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China To Issue Record $411 Billion In Special Treasury Bonds For 2025. 7 Key Questions For China’s Economy In 2025 And How India Needs To Learn From These Measures.
In a decisive move to support its slowing economy, China plans to issue a record 3 trillion yuan ($411 billion) in special treasury bonds in 2025, significantly up from the 1 trillion yuan issued this year.
The fiscal stimulus outlines Beijing’s resolve to counter mounting economic challenges, including potential increases in U.S. tariffs under the Trump administration starting January.
Key programs include, trade-in discounts for durable goods such as cars and appliances, subsidies for large-scale equipment modernization, railways, airports, and farmland development and strategic investments in critical areas.
Market Response
Following the announcement, China’s 10-year and 30-year treasury yields rose by 1 basis point (bp) and 2 bps, respectively, reflecting cautious optimism. Analysts, such as Tommy Xie, Head of Asia Macro Research at OCBC Bank, view the central government’s leverage capacity as a positive signal, providing incremental growth support amidst deflationary pressures.
Unlike regular treasury bonds, special bonds are considered extraordinary tools for targeted policy objectives. The planned issuance reflects Beijing’s readiness to deepen fiscal intervention, prioritizing economic recovery over debt constraints.
Implementation Insights
Official sources indicate that 1.3 trillion yuan of the issuance will fund “two major” and “two new” initiatives. This builds on the success of the 2024 allocation, where 70% of funds were directed to infrastructure and 30% to consumption-focused programs.
A significant portion of the planned proceeds from China’s 2025 special treasury bond issuance will be allocated to investments in “new productive forces.” This term, often used by Beijing, refers to advanced manufacturing sectors such as electric vehicles, robotics, semiconductors, and green energy.
Sources indicate that over 1 trillion yuan will be dedicated to this initiative, with the remainder aimed at recapitalizing large state-owned banks struggling with shrinking margins, declining profits, and rising levels of bad loans.
The planned issuance of new special treasury debt for next year is estimated to account for 2.4% of 2023 GDP. For context, Beijing previously raised 1.55 trillion yuan through such bonds in 2007, which equated to 5.7% of the economic output at that time. These measures reflect the government’s effort to stimulate the economy amidst mounting challenges.
President Xi Jinping and top officials convened on December 11–12 for the annual Central Economic Work Conference (CEWC) to outline China’s economic strategy for 2025.
According to state media, the meeting emphasized the necessity of maintaining steady economic growth, increasing the fiscal deficit ratio, and issuing more government debt. However, specific figures were not disclosed. Reports suggest that China plans to raise its budget deficit to a record 4% of GDP and aims for an economic growth target of approximately 5% next year.
At the CEWC, policymakers traditionally set key targets for economic growth, fiscal deficit, and debt issuance for the upcoming year. While these targets are generally agreed upon during the conference, they are officially announced at the annual parliamentary session in March and remain subject to revision.
Key Questions For China’s Economy In 2025
China’s economy has faced considerable challenges this year, including a severe property crisis, high local government debt, and weak consumer demand. Although exports have provided some relief, they are now under threat as the U.S. considers imposing tariffs exceeding 60% on Chinese goods, in line with Donald Trump’s campaign pledges.
Such tariffs would initiate the need for China to pivot towards domestic sources of growth. However, declining property prices and limited social welfare have left consumers feeling less financially secure, further dampening household demand.
To address these issues, Beijing is expanding trade-in programs for consumer goods and industrial equipment. These initiatives aim to stimulate domestic consumption and encourage industrial modernization, aligning with the broader goals of fostering economic resilience and growth
1) What Growth Target Will China Set for 2025?
China’s annual Two Sessions meeting, where it announces its economic growth target, is a key event that shapes government policy for the year. Historically, the country has met its growth targets consistently, with rare exceptions in 1990 and 2022.
The target set for 2025 will reflect policymakers’ resolve to address economic challenges in a potentially less favorable external environment.
Potential Growth Scenarios for 2025
Baseline Case: ‘Around 5%’ or ‘Above 4.5%’
This scenario represents a balanced approach, maintaining a relatively acceptable growth floor. It signals confidence in stabilizing the economy while recognizing external risks. Achieving this target would require a stronger push in fiscal and monetary policy, with a focus on boosting domestic demand and targeted support for industries affected by U.S. tariffs.
This case aligns with expectations for moderate but steady economic recovery, balancing external pressures with domestic stimulus.
Bear Case: ‘Around 4.5%’ or Below
A conservative target would lower pressure on policymakers, suggesting limited expectations from domestic stimulus to offset external challenges. Markets may perceive this as a weaker policy stance, potentially dampening investor confidence.
This case reflects caution, acknowledging significant drags from external demand and limited room for aggressive policy measures.
Bull Case: Above 5%
A bold growth target would demonstrate strong confidence, countering widespread predictions of external drag, particularly from U.S. tariffs. However, this would necessitate substantial policy interventions beyond current plans.
Achieving this target could act as a market catalyst, signaling robust policy support and optimism for economic recovery.
The baseline forecast anticipates 4.6% GDP growth in 2025, factoring in weaker external demand and a stronger domestic policy push.
However, significant uncertainties remain, including the effectiveness of current monetary easing measures and the extent of external pressures.
2) Monetary Easing and Policy Prospects for 2025
The People’s Bank of China (PBoC) has implemented aggressive monetary easing measures in 2024, including rate cuts, reserve requirement ratio (RRR) reductions, and targeted support programs for equity and property markets.
These actions have been met with positive market reactions, particularly in the latter half of the year. However, the overall impact on credit activity remains mixed, with only modest improvements in loan demand.
In 2025, the PBoC is expected to continue its easing trajectory.
Forecasts include –
- 20-30 basis points in rate cuts, potentially more if U.S. tariffs escalate.
- 100 basis points in cumulative RRR cuts, with further reductions likely by year-end.
- Expanded open market operations to enhance liquidity and stabilize markets.
- A gradual phase-out of the medium-term lending facility as part of ongoing monetary policy reforms.
- Continued targeted programs to support vulnerable sectors, ensuring a stable economic environment.
3) Can We Expect Fiscal Stimulus to Ramp Up in 2025?
While monetary policy exceeded expectations in 2024, fiscal policy largely fell short, leaving markets underwhelmed. Local governments struggled with short-term debt pressures, leading to delayed payments to vendors and staff, and lacked the capacity to implement substantial stimulus measures.
The market’s lukewarm response to the fiscal package may underestimate its potential impact. Addressing local government debt pressures is crucial to enabling them to resume their traditional role as key drivers of fiscal stimulus. Once these immediate challenges are mitigated, a more robust fiscal policy stance is expected.
Investment and Infrastructure
Fixed asset investment growth is anticipated to rise modestly from the current 3.4% to around 5% in 2025, with government-led initiatives continuing to outpace private sector investments. Priority areas will likely include green infrastructure, as well as traditional investments in roads, bridges, and railways. However, the multiplier effect of fiscal stimulus may be weaker than in the past, as many of the easiest and most impactful projects have already been undertaken.
Support for the Property Market and Consumption
Markets will closely watch for tangible policies aimed at strengthening the property market and consumption.
Property Market: The focus may shift to converting unsold homes into affordable housing or other purposes. While such plans have been discussed, their execution has been slow. A faster rollout in 2025 could provide much-needed relief to the struggling property sector.
Consumption: Efforts to stimulate consumer spending could gain momentum. Existing trade-in programs, which have driven retail sales growth in 2024, may expand in scope. Additionally, consumption vouchers, such as those seen in Shanghai, could be implemented on a larger scale across cities. These initiatives could target not only household appliances and autos but also a broader range of goods.
Tax reforms, including adjustments to income tax brackets, might also be introduced to ease the financial burden on lower-income households.
4) What Can We Expect From the Property Market Moving Forward?
China’s property market remained a significant drag on the economy in 2024, but there are signs of cautious optimism as we look ahead to 2025. The year 2024 presented a mixed picture, with progress in some areas and persistent challenges in others.
The Glass-Half-Full Perspective
The worst-case property market crisis that loomed at the end of 2023 appears to have been averted. Defaults by property developers slowed, banks remained stable, and abandoned projects saw progress. By October 2024, over 420 million square meters of property were completed, and unsold property inventories, which peaked in February, have begun to decline.
The Glass-Half-Empty Perspective
Despite these improvements, property prices continued their downward trajectory. Through the first ten months of 2024, secondary market prices fell by 7.5%, while primary market prices declined by 5.5%. From their 2021 peaks, prices have dropped 15.8% and 9.4%, respectively. These declines have eroded household confidence, making it difficult for consumers to spend freely while their most significant asset—real estate—continues to lose value.
Outlook for 2025
Stabilizing property prices will be critical for restoring household confidence and supporting broader economic recovery.
Here’s what we anticipate for the property market moving forward –
Price Stabilization – Property prices are expected to bottom out in 2025, with an L-shaped recovery being the most likely scenario. Recovery will begin in Tier 1 cities and gradually extend to Tier 2 cities. However, Tier 3 and Tier 4 cities, facing more significant supply-demand imbalances, may take longer to stabilize.
State-Led Purchases – The pace of state-owned enterprise (SOE) and government acquisitions of unsold properties is expected to accelerate, supporting the reduction of housing inventories. While inventories may not return to pre-crackdown levels in 2025, the increased pace of state purchases raises the possibility of achieving this milestone by 2026 instead of 2027.
Affordability and Policy Measures – Further expansions to affordability-focused measures and reduced barriers to home purchases are likely. These initiatives will help the market find a bottom and encourage cautious buyer participation.
Investment Recovery – A meaningful recovery in real estate investment is unlikely until property prices stabilize and inventories normalize. While both conditions may not fully materialize in 2025, the market is expected to gradually move past the most challenging phase of this cycle.
5) Will Consumption Recover in 2025?
Consumption has been a significant drag on China’s economic growth in 2024, with retail sales growth slowing to just 3.5% YoY through October, compared to 7.2% in 2023. The waning impact of “revenge consumption” and record-low consumer confidence have weighed heavily on household spending.
Key Factors Behind Weak Consumption
Negative Wealth Effect – persistent declines in property values have eroded household wealth, a critical factor influencing spending confidence.
Equity Market Challenges – Lackluster performance in the equity markets over the past 3-4 years has further exacerbated the wealth effect, leaving many investors disillusioned or caught at market peaks during rebounds.
Cost-Cutting and Wage Stagnation – Wage growth in 2023 was the slowest since 1998, at just 3.5% YoY, and income confidence hit record lows in 2024, as per a PBoC survey. Reports of pay freezes, cuts, and layoffs throughout the year have only deepened concerns about income stability, stifling consumer spending.
2025 Outlook for Consumption
While headwinds to consumption are expected to weaken gradually, they are unlikely to dissipate entirely in 2025.
Key developments to watch include –
Property Market Stabilization – With property prices expected to bottom out in 2025, the negative wealth effect may transition to a neutral factor. However, the anticipated L-shaped recovery means this will not yet translate into a significant boost for consumer confidence.
Cost-Cutting Easing – Companies, having implemented significant cost-cutting measures in 2024, may enter 2025 in a more stable position. If wage freezes and layoffs subside, income confidence could see a modest rebound.
6) Can China’s Exports Weather a Second Trade War?
China’s export performance in 2024 was a significant bright spot, contributing substantially to the economy’s expected growth of “around 5%.” Following a challenging 2023, where exports contracted by -4.6% YoY, the 5.1% YoY growth in the first 10 months of 2024 exceeded expectations. Net exports added roughly 1 percentage point to GDP growth, with strong export demand indirectly bolstering industrial production.
However, with Donald Trump’s return to the U.S. presidency and the looming threat of renewed trade tensions, 2025 may bring a more challenging external environment for China’s exports. The U.S. remains a crucial market, with estimates of direct and indirect exports to the U.S. ranging between $600 billion and $700 billion. Despite this, fears of an immediate and devastating impact on China’s economy from potential tariffs may be overstated.
Assessing the Trade War Risks
Tariff Implementation Likely to Be Gradual – Instead of blanket 60% tariffs, a phased approach with room for negotiations and exemptions is more probable, limiting the immediate shock to China’s export sector.
Re-Export Channels – Since the first trade war, China has established various re-export mechanisms that could mitigate the impact of U.S. tariffs, provided these channels are not swiftly targeted.
Policy Support – China is likely to deploy supportive policies to cushion the economy from tariff-related shocks, further reducing the drag on GDP. Analysts estimate the potential hit to GDP growth could range between 0.4 to 0.8 percentage points, lower than some early projections of 1-2 percentage points.
Structural Trade Shifts Since the First Trade War
China has diversified its export destinations and reduced dependency on the U.S., with exports to the U.S. declining from 19% of total exports in 2018 to 14.6% in 2024. Additionally, fast-growing export categories such as automobiles, ships, and semiconductors have a lower reliance on the U.S. market.
Nonetheless, risks remain. A coordinated effort by the U.S. to align allies for broader tariffs or crackdowns on Chinese-owned companies could amplify the impact, though logistical challenges and China’s role in global supply chains may limit the feasibility of such measures.
7) Can China Stave Off Deflation in 2025?
China’s economy has been confronting a low-inflation environment in 2024, with the risk of deflation remaining a persistent concern. While headline CPI inflation returned to positive territory in February 2024 and stayed there, the underlying dynamics reveal vulnerabilities.
Initially driven by non-food inflation, recent months have seen food prices become the primary driver. Non-food inflation, a critical indicator of deflationary pressures due to its cyclical nature, dipped into negative territory in September, with falling vehicle prices and rents as key contributors.
Meanwhile, PPI inflation has been negative since October 2022, driven by declining raw material prices. Additionally, China’s GDP deflator—a key macro-level indicator—has been in negative territory since the second quarter of 2023, highlighting that nominal GDP growth has consistently lagged behind real GDP growth.
Policymakers have responded with monetary easing measures, signaling their commitment to counter deflationary pressures.
Challenges and Strategies for 2025
The risk of mounting deflation in 2025 is real, with tariffs adding complexity. On one hand, tariffs could exacerbate overcapacity and intensify price competition, worsening deflation. On the other hand, retaliatory measures from China might push specific prices higher.
More significant, however, will be the deployment of fiscal stimulus. Infrastructure-focused spending could boost commodity prices, while measures to stimulate consumption may provide a lift to CPI inflation.
Our forecast anticipates low but slightly higher inflation in 2025, with CPI inflation expected to tick up to 0.9% YoY. Food prices are likely to drive early-year inflation, while non-food inflation should gradually recover as policy measures take effect. Nonetheless, uncertainties around tariffs, retaliation, and the scale of domestic stimulus pose risks to this outlook.
8) Key Themes for the Chinese Government Bond Market in 2025
China’s government bond market has outperformed in recent years, attracting attention for its low yields—a sign of both deflation concerns and economic weakness. Policymakers have also voiced criticism, arguing that yields are misaligned with fundamentals.
Why Are Bond Yields So Low?
The low yields can be attributed to a combination of economic pessimism and deflation fears, but the primary driver is limited investment alternatives for risk-free yield:
- Deposit rates have fallen below 1% as the PBoC cut rates.
- Banks have redirected funds into bonds due to limited high-quality borrowing demand following RRR cuts.
- The property market bust and rising corporate bond defaults have increased risk aversion.
- A weak equities market has reduced investor appetite for higher-yielding options.
- Capital controls have limited domestic investors’ ability to diversify internationally.
Outlook for 2025
Government bonds are expected to continue performing well, supported by likely rate and RRR cuts and sustained safe-haven demand. The 10-year government bond yield is forecasted to decline gradually to around 1.9% by year-end.
The PBoC has occasionally intervened to prevent a bond market bubble and encourage a shift toward risk assets. While the 2% yield level served as a psychological barrier in 2024, policymakers may tolerate a move below this level in 2025, provided it is gradual.
The yield curve, which steepened slightly in 2024, is expected to continue this trend.
Factors contributing include, rate cuts pulling the short end of the curve lower, increased bond issuance pushing the long end higher, PBoC’s open market operations targeting a healthy yield curve.
The Last Bit
China faces a delicate balancing act in 2025. Efforts to stave off deflation will hinge on effective fiscal and monetary policies, while the government bond market remains a critical tool for navigating economic challenges.