China’s National People’s Congress and the Chinese People’s Political Consultative Conference met in early March to lay down the country’s main economic targets for 2025. As expected, the main target is once again real gross domestic product growth at around 5% and consumer price index inflation of around 2%. This real growth will have to be achieved by an increase in the deficit to GDP ratio of 4%, up from the previous 3%. Special local government bond quotas will be allowed to increase by 4.4%, compared with 3.9% previously.
These debt indicators are comparable to the debt ceiling in the US and the Maastricht criteria in the euro area. China has always paid attention to limiting the general fiscal deficit to 3%. The local government financing requirement has always remained below the radar as local governments were not allowed to borrow. However, as the main source of local government revenues (some 80%), the allocation of land use has dried up since the onset of the real estate crisis and borrowing though local government financing vehicles has skyrocketed.
The Chinese government has addressed this problem by allowing sub-national governments to issue bonds within the local government bond quotas to swap their hidden LGFVs for official bond issues and to refrain from using this shadow financing channel to cover their current financing needs. The LGFVs were mainly held by banks and insurances. However, direct bank lending has also replaced the issue of LGFVs.
According to the most recent International Monetary Fund Article IV Consultations in mid-2024, China’s general government borrowing rose rapidly to an estimated 60.5% of GDP in 2024 from 38.5% in 2019. Augmented debt, which includes LGFVs, has increased to 124% of GDP from 86.3%. The share of local government debt rose to more than 60% of GDP from close to 50%. The overall non-financial debt increased to 312% of GDP in 2024 from 245%, putting China among the most indebted countries.
On the reverse side of the coin, the increase in M2 money supply (annex 4 of the IMF report) is running at twice the growth in real GDP. At the same time the CPI is running close to deflation (negative in February 2025), a conundrum in itself.
Can China reach its growth target?
The recent parliamentary decisions tell us that everything is subordinate to the real GDP growth target of around 5%. However, this growth has to be supported by an accommodating monetary policy and by a higher debt to GDP ratio of 4% as adopted by the NPC.
The People’s Bank of China has been pursuing this accommodative monetary policy already over the past two years to boost sagging economic growth. The bank purchased a record supply of newly issued government bonds last year, without calling it quantitative easing. However, this was suspended at the beginning of 2025 as yields fell to record lows and the renminbi depreciated. Regional banks and institutional investors continued buying these additional bonds issued. In early 2025, the PBoC also supplied record liquidity in the money market to support bank lending, which is supposed to pick up.
The open question is whether all these measures will stimulate real economic activities such as borrowing by the private sector to boost private consumption and investment. In view of the uncertain export prospects and lack of confidence in the domestic market, the growth objective might be even more elusive than before.
Herbert Poenisch is Senior Research Fellow, Zhejiang University, and former Senior Economist, Bank for International Settlements.
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