China is set to unveil its economic strategy for the year ahead at the upcoming Two Sessions, a key annual political gathering where the government is expected to acknowledge softening domestic demand and introduce targeted stimulus measures to support growth. The event, which consists of the Chinese People’s Political Consultative Conference and the National People’s Congress (NPC), is closely watched by global markets as it sets the policy direction for the year.

The meetings will take place against a backdrop of economic uncertainty, ongoing deflationary pressures, and external trade challenges. As China navigates these complexities, the focus will likely be on stabilizing the economy, boosting domestic consumption, and addressing key structural issues.

Inflation Target and Fiscal Policy Adjustments

At the NPC’s opening session, Beijing is expected to revise its annual inflation target to around 2%, marking the lowest level in over two decades. This adjustment underscores weaker-than-expected consumer demand and ongoing deflationary trends. Over the past two years, consumer prices have barely risen, with inflation recorded at just 0.2% in both 2023 and 2024, while producer prices have been declining for more than two years.

This deflationary environment has created additional pressure on policymakers to introduce stimulus measures that encourage spending and investment. One significant policy shift expected at the Two Sessions is an increase in the budget deficit to 4% of GDP, up from 3% in 2024. This move suggests a more flexible fiscal stance aimed at supporting growth through increased public spending.

To further stimulate infrastructure investment and economic activity, China is also expected to triple the quota for special sovereign bond sales to 3 trillion yuan ($410 billion), a major increase from 1 trillion yuan in the previous year. Additionally, local government bond issuance is projected to rise to 4.5 trillion yuan, up from 3.9 trillion yuan, providing more liquidity for infrastructure projects and regional economic initiatives.

Balancing Growth Amid Trade Uncertainty

Despite the expectation of higher government spending, policymakers are likely to remain cautious in implementing large-scale stimulus in the first half of the year. Uncertainty surrounding global trade conditions and tariff adjustments presents an additional challenge, as external demand remains one of the few bright spots in the economy.

While China’s economy expanded by 5% in 2024, growth in retail sales slowed significantly, falling from 7.1% in 2023 to 3.4% in 2024. The ongoing downturn in the real estate sector also weighed on overall economic performance, with property investments shrinking by 10.6% year-over-year. Given these factors, a stronger emphasis on domestic consumption is expected in this year’s policy agenda.

One of the key stimulus measures under discussion is the expansion of trade-in subsidies to encourage consumer spending. Initially focused on automobiles and household appliances, the program is expected to broaden its scope to include smartphones and other high-value goods. The total subsidy allocation for this initiative could exceed 300 billion yuan, more than doubling last year’s amount. Additional measures, such as increased pension benefits, subsidies for families with young children, and enhanced social welfare programs, may also be introduced to bolster household income and encourage spending.

Strengthening the Private Sector and Business Environment

A major focus at the Two Sessions will be revitalizing the private sector and improving the business climate. Policymakers are reviewing new legal frameworks aimed at ensuring fair treatment for non-state-owned businesses and limiting arbitrary fines and fees imposed by local authorities.

This comes amid concerns that private enterprises, particularly in the technology and consumer sectors, have faced an uncertain regulatory environment in recent years. The government is expected to introduce clearer guidelines to encourage investment, support entrepreneurship, and enhance access to financing for small and medium-sized enterprises.

The easing of regulatory restrictions on technology companies is another area of interest. There are signals that the government may be shifting toward a more supportive stance, allowing firms in key technology sectors to expand operations, attract investment, and contribute to national innovation efforts.

Additionally, China is exploring new policies to attract foreign investment, including measures to streamline approval processes, improve intellectual property protections, and create incentives for multinational corporations to expand operations within the country. These steps are aimed at reinforcing China’s position as a key global manufacturing and innovation hub.

Long-Term Economic Planning and Strategic Investments

Beyond short-term stimulus measures, this year’s Two Sessions will also lay the groundwork for long-term economic planning, as the government prepares to outline priorities for the next five-year economic cycle. The current five-year plan ends in 2025, and policymakers are expected to provide initial insights into the next phase of economic development goals.

Key areas of focus will likely include:

• Technological innovation and industrial upgrading – Expanding investment in semiconductors, artificial intelligence, and renewable energy to reduce reliance on foreign technology.
• Defense and security-related spending – Allocating additional resources to modernizing national defense and strengthening cybersecurity.
• Green energy and sustainability – Promoting the transition to clean energy, electric vehicles, and sustainable infrastructure projects.

The government’s long-term economic vision will aim to balance economic resilience, industrial modernization, and sustainable development while addressing challenges such as an aging population, shifting global trade dynamics, and financial stability concerns.

Looking Ahead: Policy Signals and Market Reactions

While the Two Sessions are not typically a venue for sudden or drastic policy shifts, they serve as a critical indicator of the government’s economic priorities and future policy direction. Decisions made during the gathering will shape market sentiment, business confidence, and investment strategies in the months ahead.

As China navigates a complex global environment, the government is expected to maintain a delicate balance between stimulating economic activity and preserving financial stability. The effectiveness of this approach will depend on how well stimulus measures are implemented and whether they translate into sustained economic momentum.

For businesses, investors, and policymakers, the outcomes of the Two Sessions will offer valuable insights into China’s growth trajectory, policy focus areas, and strategic economic positioning for the years ahead.

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