Here are the key announcements and their implications:
Economic growth and fiscal policy. China has set an ambitious goal to grow its economy by around 5% in 2025 and raise inflation to 2%. These goals show the government's commitment to boosting the economy despite global uncertainties.
China plans to spend more money than it earns – increasing the central government budget deficit to 4%, up from 3% in 2024. But the total change – including local government spending, for example – is larger, equivalent to a loosening of 1.5-2% of GDP, adding more than 2 trillion yuan (US$275 billion) to the deficit. This extra spending will stimulate the economy.
Officials plan to issue more bonds to finance this extra spending. Local Government Special Bonds (LGSB) will increase by 500 billion yuan to 4.4 trillion yuan. Funding allocated for local debt swaps and housing acquisitions should have positive effects on the property market. ‘Ultra Long-Term Special Treasury Bonds’ issuance will increase to 1.3 trillion yuan. Within this, 300 billion yuan will be used to support trade-in of consumer goods, while 200 billion was also allocated for upgrading corporate equipment and 800 billion for long-term strategic projects. [1]Technology and innovation. The government is putting further emphasis on investing in high-tech sectors, which will cause more tension with the US. The Chinese Communist Party (CCP) continues to prioritise ‘high-quality’ growth, with a strong focus on scientific and technological development. The recent success of DeepSeek, a prominent AI initiative, has bolstered discussions around 'AI+' and its integration into China's advanced manufacturing base.
People’s Bank of China (PBOC) Governor Pan Gongsheng announced an expansion of the relending quota for innovation and upgrading. New tools may also be introduced to help finance science and technology development – further supporting the country's push for self-reliance in these critical areas.
Consumption and social safety net. Despite talk about boosting consumer spending, the measures announced fell short of expectations. The expansion of the consumer goods trade-in programme will only provide a temporary boost to demand. Urban pensions received a modest increase of 20 yuan per month, while healthcare cost subsidies rose by 35 yuan a year. A new scheme to subsidise childcare is in the works, but details are not expected until later this year.
- Inflation. Low inflation is still a worry, so the government has lowered its inflation target to 2% (which is still ambitious). Excess supply of goods is likely to keep prices from rising much. The inflation rate for February was so low that the annual forecast for 2025 was revised down. The government acknowledges there are areas where there is too much production and plans to issue specific guidelines to address this.
View from the Equities desk
Equity investors reacted positively to these announcements. The government's commitment to more fiscal stimulus and the focus on technology innovation have been particularly well received.Our ‘China A’ and ‘All China’ portfolios have performed well, and this suggests investors are returning to quality growth names, while moving away from state-owned enterprises (SOEs). This bodes well for strategies with a focus on high-quality stocks.
The economic growth target of around 5% and moderately accommodative monetary policies have reinforced investor confidence. The authorities' willingness to use tools such as bank reserve-requirement adjustments and interest-rate cuts have further supported sentiment.
Meanwhile, increased quotas for bond issuance and the focus on technology innovation are seen as positive signals for stock investors, particularly for sectors related to artificial intelligence (AI) and advanced manufacturing.
View from the Fixed Income desk
The bond market, however, has reacted less favourably. The ambitious 5% growth target is still viewed more as a signalling tool rather than an achievable goal, given the current economic conditions.The increase in the budget deficit was largely anticipated by bond investors, but bond yields have still risen in response. For example, on March 11, 10-year Chinese Government Bond yields increased by 30 basis points, or 0.3 percentage points, while the 20-year yields rose 20 basis points. When bond yields rise, bond prices fall, and vice versa.
The strong performance of the equity market and tighter monetary conditions in recent weeks have contributed to the poor performance of fixed income. Investors have interpreted the government's signals as pro-growth – leading to a shift in capital flows from bonds to equities.
However, despite some positive data – such as home-price stabilisation in key cities – the overall macroeconomic outlook remains weak, with exports growth showing signs of weakness and inflation in February being the weakest in recent memory.
Bond investors believe the deflationary environment is entrenched and that the government will need to do more with fiscal and monetary policies to fix this. That said, the PBOC, China’s central bank, has room for more rate cuts, and we expect bond yields to move lower when liquidity is loosened further.
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