Opinion | Why China needs bold fiscal expansion to hit 5% growth target

In the years following the 2008 global financial crisis, bold stimulus measures enabled China to achieve a V-shaped recovery. Since then, however, the government has largely maintained neutral – even tight – macroeconomic policies. If China is to achieve its growth target for 2025, this must change. In fact, since September 2024, China has reoriented its macroeconomic stance substantially.

Two indicators typically dictate whether a government pursues expansionary or contractionary macroeconomic policies: the rate of economic growth (or the employment rate), and the inflation rate. Low growth calls for expansion (as long as inflation also remains low), and high inflation requires contraction (calibrated not to crush growth). By this standard, the case for expansionary policies in China today is clear.

China’s PPI inflation has been in negative territory for the better part of the past 13 years, and its annual average CPI inflation has also been very low, at just 0.2 per cent in 2024. At the same time, China’s GDP growth rate has declined from 10.6 per cent in 2010 to 5 per cent last year.

So why didn’t Beijing embrace macroeconomic expansion much earlier? First and foremost, it fears the deterioration of its fiscal position. At the end of 2023, China’s government debt-to-GDP ratio was approaching 61 per cent, and its “augmented government debt-to-GDP ratio” (which includes debt held by local government financing vehicles) had reached nearly 117 per cent.

Late last year, however, the Ministry of Finance did acknowledge that the government has “considerable headroom” for issuing debt and increasing the fiscal deficit, a notable shift from the rhetoric of recent years. Moreover, at last September’s Politburo meeting, top Communist Party officials pledged to strengthen the “countercyclical adjustment” of fiscal and monetary policies and to deploy “necessary fiscal spending” to meet growth targets.