By Yu Yongding, Project Syndicate | Jun 2, 2025
While GDP growth is no longer paramount for China’s leaders, it still matters. And, at a time of falling export growth and insufficient domestic consumption, the only way China can reach its growth target is with a bold fiscal expansion that targets a robust increase in infrastructure investment.
BEIJING – 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 reorientated 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% in 2024. At the same time, China’s GDP growth rate has declined from 10.6% in 2010 to 5% last year.
So, why hadn’t China’s government embraced 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%, and its “augmented government debt-to-GDP ratio” (which includes debt held by local government financing vehicles) had reached nearly 117%. While these levels are much lower than those in most developed economies, they are high by Chinese standards, leaving the government reluctant to raise its budget deficit-to-GDP ratio above 3%.
Late last year, however, China’s Ministry of Finance did acknowledge that the central 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 meeting, top Communist Party of China (CPC) officials pledged to strengthen the “counter-cyclical adjustment” of fiscal and monetary policies and to deploy “necessary fiscal spending” to meet growth targets.
For many in China, economic growth is no longer paramount. Instead, their top priority has lately been to eliminate overcapacity – an objective that some fear a new round of stimulus, with its requisite surge in investment, would undermine. But overcapacity is a structural issue, which should be eliminated primarily through market mechanisms, though some supportive policies can also be used.
In any case, GDP growth still matters. And, as it stands, achieving this year’s growth target of 5% will not be an easy task. After all, net export growth makes a significant contribution to growth – 1.5 percentage points in 2024 – and this is likely to take a major hit, given ongoing trade tensions with the United States.
To be sure, in the first quarter of 2025, according to General Administration of Customs office, net exports grew at an annual rate of 50%. But the reason is both obvious and temporary: US importers were hoarding Chinese products ahead of expected tariff increases. Over the course of the year, net-export growth will likely decline sharply, shaving at least one percentage point off China’s GDP growth, according to some estimates.
Slowing export growth is not China’s only problem. Consumption is a function of income, income expectations, and wealth. Fostering the increase in domestic consumption needed to boost aggregate demand is difficult, owing to slower income growth, falling housing prices, and stock-market volatility.
Based on available information, I calculate that, at the end of 2024, final consumption accounted for 56.2% of GDP, and net exports comprised 3.4% of GDP. With total retail sales of social consumer goods (a proxy for final consumption) having grown by 4.6% in the first quarter of 2025, one can reasonably assume that, together, final consumption and net exports will contribute about 2.8 percentage points to China’s GDP growth this year.
If this turns out to be the case, China will be able to reach its 5% growth target only if the third element – capital formation, which accounted for 40.4% of GDP in 2024 – contributes 2.2 percentage points to growth. To achieve this, capital formation would have to grow at a rate of 5.4% this year.
Due to the lack of direct data, fixed-asset investment – comprising manufacturing investment (48.3% in 2024, according to my calculation), real-estate investment (19.5%), and infrastructure investment (32.2%) – is used as a proxy for capital formation. Last year, manufacturing investment grew by 9.2%, while real-estate investment growth declined by 10.6%. If, as seems likely, manufacturing investment maintains its growth momentum (9.2%) in 2025, and real-estate investment slows its decline (-0.5%), they will together contribute about 3.5 percentage points to total fixed-asset investment.
This means that achieving 5.4% growth in fixed-asset investment this year will require infrastructure investment to grow by 6% – a materially higher rate than in 2024. (In the first quarter, fixed-asset investment grew by just 4.2%.) While these figures are not precise, owing to insufficient data, they do offer a rough idea of the challenge China faces – namely, to accelerate the rate of infrastructure-investment growth substantially. To this end, a significant increase in government-bond issuance is essential.
There is some promising news: China is targeting a budget deficit-to-GDP ratio of around 4% for 2025 – the highest level since the 2008 global financial crisis. But all signs indicate that the expansion China’s government has planned still won’t be enough. To achieve 5% growth, it will need to go big.
Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.
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