China’s National People’s Congress 2025 and the economy: Misdiagnosis
How achievable are Beijing’s economic goals for 2025?
The Investigator | No. 10/2025
This is the first of two ‘Investigators’ this week which will analyse the outcomes of this year’s ‘Two Sessions’ political gathering in Beijing, which refers to the annual plenary meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), held between 4-11th March this year. This ‘Investigator’ by George Magnus focuses on the economic implications of the ‘Two Sessions’, while the next one by Charles Parton will focus on the political outcomes.
The economic headlines from this year’s NPC were that the government has set a 5% Gross Domestic Product (GDP) growth target for 2025, along with a series of other economic and sector targets, and moved consumption growth into pole position among diverse policy tasks. These initiatives had been clearly flagged in the political economy discussions at the Third Plenum of the 20th Central Committee in July 2024, the year ahead outlook at the Central Economic Work Conference in December, and several other high-profile meetings over the last year, including last month’s symposium with the leading private entrepreneurs of the People’s Republic of China (PRC).
Yet, there is more to the Chinese Communist Party’s (CCP) targets and goals than meets the eye, and it is important to consider the context against which the government’s economic narratives, assessments and prospects are set, particularly under prevailing domestic and geopolitical circumstances – and especially trade. Even though the economy is still riding the wave of stimulus measures passed late last year, and will be affected by some new ones planned for 2025, the economy is most likely to remain in a persistent cycle of slow growth and the need for debt-financed stimuli.
The government is certainly not planning to shift its mercantilist economic model away from the emphasis on industrial policies and exports, despite new measures to appear more consumer-focused. The problem is that by not recognising the close binary and antagonistic link between successful manufacturing output and the many issues related to sluggish domestic demand, the government is misdiagnosing the PRC’s economic condition. In doing so, it risks exacerbating the sluggish domestic demand.
Misdiagnosis: The centrality of trade
The emphasis at the NPC was, as usual, overwhelmingly on domestic economic, industrial and financial policy issues. Li Qiang, Premier of the PRC, acknowledged in the Government Work Report that the foundation for Beijing’s sustained economic recovery and growth is not strong enough, demand is weak, there are pressures on employment and some local governments have fiscal ‘difficulties’.
He also acknowledged a variety of international problems – including protectionism, threats to supply chains and geopolitical tensions – which could all impact Beijing’s trade, science and technology. To this end, the Work Report provides for greater efforts to relieve pressures on export firms, boost foreign investment, exploit further trade from the Belt and Road Initiative (BRI) and support the PRC’s participation in international trade arrangements. Yet, nowhere is there any recognition of the intimate connection, and indeed causation, between the PRC’s domestic economic difficulties and the nature of its international footprint.
Put another way, the economic problems which the PRC faces at home are not chance or random phenomena that can be easily cured by incremental tweaks. Rather, they are features of the other side of a highly successful manufacturing and export model. Beijing cannot improve the outlook for the domestic economy materially or ramp up the role of household consumption without making politically awkward decisions to change that model.
The PRC’s astounding foreign trade performance in 2024 was not even a footnote at the NPC. Its trade surplus was almost $1 trillion (£770 billion), or close to 5% of GDP. Export values rose by approximately 6%, and imports by just 1%, but in volume terms (allowing for price falls), Chinese exports rose by approximately 13%, or four times as fast as world trade, while imports rose just 2%. Adjusting for flows related to tourism, services and investment income, Beijing estimates that its current account surplus was approximately $400 billion (£309 billion), or just over 2% of GDP, but a forensic examination of the data suggests that it was perhaps twice as big. Trade, then, may have contributed almost half of the PRC’s reported economic growth in 2024.
Trade is the key factor in the PRC’s economic prospects for two reasons. First, pushback against Chinese overinvestment, overcapacity and overproduction can be seen in the rising incidence of so-called ‘trade defence instruments’ aimed at Chinese products (including tariffs, anti-dumping measures and other restraints) among the world’s 50 largest economies and across all continents, spanning an array of middle-income and developing economies including India, Indonesia, Malaysia, Mexico, Thailand, Turkey and Vietnam.
Second, since protectionism is nowadays a feature of the economic outlook – the PRC’s role is as both a major instigator and a victim – it follows that the government is on the horns of a dilemma. Its policies favour production, supply and exports, but demand at home is sluggish, and demand abroad may be constrained by trade resistance. The NPC offered nothing to suggest that the authorities are prepared for the consequences, or to change the model.
The domestic agenda
In 2025, the government will prepare the 15th ‘Five-Year Plan’ (2026-2030), in which there will be a strong emphasis, one imagines, on science, technology and self-reliance, including priority attention to Artificial Intelligence (AI) and other strategic emerging industries, innovation, data capacity and the recalibration of supply chains.
Much of this is already referred to in a list of ten tasks to be accomplished in 2025, announced at the NPC. The most important task is ‘vigorously boosting consumption and investment returns, and stimulation of domestic demand across the board’. The other tasks comprise:
Developing new quality productive forces in industry (i.e., cutting-edge science and technology sectors). The government is also proposing up to ¥1 trillion (£107 billion) in new funding mechanisms to nurture industries such as AI, digital technologies, 5G technology, bio-manufacturing and quantum computing, and for Small and Medium Enterprises (SMEs) in the technology space and start-ups;
Support for science and technology through education system enhancement;
Unspecified ‘landmark reforms’: the focus is on ‘economic structural reform’, but what it probably means is doubling down on industrial policy and exports;
Development of international trade and investment;
Resolution of real estate and local government finance risks. Though far down the list, the government remains worried about asset price declines and financial stability risks;
Rural revitalisation, including a focus on grain production, land usage and management, poverty alleviation and rural growth;
New urbanisation, which increasingly looks like a question of reclassification of small towns and communities rather than high migrant flows from rural to urban areas;
Lowering carbon intensity, which also includes lowering pollution, and the broader green transition agenda; and
Increasing the quality of people’s livelihoods and social governance – this is probably a catch-all for social stability.
Boosting consumption
On the first and most urgent task, the government says it wants to boost consumer spending and personal income growth, and the supply of quality products and services. However, the main measures outlined are fairly limited, such as more subsidies for consumer goods trade-in programmes – which is essentially about bringing forward future consumption – even though these subsidies are half as big as those for trade-ins for businesses. The government also mentioned increased supply of health, old age and childcare services, small increases in old age and healthcare benefits, and a reform of leave arrangements so as to allow people to enjoy more tourism, culture and sporting events.
Following on, just over a week ago, the government announced a ‘Special Action Plan’ to support consumption, comprising 30 points under eight broad headings. While one of the more content-heavy plans for consumption announced in recent years, the plan was perhaps more about political messaging than economic content. There was, after all, some repetition of NPC measures, but nothing about new spending on, or funding for, programmes. The government aims to lift people’s incomes by underpinning employment, education and stock prices, and encourage people to save less by making minor changes to education and pension benefits as well as medical and maternity insurance. Much of the rest revolves around the expanded trade-in scheme already announced, and measures to ramp up the supply of consumer goods and services in recreational and cultural pursuits as well as for the elderly and tourists.
Such measures are welcome at the margins, but they will do little to strengthen and sustain higher household income and employment growth – the sine qua non for higher spending.
The ongoing funk in the real estate market looks set to continue for structural reasons related to weak household formation and excess supply, especially away from the largest cities. More local government borrowing to finance purchases of uncompleted and unoccupied homes might help to raise sales for a while – already evident in the largest Chinese cities – but construction activity is likely to remain in the doldrums.
Encouraging private firms
The NPC also sought to convey a positive message to private firms, including references to the new draft private economy promotion law. The government’s mission to regulate and punish wayward private firms ended some time ago, and it knows it needs the active participation of entrepreneurs in helping to meet the country’s economic challenges, for example in AI and local technology clusters and hubs. The CCP says it wants fairer law enforcement, lower barriers to entry in key sectors and greater credit allocation, but low business confidence is basically down to existing regulatory hurdles, political interference and weak demand and profitability resulting from a flawed economic model.
Macroeconomic targets
The CCP’s principal macroeconomic targets for 2025 include:
A 5% growth in GDP – the same as 2024 – though the latter outcome was almost certainly overstated;
New urban employment of 12.5 million, but this excludes the rural economy and urban employees who are laid off, leave work for any reason, or are otherwise inactive. With labour force contraction of about 7 million per year, arising from ageing alone, net employment is no higher than maybe 4-5 million; and
A 2% Consumer Price Index (CPI) inflation: this is a reduction and represents a small nod to the deflationary pressures in the economy, which are likely to persist. The GDP deflator, which is the broadest measure of inflation, has been negative for the last six quarters, a sign of the dangerously low ‘nominal world’ for wages, profits and asset prices.
Fiscal, rather than monetary, measures are going to dominate policy. The latter will doubtless entail minor reductions in interest rates and banks’ reserve requirements, a continuing focus by the People’s Bank of China (PBoC) – the PRC’s central bank – on liquidity provision, and schemes to encourage lending by banks for government priority areas, such as green technologies and SMEs.
The headline rise in the fiscal deficit to a record 4% of GDP should be taken with a pinch of salt, as it represents central government only, and excludes government-managed funds, which are largely used for infrastructure, the social security budget and other off-balance sheet funds, local government accounts, state enterprises, and contingent liabilities of the state such as pensions. The real, public sector fiscal deficit, according to the International Monetary Fund (IMF), is much closer to 15-18% of GDP. Nevertheless, it is clear that a looser fiscal policy is going to happen this year, and that Beijing is picking up a part of the responsibility from local governments.
The government is proposing almost ¥12 trillion (£1.3 trillion) of new borrowing this year, equivalent to approximately 8.5% of GDP, which comprises:
Borrowing to fund the fiscal deficit of ¥5.6 trillion (£597 billion);
Ultra-long-term government bonds, with a value of ¥1.3 billion (£139 million), of which approximately a quarter will fund consumer trade-ins and the rest will fund national security and other strategic projects;
Special government bonds of ¥500 billion (£53 billion) to support the recapitalisation of the largest banks; and
Local government special purpose bonds of ¥4.4 trillion (£469 billion) to fund infrastructure, purchases of idle land and unsold housing, and to alleviate cash flow problems.
Conclusion
Notwithstanding the array of domestically focused numbers and programmes outlined at the NPC, and the persistence of an unrealistically high GDP target, the critical factor this year will be trade. The immediate focus will be on whether Donald Trump, President of the United States (US), and Xi Jinping, General Secretary of the CCP meet, and if there might yet be a trade deal between the two countries in which both sides commit to additional purchases from one another. While this could lower the geopolitical temperature for a while, it would be a largely cosmetic – and probably ineffective – deal, leaving the structural deterioration in relations to fester. Meanwhile, the behaviour of many other nations will be worth monitoring for signs of stress in commercial relations with the PRC.
George Magnus is a member of the Advisory Council of the China Observatory at the Council on Geostrategy.
To stay up to date with Observing China, please subscribe or pledge your support!
What do you think about this Analysis? Why not leave a comment below?