GWR relatively conservative

Beijing treads warily

Overall, the Government Work Report (GWR) has met our expectations, with no major surprises in the headlines. Despite a challenging environment—particularly regarding trade relations with the United States which recently implemented a second round of 10% tariffs and new counter-tariffs on US agricultural products, as well as adding American companies to China's Unreliable Entity List and imposing additional export restrictions—Beijing has maintained a cautious approach. 

Beijing has established a GDP growth target of "around 5 percent," consistent with previous targets, while acknowledging the difficulties posed by proliferating geopolitical tensions. Other key objectives include maintaining an urban unemployment rate of approximately 5.5%, creating over 12 million new jobs, and ensuring that personal income growth expands in lockstep with economic growth.

As expected, the government is shifting towards a more proactive fiscal policy, raising the deficit-to-GDP ratio to 4%, with a projected government deficit of CNY5.66tn. That implies that Beijing expects nominal GDP of CNY141.5tn, translating into nominal GDP growth of just 4.9%. Given that they are targeting a consumer price index (CPI) increase of around 2% (down from 3%), deflation at the factory gate will likely remain steadfast. Manufacturing investment surpassed real estate and infrastructure investments, amounting to CNY32tn by 2024—equivalent to 23% of GDP. A slowdown in this sector could have destructive consequences for near-term economic activity.

Beijing’s plans include issuing CNY1.8tn in ultra-long Special Treasury Bonds (STB), less than we expected – near one-third of which is to siphon to recapitalise banks. Local governments are expected to issue CNY4.4tn in Special Purpose Bonds (SPB). That’s slightly more than last year, but the proceeds will be allocated not just for construction projects but also for land acquisition and settling overdue payments. This move is aimed at alleviating some financial pressure on local governments; however, it also limits the potential for increased infrastructure investments and demand for commodities. 

The monetary policy directive has shifted to emphasize an "appropriately accommodative monetary policy," focusing on ensuring liquidity while aligning credit growth with economic conditions and CPI targets. The lower CPI projection for 2025 implies that credit growth may decelerate from 8% last year to approximately 7%. The GWR also provided additional details regarding the People's Bank of China's (PBOC) commitment to support various sectors, including real estate, the stock market, technological innovation, green initiatives, consumption, and small businesses, with provisions for loan renewals that do not necessitate full repayment of principal.

Stimulating domestic demand has been identified as the primary task for 2025 and is viewed as a crucial driver of economic growth. This effort will focus on increasing personal income and addressing households' inclination to save rather than spend. With plans to issue special treasury bonds to support consumer goods trade-in programmes, Beijing aims to open a variety of new consumption channels to rejuvenate household sentiment and drive economic activity.