pile on more public debt, which has already reached 100% of GDP.
The second change announced by Li is the lowering of the government’s inflation target from 3% to 2%. This move appears to indicate that China is ready to accept deflationary forces since lower prices, especially for shipped goods, can help China export its way to 5% GDP growth.
Export price trends were negative in 2024 and so far in 2025. In February, meanwhile, consumer prices suddenly turned negative (-0.7%), following producer prices.
While pushing prices down to compete overseas carries risks (Japan in the 1990s, for example), Trump’s additional 20% tariffs on China and the ongoing weakness of the US dollar leaves China scant room to maneuver.
Li’s third important policy message was de facto confirmation that China will continue to ramp up manufacturing capacity as a growth engine. In other words, China has no intention of addressing “overcapacity” criticisms by reducing factory supply.
Considering the announced fiscal deficit increase does not seem to be directed at boosting consumption but rather to supporting debt restructuring of local governments, domestic consumption is not expected to improve substantially in 2025.
This is all the more likely the case while labor markets remain weak and disposable incomes stagnant. Against this domestic backdrop, China will need to ramp up exports even more than in 2024 amid headwinds from a weaker US dollar and higher US tariffs.
This is potentially worrisome news for the rest of the world, as China seeks new markets for its low-cost goods, putting new price pressure on indigenous industries.
Beyond trade channels, Western companies operating in China are poised to face even stronger competition amid strong deflationary pressures, which will inevitably continue to erode profits.
The second main way for China to rebuff Trump’s tariffs is through more technological self-reliance. Trump’s Stargate technology investment program, announced at US$500 billion with OpenAI and Softbank in attendance, is being closely watched in Beijing and, so far, the reaction seems clear.
Firstly, Chinese AI platform Deepseek’s revelation in late January has sparked a recovery in Chinese tech and other stocks, both in the mainland and in Hong Kong. Some of China’s best-known tech companies have seen strong rebounds in their share prices.
Given the crucial importance President Xi Jinping attaches to China’s self-reliance in technology, the Lianghui has held several discussions on providing different types of support for critical indigenous technologies, particularly in regard to AI.
Two new policies were announced at the Lianghui, namely the establishment of a 1 trillion yuan ($138 billion) national venture capital guidance fund aimed at strengthening AI, quantum technology, hydrogen energy and energy storage.
The second measure relates to the easing of existing constraints on initial public offerings (IPOs) for loss-making companies in key sectors like AI. In the future, they will be allowed easier access to public capital markets.
All in all, China’s leadership has used the Lianghui to respond to Trump’s threats and actions, both in terms of cushioning the blow of new US tariffs and through moves to reduce China’s technological dependence on the US through more indigenous activity.
