All bark, but no bite

Premier of the People's Republic of China Li Qiang with Biden-era U.S. Secretary of the Treasury Janet Yellen.

After three months of ongoing blunders– persistent deflation, intensifying trade wars and plummeting house prices, China’s economy faces a series of ongoing setbacks. “Our country is on the verge of a comeback the likes of which the world has never witnessed” preached Premier Li Qiang, in efforts to reign in impending doubts upon the economy’s future. Despite such ambitions, China’s plans are clearly at odds with fiscal reality. 

Mr Qiang’s much awaited annual report was met with a congregation of 3,000 delegates. March 5th was targeted to inform lawmakers on the government’s economic plans moving forward: investing in job creation, private sector development and advancement within the country’s technology sector, with the aim of driving growth to the targeted 5% rate. These listed objectives, among others, were set to be implemented following the execution of a fiscal measure: increasing the deficit from 3% to 4% of GDP. Sadly, the looming economic realities pose a threat to the government's efforts. 

China couldn’t be in a more dire situation than it is now. Housing prices have seen a steady decline since 2020 and China’s stock of unfinished homes continues to increase. Property sales in 30 of China’s largest cities fell by 16% year on year in the first six weeks of 2025— understandably shaking the confidence of many homebuyers and homeowners in the process. Tighter regulation in the tech and finance sectors have resulted in pay cuts and layoffs, all symptomatic of deterrence in consumer spending, and the country’s ongoing deflationary pressures. A renewed trade war between Beijing and Washington has also resulted in a hit on economic activity. Trumpian tariffs on Chinese exports have slowed their transport to American markets, and hindered export growth— a problem that proves itself to be inconvenient when they account for 20% of GDP.

The significance of these setbacks on economic activity is not the only cause for scepticism. The fiscal policies that Beijing has chosen to incorporate are very much in line with those made by many European democracies in the early 90s: keep the public deficit around 3%, and maintain a healthy debt burden (under 60%). Concerns over possible strains on the public purse have created doubt as to the fiscal headroom that China has. The country’s aging population has already added tension on government outlays in the form of state-pensions. Falling tax revenues, down 6 percentage points between 2018 and 2024, along with rising pressures to finance the development of presold, unfinished buildings within the property market only serves to enlarge the debt burden that the government has to take on in order to resolve pressing issues. These figures make the targeted 4% deficit figure seem almost fanciful.

Mr Qiang’s grand plan can be labelled no more than an aspiration. Given the challenges the country faces, the slowdown in economic activity has only added to the necessity for significant increases in government expenditure. With such low confidence from households and firms presently within the country, it may require a big step up for the Chinese government to provide a significant amount of outlays in order to course-correct the reduction in growth.

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