By Vaibhav Tandon

Two Sessions, or Lianghui, is the popular name for the annual meeting of China’s top legislative and consultative bodies.  These gatherings are closely watched by overseas observers as they provide key insight into China’s political landscape, economic priorities and overall policy direction. 

This year’s conclave was surrounded by expectations that policymakers would unlock large-scale measures to bolster China’s struggling economy.  Unfortunately, the results left investors wanting.

China’s 2025 growth target was set at “around 5%” for the third year in a row.  The inflation target was lowered by a full percentage point to “around 2%.”  To achieve these outcomes, officials raised the targeted budget deficit to 4% of gross domestic product (GDP) – the highest level in more than three decades.  This represents an RMB1.6 trillion ($221 billion) increase, largely driven by an expansion of central government spending.

The government also raised the quota for local government borrowing by 13% and for long-term treasury bonds by 30%.  The proceeds will be allocated to infrastructure development, land acquisition and investments in national strategic projects. 

Beyond direct stimulus, Beijing also plans to issue RMB500 billion ($70 billion) in special treasury bonds to replenish the capital of key state-owned banks.  Following the success of DeepSeek’s artificial intelligence (AI) reasoning model, officials also announced a state-backed fund to support AI and other technological innovations.

The Two Sessions attempted to signal that policymakers will deliver robust government support, as the deficit target crosses an implicit “red line” of around 3% of GDP.  That said, the scale and composition of stimulus measures will not fully offset domestic economic hardships or cope with rising external headwinds.

The world's second-largest economy is grappling with sluggish domestic demand and high youth unemployment.  Last year’s plan for housing inventory destocking failed to take off, given weak buy-in.  A prolonged property sector crisis has dented confidence and strained the finances of households, regional governments and banks. 

The impulse from fiscal spending announced during the Two Sessions is not big enough to drive a recovery in household consumption growth.  Though doubled from last year, only RMB300 billion ($41 billion) is earmarked for a trade-in program that subsidizes purchases of big-ticket items.  Last year’s effort produced gains in narrow retail segments but little impact on aggregate spending.

Consumer-oriented services received no policy support.  The government announced some improvements in retirement benefits, but these are unlikely to encourage declines in China’s elevated saving rate.

Beijing is also facing a repeat of frictions from the first Trump Administration, but taken to a much higher level.  Increased tariffs on Chinese goods are adding to uncertainty for the country’s exports, which made up nearly a third of China’s real economic growth last year. 

Chinese imports are now subject to an average 32% import levy into the U.S.  This will significantly weigh on Chinese shipments and industrial performance, exacerbating the prevailing excess capacity problem.  Policymakers could pivot towards greater currency depreciation to offset the impact from higher duties, but will risk triggering capital outflows.

Amid these hindrances, even the lower target of “around 2%” for inflation seems optimistic.  The headline consumer price index declined 0.7% year over year in February and averaged only 0.2% last year.  China’s GDP price index has fallen for seven quarters in a row, the longest streak since the Asian Financial Crisis of 1998.  Deflationary pressures are eroding corporate profits, diminishing employees’ incomes, hindering consumption and exacerbating debt burdens. 

The government has also promised an accommodative monetary policy.  Given weak credit demand, it is unlikely to be effective.  Deleveraging efforts will hinder the transmission of looser monetary conditions.  Lower interest rates will further squeeze banks’ net interest margins. 

China’s demographics are also among the least favorable in the world.  An aging, shrinking population coupled with a falling birth rate will contribute to a declining labor pool and sluggish consumer markets.  Thousands of kindergartens across the country have closed in the past three years as enrollment dropped sharply.

Beijing has long sought to rebalance the economy toward more consumer-led growth, but policymakers have not yet taken concrete steps to this end.  Consumption levels continue to account for just over half of GDP, one of the lowest rates in the world.  (Consumer spending in the U.S. accounts for more than two-thirds of the economy.)  A massive demand-side stimulus could help, but Chinese households are unlikely to shift away from their strong savings culture anytime soon, given the significant negative wealth effects from the real estate downturn.

Some are of the view that policymakers are keeping some dry powder to cope with further escalation in trade tensions with the United States.  Even if Chinese leaders were inclined to offer demand-side stimulus, already-elevated debt levels will limit their capacity to intervene.  Weak revenues from land sales, taxes and fees will continue to weigh on local government spending and impact their ability to service debt. 

China needs bold steps. Structural reforms that boost household incomes, strengthen the social safety net and improve market competition would lift long-term growth prospects.  But the Two Sessions meetings appear to have tiptoed around the country’s problems.