In this blog, we discuss the fiscal package for 2025 against rising AI (artificial intelligence) and accelerated tariffs and assess the corresponding economic impact.
Expansionary fiscal package for 2025
The Chinese government announced an expansionary fiscal arrangement for 2025 in March National People’s Congress (NPC)-Two Sessions:
- Fiscal deficit: approximately 4% (vs. 2024: 3%)
- Special China Government Bond (CGB) quota: CNY1.8 trillion (trn) (vs. 2024: 1trn)
- Local Government (LG) special bond quota: CNY4.4trn (vs. 2024: CNY3.9trn)
The fiscal package aims to boost consumption and fixed asset investment (FAI) as major offsets to external headwinds, managing downside risk in the housing sector and continually pushing on technological developments and upgrades.
We read the fiscal package as positive as the Chinese government takes a bold move to break through the 3% implicit fiscal deficit cap which has been in place for many years. But we also note this is against the backdrop of a fast evolving trade war 2.0, in which the Trump administration prefers a more ambitious tariff plan compared to trade war 1.0.
Based on our estimate, the fiscal package can only partially offset the tariff drag on the Chinese economy, and we expect full year GDP growth moderating to 4.5% in 2025, down from 5% previously. With that, we are not seeing the fiscal package to be a strong stimulus, and we expect that more (than already announced) fiscal support is needed if 5% is a must achieve growth target, with only mild support from AI and potential downside risk due to elevated trade tension.
Rising AI is not a game changer to the growth model yet
The emergence of DeepSeek gained much traction in past months, serving as a milestone of Chinese technological developments amid continuous curb the past few years. Fundamental wise, we expect the AI-led economic impact will be felt via capital expenditures (capex) and labor channels.
Related capex will be firstly in AI infrastructure (such as data centers and semiconductors) and gradually spread to non-AI segments (such as smart manufacturing, autonomous vehicles, healthcare, biotech, smart cities etc) in the medium and long term. Based on Chinese tech leading players’ capex plan, and our estimate, we expect AI related capex in 2025 to be relatively small, 0.1-0.2% of GDP, before it reaches a more sizable scale three or four years later. Nonetheless, in the near term, the positive equity market reaction triggered by DeepSeek can boost up sentiment and generate some positive wealth effects in our view.
We see mixed AI impact on the labor force. On one hand, massive adoption of AI is supposed to enhance productivity and efficiency attached to labor and increase labor contribution to economic growth in the medium and long term. However, on the other hand, massive adoption of AI is likely to hit the labor market in the first few years and weigh on employment. Based on our estimate, the net AI impact through the labor channel may be slightly negative in the initial stage. As a larger portion of Chinese employment is in sectors which are less sensitive to AI, both the negative impact (via employment hit) and positive impact (via productivity improvement) will be less compared to the case in U.S. With that, we see limited AI upside for the potential growth trend derived from labor in the near term.
Faster tariff play with much uncertainties ahead
The U.S. government already increased the tariff rate on China by an extra 20% and the effective tariff rate reached 30% in the first two months of 2025, which is much faster than that in 2018-2019. Based on the two memorandums - “America First Investment Policy” and “America First Trade Policy”, the Trump administration is contemplating further trade and non-trade plans on China. It is possible to see policy swings and negotiation before reaching any conclusions, but we see high uncertainties ahead and hold a cautious view on the tariff playbook.
We expect China to remain under a reactive policy framework, so it is likely that the government will announce additional fiscal measures if the external situation visibly deteriorates. However, at the same time, this reactive approach means stimulus overshoot is unlikely.