China is deliberately holding off on substantial fiscal expenditure as it seeks to retain financial flexibility for potential challenges arising from the ongoing trade war, particularly the pressure from increasing US tariffs.
Recent data from the Ministry of Finance reveals that China’s combined spending through its general public budget and government fund account reached 5.65 trillion yuan ($779 billion) in the first two months of 2025, a modest 2.9% increase compared to the same period in 2024. This figure accounts for just 13.38% of the annual spending target, marking the slowest start to the fiscal year since 2022.
The spending delay is seen as a strategic move, with senior economist Zhaopeng Xing from Australia & New Zealand Banking Group suggesting that the government is conserving fiscal resources to navigate potential economic volatility. “Authorities need to reserve fiscal strength for uncertainties to ensure continued economic recovery,” he noted.
Despite this caution, China’s economic indicators showed strong performance in the early part of the year. Consumer spending, investment, and industrial production all exceeded expectations in January and February, giving Beijing some breathing room before launching further stimulus measures. Officials have reassured that they have ample tools at their disposal to support the economy, which is expected to face heightened pressures in the coming months as the full effects of US tariffs begin to impact Chinese businesses.
However, China’s fiscal situation also faces strain. The country’s overall revenue under its two primary fiscal accounts fell by 2.9% to 5.02 trillion yuan, driven by a decline in tax income and a further slump in land sales. Real estate continues to be a significant challenge, with tax revenue linked to the property sector dropping by 11.4%—the steepest fall since August of the previous year. Land sales by local governments also dropped by 15.7%, reflecting continued weaknesses in the housing market.
In addition to these challenges, non-tax revenue growth took a hit following the one-time boost provided by state-owned enterprise profit transfers in late 2024. The government is also tightening its grip on local government fines, another source of revenue, as part of efforts to restore private sector confidence.
As expenditures outpaced revenues, China’s budget deficit surged to nearly 622 billion yuan—more than double the deficit reported during the same period in 2024. To bridge this gap, the government issued a significant amount of debt, with net bond financing for January-February reaching a record 2.4 trillion yuan.
Some of the proceeds from this bond issuance are earmarked for addressing “hidden debts” incurred by local government-affiliated firms through infrastructure projects, which have contributed to rising financial pressures.
Looking ahead, the People’s Bank of China (PBOC) may adjust its reserve requirements for commercial banks and resume purchasing treasury bonds, given the anticipated acceleration of government bond issuance in the months to come. According to Goldman Sachs analysts, this strategy is aimed at mitigating the growing fiscal gap.
Despite the challenges, economists like David Qu and Chang Shu from Bloomberg Economics argue that to maximize the effectiveness of the fiscal stimulus announced during the National People’s Congress, China must prioritize front-loading spending for the remainder of 2025, a shift from its traditional slower fiscal pace. Recent bond issuance, which has more than doubled from last year’s figures, indicates that officials are already making efforts to ramp up spending.
ANZ’s Zhaopeng Xing predicts that fiscal spending will likely accelerate substantially starting in the second quarter as the adverse effects of US tariffs begin to take a toll on Chinese exporters and manufacturers.
This cautious fiscal approach is a balancing act for China as it prepares for the long-term economic implications of the ongoing trade tensions with the United States.
Related Topics:
Asian Stocks Rise as Chinese Tech Bets Fuel Rally
D-Wave Quantum Stock Surge: What Investors Should Watch Now
BlackRock, Vanguard, State Street Seek Dismissal of U.S. Antitrust Lawsuit
