China’s Xi and other leaders discuss GDP growth target and stimulus measures

Chinese President Xi Jinping and other top leaders are preparing for the annual Central Economic Work Conference, reportedly due to take place this week, as Beijing seeks to boost growth.

While an official date for the two-day conclave has yet to be announced, Bloomberg has reported that the closed-door meeting will take place on December 11-12. Normally, the annual conference is preceded by the high-profile gathering of members of the Politburo, the top decision-making body headed by President Xi.

At both meetings, senior policymakers will review economic performance and policy implementation in the current year while setting priorities for the following year, Goldman Sachs economists said.

According to Goldman Sachs, the central government will also discuss its growth target and budget for 2025, including to provide guidance to local governments in setting their own targets ahead of the annual parliamentary session early next year.

While the specific numbers won’t be announced until March, Beijing is widely expected to keep its GDP growth target for next year at “around 5%” – the same as this year – if not slightly lower.

“If history serves as a guide, policymakers could leave the 2025 growth target unchanged at around 5% or cut it to 4.5% to 5%,” said Larry Hu, chief China economist at Macquarie, adding that the Chinese policymakers have never lowered the target by more than 0.5 percentage points in the past.

According to Lynn Song, chief economist at ING, the Chinese government has rarely missed its growth targets, with only two exceptions where growth fell well short of target: 1990 and 2022.

While China’s economy is on track to meet this year’s growth target of “around 5%,” it is still grappling with several longer-term issues, including a prolonged real estate downturn, subdued domestic consumption and an escalation in trade tensions with the U.S. as Donald Trump returns White House back.

Chinese officials have announced increased stimulus packages since late September, including multiple interest rate cuts, looser rules on property purchases and liquidity support for stock markets.

Recent data suggests that existing stimulus measures have helped to stimulate some aspects of the economy, but were still not enough to offset ongoing deflationary pressures.

In November, the country’s consumer price inflation, already near zero, fell to a five-month low and wholesale price deflation continued to worsen, with the producer price index falling for the 26th straight month, data showed on Monday.

The ongoing slowdown in consumption in the country is due to the country’s real estate collapse and its close ties to local government finances.

Last month, China’s finance minister announced a $1.4 trillion package to ease local governments’ debt crisis.

Authorities need to further expand the size of the debt-swap program, Morgan Stanley economists said in a note, as local governments’ debt in financial vehicles accounted for nearly half of the country’s GDP.

Beijing is also expected to expand its budget deficit by 1.4 percentage points, which would allow more central government borrowing to support the economy, according to Morgan Stanley.

Although the budget deficit increased to 3.8% in October 2023 through the issuance of special bonds, the authorities returned to their 3% deficit target in March.

Faced with additional tariffs, Chinese leaders may consider larger fiscal packages “in multiple steps” next year while monitoring and responding to U.S. policy, economists at Barclays said in a note.

Trump, who takes office in January 2025, has said he will impose additional 10% tariffs on Chinese goods unless Beijing does more to stop trade in the highly addictive narcotic fentanyl. During his campaign, he had also threatened to impose tariffs of more than 60% on Chinese goods.

The latest threat of tariffs is likely a “tactic to push China to the negotiating table,” economists at Barclays said, predicting that the president-elect would ultimately impose just 30% additional tariffs. However, this could still lead to a decline in China’s GDP of up to 1 percentage point, they added.

“A political bazooka could arrive if Trump tariffs hit China’s exports hard,” Macquarie’s Hu said, adding that Beijing needs to boost domestic demand to meet its growth target.

Exports and manufacturing sectors can no longer drive the economy to achieve 4 to 5 percent annual growth over the next decade, Hu added: “They have simply become too big to drive growth in the long run,” and exports are through trade exposed to greater risks tensions.

Hu stressed that China needs to boost consumption as the main engine of growth by fighting unemployment, increasing labor income and providing more for low-income groups. “A reasonable target is for household consumption to reach 50% of GDP,” Hu said.

China’s government bonds are on the rise on expectations of further interest rate cuts and weak economic fundamentals. 10-year yields recently fell below the psychological benchmark of 2%, hitting a decade low.

The Chinese government has tried to contain the bond rally, fueled by pessimism about its economy and a lack of attractive investment opportunities.

“The market is still expecting some fiscal stimulus early next year,” said Edmund Goh, investment director at abrdn. Despite some encouraging signs of recovery in China’s real estate market, “we have not seen any improvement in domestic economic data in recent months,” Goh added.

In equities, Barry Gill, head of investments at UBS Asset Management, said China was still his “first choice” due to cheap valuations and “greatest potential to surprise investors” compared to other markets on numerous fronts.

China’s benchmark CSI 300 lost 0.5% on Monday after rising 1.3% last Friday to its highest level in two weeks, as some traders braced for further stimulus measures at this week’s policy meeting.

“The next 12 to 18 months could see a more decisive economic response and a turnaround in markets,” the UBS wealth management team said in an email.

— CNBC’s Evelyn Cheng contributed to this report.