Mr Trump’s speech, bombastic and bilious, was heckled by a congressman who had to be removed from the chamber for “disruption of proper decorum”. The president’s words were punctuated by chants of “usa, usa, usa!” and “Fight, fight, fight!” and “Na na na na, hey hey, goodbye!”
Mr Li’s speech had none of that. His audience—3,000 delegates assembled in the Great Hall of the People overlooking Tiananmen Square (pictured)—tried to look attentive. Tea was sipped, proper decorum preserved. Much of what Mr Li said was formulaic and predictable. As always, he heaped dutiful praise on his boss, Xi Jinping. But amid the platitudes and boilerplate, the fiscal numbers he provided were revealing about his government’s mindset at a difficult time. China’s economy faces a lingering property slump, chronic deflation and an intensifying trade war. The government’s response has too much of what Mr Trump sorely lacks: caution.
In his report, China’s prime minister announced the same official economic growth target as last year: about 5%. He also provided a catalogue of ten “major tasks” for the year ahead that echoed the list in 2024. Industrial modernisation, technological self-reliance and expanding domestic demand all featured prominently. But stimulating domestic spending was elevated from the third priority last year to the top task for 2025. Indeed, Mr Li mentioned consumption 32 times, a record. The previous peak (adjusted for the length of the speech) was 26 times in 2009, as China tried to revive spending in the aftermath of the global financial crisis.
Now, as then, the government is keen to restore consumer confidence, which has never recovered from the covid lockdowns. It also wants to steady the property market, which is struggling to find a bottom. Homeowners are no longer sure that their flats will hold their value. And homebuyers who have paid in advance are no longer confident their property will be built. These fears have contributed to a lack of demand and months of declining prices.
America’s trade war will not help. Mr Trump hit China with a fresh 10% tariff on the day before Mr Li’s speech, following a similar duty a month earlier. Combined with older levies, they mean Chinese goods now face an average American tariff of about 34%, reckons Larry Hu of Macquarie, an Australian bank. China’s government swiftly retaliated by imposing tariffs on a narrower range of American goods, from chicken to soyabeans. It also added more American firms to a blacklist that could curb their dealings with Chinese firms. “If war is what the us wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end,” said the Ministry of Foreign Affairs.
To offset tariffs and deflation, China’s economy needs a more forceful stimulus. “It is better to act early than late,” as Mr Li put it. Most economists have been expecting an extra fiscal push this year of about 2% of gdp or more. That would be enough to stop deflation worsening, though probably not much more.
The fiscal package Mr Li actually announced had several parts. The target for this year’s headline budget deficit will rise from 3% of gdp last year to 4% this year. The headline figure covers only a fraction of China’s sprawling public finances, leaving out government-managed funds and financing vehicles sponsored by local governments, among other things.
But the headline number sends an important signal. By tradition, China has tried to keep the official deficit at 3% of gdp or below, in keeping with old-fashioned international norms. A 4% deficit shows that it is willing to abandon fiscal piety for the sake of rescuing the economy. That was a good first step.
As well as a bigger headline deficit, the central government will also loosen the financial reins on local governments. It will increase the quota of “special bonds” they can sell from 3.9trn yuan ($540bn) last year to 4.4trn this year. These securities were once reserved for infrastructure projects that can earn some revenue. But local governments can now use the money to buy unsold flats and idle land from property developers. The larger quota was close to expectations: a satisfactory second step.
But on the third step, the speech fell somewhat short. The central government will itself sell another batch of “special” bonds worth 1.8trn yuan, including 500bn yuan to help recapitalise China’s banks. That is more than it sold last year. But the figure is about 700bn yuan below expectations. All told, economists expect China’s broad fiscal deficit to increase by a little less than 2% of gdp (see chart 1).
The style of China’s stimulus was also mildly disappointing. In the past the government has lavished money on bridges to nowhere and other white elephants. Whereas America fights downturns by printing money, China pours concrete. In his speech Mr Li promised to give greater priority to “improving the people’s well-being” and “boosting consumption”. The central government will, for example, devote 300bn yuan to its “trade-in” scheme which encourages households to replace old appliances and cars with newer ones.
China has also given civil servants a pay rise. And it will up medical-insurance subsidies for rural folk and city dwellers who are not covered by work-based schemes. Annual subsidies would rise to 700 yuan per person, an increase of 4.5%, according to the budget. The same groups will receive an increase in their basic pensions of 20 yuan a month, similar to last year. That is a large rise in percentage terms (almost 40% over two years) but tiny in absolute amounts. Nonetheless, of the extra fiscal stimulus provided this year, only about a quarter is related to consumption, calculates Robin Xing of Morgan Stanley.
Boosting consumption is not the only priority. A new “guidance fund” will also mobilise 1trn yuan in venture capital for new technologies. The budget for national defence will rise by 7.2%, before adjusting for inflation. In the past, China’s economy has kept pace with increased military spending, through a mix of real growth and inflation (see chart 2). As a result, the official military budget has remained fairly steady as a percentage of gdp, fluctuating around 1.3%. But now that China has slower growth and deflation, the equation has changed. Last year, for example, gdp grew by only 4.2% in nominal terms, before adjusting for changing prices.
Will the same thing happen this year? The government does not give a growth forecast for nominal gdp. But the fiscal arithmetic in Mr Li’s speech implies he expects it to grow by about 4.9%. Since that is slower than the target for real, inflation-adjusted growth, the government must believe that economy-wide prices could fall again this year. Not even the government, then, expects their stimulus efforts to succeed in decisively defeating deflation.
In his very different speech in Washington, America’s president said he was looking forward to relentless success. “Our country is on the verge of a comeback the likes of which the world has never witnessed,” he said. More prudent leaders like to underpromise in the hope of overdelivering. But in the fight against deflation, that may be the wrong approach. Gloom can be self-fulfilling. In trying to restore confidence and revive animal spirits, then, a dash of bravado probably helps. The back-to-back speeches offered a stark contrast. Both would have been better if each had more closely resembled the other.
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