Economists say China’s growth goal will need much stronger stimulus if U.S. trade war intensifies

Chief China economist at Macquarie Larry Hu revealed in a note on Wednesday that Beijing will use stimulus to offset tariffs. He argued that China will optimize the stimulus to boost the country’s growth at around 5%.

Hu also acknowledged that any additional measures will likely arrive after the state’s officials assess the impact of tariffs on growth. China is expected to release its official first quarter GDP data in mid-April. The growth data will be followed by a meeting of the decision-making body Politburo to discuss economic policy at the end of April.

Larry Hu believes China will use stimulus to offset tariffs

Beijing’s leadership set an ambitious growth target this year in the wake of trade war worries with the United States. On Wednesday, the country set its GDP growth target at “around 5%” for 2025. Larry Hu believes that the target seems harder to reach given rising trade tensions with the U.S. and persistently weak domestic consumption.

“Beijing’s target of around 5 percent growth amidst ongoing trade tensions with the U.S. speaks volumes about their strategic economic confidence. It will be interesting to see how this plays out in their global economic interactions.”

–Greg Shockey, Chief Strategy Advisor at Pointward.

Chinese Premier Li Qiang highlighted that the nation faces external challenges that were unseen in a century. Qiang revealed in a speech at the opening of the annual parliamentary meeting that China’s challenges were “unfolding across the world at a faster pace.”

The U.S. president issued a cumulative 20% new tariffs on Chinese imports in just a month and threatened more to come as soon as early April. The tariff woes have strained China’s exports in the midst of its slowing economy.

The country’s officials have been pressured to include more forceful stimulus measures to boost domestic consumption and the housing sector. The state also wants to reduce its economy’s reliance on exports and investment to mitigate the strain on tariffs. China recorded that exports contributed nearly 25% of its GDP in 2024.

Chief China economist Larry Hu acknowledged that China will use stimulus to offset tariffs in 2025. He believes that the move will help the state to grow its GDP to around 5% this year. 

Hu also said that additional measures will arrive after officials assess the impact of tariffs on growth. He believes that Beijing’s historic record proves that it “can’t miss the GDP growth target, but they also don’t want to over-deliver.”

The country hit a 5% growth rate in 2024, boosted by a late stimulus push toward the end of the year. The stimulus included several interest rate cuts and a five-year stimulus package totaling 10 trillion yuan. Hu believes that March is too early for any major policy stimulus because “policymakers needed more time to see the actual impact of the trade war 2.0.”

China revises its annual inflation target

Beijing revised its annual inflation target to “around 2%,”  which was the lowest in more than two decades from above 3% in prior years. Julian Evans-Pritchard, head of China economics at Capital Economics, revealed that the lower inflation target “hints at a degree of official acceptance of the current deflationary environment.” He believes that the inflation goal serves as a ceiling rather than a target to be realized. The economist also added that China’s policymakers were not counting on a substantial reflationary impulse in 2025.

Evans-Pritchard argued that the fiscal package may not be sufficient to initiate a reflationary rebound and prevent growth from slowing this year. He said that the government made a rare increase in its fiscal deficit target to 4% of GDP, up from 3% last year, to support this year’s growth target.

China wants to issue 1.3 trillion yuan ($179.5B) in ultra-long-term special Treasury bonds this year as part of the fiscal fund package. Beijing also gave the green light to local governments to issue 4.4 trillion yuan of special debt, up from 3.9 trillion yuan in 2024. The special debt will be used for infrastructure investment, purchasing land and apartments from debt-strapped developers, and local debt swaps.

The economist at Capital Economics disclosed that the estimated overall increase in deficit spending was around 1.5% of GDP. He also argued that China needed a “more pronounced shift in government spending towards boosting consumption.” The economist is confident it will ring-fence the economy’s path toward this year’s roughly 5% growth target.

Chinese officials also pledged an additional 300 billion yuan of ultra long-term special government bonds for the subsidy support. Gabriel Wildau, managing director at Teneo, said that “this increased sum is small in the context of China’s 135 trillion yuan economy.” Wildau believes that stabilizing the housing market will be crucial in bolstering domestic demand as the prolonged real estate slump has dented consumers’ willingness to spend.

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