China Plans Record Budget Deficit in 2025 to Counter US Tariff Threat

China will run a budget deficit of 4% of its gross domestic product (GDP) in 2025, the highest on record, as the country prepares to counter the impact of potential tariffs from the United States, report two sources with knowledge of the matter to Reuters.

The new deficit target, which was agreed upon by Chinese leaders last week, represents a significant increase from the initial target of 3% for 2024. This increase in spending, equivalent to approximately 1.3 trillion yuan ($179.4 billion), will be funded through the issuance of off-budget special bonds, according to the sources.

The move towards a more proactive fiscal policy is part of China's strategy to mitigate the potential economic consequences of increased US tariffs on Chinese imports. This follows through on pronouncements from leading officials after December's Politburo meeting and last week's Central Economic Work Conference (CEWC), where the targets were agreed upon but not officially announced.

Despite the significant increase in the budget deficit, China will reportedly maintain its GDP growth target of around 5% in 2025. This comes after government advisers recommended against lowering the growth target, as reported by Reuters last month.

China's economy has faced several challenges this year, including a severe property crisis, high local government debt, and weak consumer demand. Exports, previously a source of strength, are now facing the potential threat of US tariffs exceeding 60%, should President-elect Donald Trump implement his campaign pledges.

The potential imposition of tariffs has already prompted many Chinese manufacturers to shift production abroad to avoid the levies. Exporters warn that tariffs will further erode profits, potentially leading to job losses, reduced investment, and slower economic growth. They also point to the risk of exacerbating China's industrial overcapacity and deflationary pressures.

The CEWC and Politburo meeting summaries also indicate that China's central bank will adopt a more accommodative monetary policy stance, suggesting potential interest rate cuts and increased liquidity injections. This marks a departure from the "prudent" monetary policy stance maintained for the past 14 years, a period during which China's overall debt levels, including government, household, and corporate debt, have more than quintupled.

Analysts anticipate that China will heavily rely on fiscal stimulus next year to offset the impact of tariffs. However, they also note that Beijing may utilize other tools, such as allowing the yuan to weaken, to mitigate the negative consequences of punitive trade measures.