China’s top legislative body, the National People’s Congress (NPC), kicked off its annual meeting on Wednesday, March 5. This week-long concave, which also includes the Chinese People’s Political Consultative Conference (CPPCC), brings together nearly 3,000 delegates from around the country to iron out national and economic policies for the coming year. Many consider the NPC a “rubber-stamp” legislative body as its decisions unanimously align with the views of the Chinese Communist Party — no proposed bill by the NPC has ever been rejected by parliament. Nonetheless, investors pay close attention to the meeting as the government uses the platform to introduce key economic priorities and targets each year.
To summarize the ongoing event, here are five key takeaways from this year’s parliamentary proceedings.
- China’s growth target remains at 5% for 2025. Premier Li Quiang — second in command behind President Xi Jinping — opened the session with the closely watched government work report, where he outlined China’s growth target of “about” 5% for 2025. While this was widely expected by economists, it marked the first time in more than a decade that policymakers have penciled in the same growth forecasts for three straight years. Economists are less optimistic, with consensus forecasts calling for 4.5% growth this year. Most strategists also tend to agree additional stimulus measures will be required to meet this goal, especially given the potential headwinds from tariffs. Premier Li Quiang addressed the rise of protectionism at the NPC, stating, “An increasingly complex and severe external environment may exert a greater impact on China in areas such as trade, science, and technology.”
Regarding inflation, Beijing has adjusted its target to “around” 2% following two consecutive years of almost stagnant consumer price growth. This lowered inflation target indicates that policymakers are becoming somewhat more accepting of the deflationary environment in China.
China's GDP Growth Slowing, But Potentially Stabilizing
Source: LPL Research, Bloomberg 03/06/25
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Estimates may not materialize as predicted and are subject to change.
2. China’s budget deficit forecast was raised to a multi-decade high. To support growth, Beijing announced plans to raise its general budget deficit from 3% to 4% of gross domestic product (GDP), marking the highest level since 1994. This notable shift in fiscal discipline signals China’s unwavering commitment to restoring “sluggish” domestic demand. Li acknowledged this fact, stating, “Achieving this year’s targets will not be easy, and we must make arduous efforts to meet them.”
As part of the fiscal package, the government announced plans to increase sovereign debt issuance, including doubling the funding of an expanded consumer trade-in subsidy program compared to last year. They are also increasing support for local governments to spend on infrastructure and real estate investment. Monetary policy is also expected to remain accommodative throughout the year.
3. Restoring domestic growth remains a top priority in Beijing. China has shifted its strategy from an export-driven growth model to one that is more balanced and sustainable. This change in the playbook involves increasing domestic consumption and reducing its reliance on exports and investment-heavy industries. According to Premier Li Quiang, “vigorously boosting consumption” is the government’s top priority this year to ensure domestic demand becomes the “main engine and anchor of economic growth.” Outside of fiscal and monetary policy support, Beijing has signaled toward implementing a more business-friendly environment, including support for tech firms through a national venture capital guidance fund.
4. Chinese equity markets are welcoming the NPC news. The MSCI China Index rallied 2.8% yesterday, extending its year-to-date gain to 16.1% as of March 5. For reference, this index is priced in Hong Kong dollars and provides exposure to mid and large cap Chinese stocks (top 85% in market cap) that are available to international investors. Buying pressure is also broadening out as over two-thirds of index constituents are trading above their 200-day moving average (dma). Technically, a close above 77 would check the box for a breakout from nearly a three-year bottom for the index.
Chinese Stocks Are Close to Breaking Out of a Major Bottom
Source: LPL Research, Bloomberg 03/06/25
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
5. The fixed-income market is starting to reflect a buy-in for economic growth. Double-digit returns this year imply equity investors in China are optimistic about a recovery, but the fixed income market has been less enthusiastic. Sovereign 10-year yields in China fell to record lows last month due to disappointing economic data and tariff threats. However, more recently, yields have bounced back, and a potential double-bottom has now developed on the 10-year. While the prospect of increased supply and the recent rise in global rates have supported higher yields, the steepening of the yield curve in China over the last month suggests that fixed-income investors are beginning to price in an improving growth outlook. Chinese investment-grade credit spreads over Treasuries are telling a similar story as they recently tightened to levels below U.S. investment grade spreads to Treasuries.
China’s Yield Curve Is Steepening As the U.S. Treasury Curve Flattens
Source: LPL Research, Bloomberg 03/06/25
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Summary
This week’s NPC meeting confirmed Beijing’s commitment to supporting the Chinese economy through continued fiscal and monetary policy measures. Despite the potential headwinds from tariffs, policymakers penciled in growth of 5% and appeared to acknowledge ongoing deflationary pressures by reducing their inflation target. While many of the economic targets were in line with forecasts, equity and fixed income markets reacted positively to the news out of Beijing. The shift to a more domestic-driven growth model will not happen overnight, and additional stimulus measures will likely be needed to underpin consumer spending enough to offset an array of other economic challenges in China.
The LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) maintains its underweight stance toward emerging market (EM) equities, in which China is the largest market, with a preference for U.S. stocks. China may have become more investable lately and a potential shorter-term trading opportunity, but governance remains a concern as companies generally must align with the communist party’s objectives, and policy support thus far has mostly overpromised and underdelivered.