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Trustee Chair in Chinese Business and Economics > Trustee China Hand
Scott Kennedy, Senior Adviser and Trustee Chair in Chinese Business and Economics
China earlier this week concluded its Two Sessions conclave, the annual parallel meetings of the National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC). As usual, the country’s Premier, currently Li Qiang, issued the opening speech summarizing the Government Work Report (GWR), the government’s most authoritative summary of their performance for the previous year and their policy goals and plans for 2025. The overall agenda also included discussion of reports on the state of the economy and development, central and local government budgets, and reports from the NPC Standing Committee, Supreme People’s Court, and Supreme People’s Procuratorate. Several officials, including Foreign Minister and Director of the Chinese Communist Party Central Committee Foreign Affairs Commission Wang Yi, held press conferences, though this was the second year in a row that the Premier did not hold a press briefing at the conclusion of the meetings. The actual legislative agenda was modest, with only revisions made to the law on NPC deputies.
The main message from the Two Sessions is continuity. The GWR and top officials identified a range of challenges, including both international tensions as well as an economy with weak foundations for growth. At the same time, they tried to convey that China’s overall situation was relatively strong and that they have effective plans to tackle all of its problems. They outlined a long list of policies to shore up the economic and boost domestic demand, including a looser monetary policy, accepting a larger fiscal deficit, greater investments in education and healthcare, more support for local governments and a commitment to resolve the real estate crisis, and a more supportive environment for the private sector.
The message of continuity is meant to be reassuring by conveying a comprehensive package of policies and overall confidence. Beijing may be helped in this framing by the dramatic changes in Washington, DC, including the dismissal of thousands of civil servants, dismantling of multiple agencies, a multi-sided tariff war between the United States and multiple countries, and greater tensions with the U.S.’s traditional allies.
At the same time, from some perspectives, the continuity may be seen as worrying. Some observers may believe that the specific policies announced to tackle China’s various problems are insufficient to the task. For example, the GWR emphasized that the primary way to raise domestic demand is to provide more “high-quality supply” of products and services. That will not address the concerns of those who believe that the primary obstacle to increased consumption is to reduce the reasons households have for such high levels of precautionary savings, including the high costs of healthcare and education and worries about their employment income and future prospects. As a result, some at home and abroad will, at best, adopt a wait-and-see approach to determine if Beijing’s posture of confident continuity is justified.
Logan Wright, Senior Associate (non-resident)
While the tone of the National People’s Congress public statements on the economy was upbeat as usual, with real GDP growth targeted at “around 5 percent” for the third consecutive year, the details of China’s actual budget targets for 2025 indicated far more caution and greater internal recognition of China’s structural economic headwinds. For the first time that we can remember, China’s official budget anticipated economy-wide deflation in prices.
Officially, China targeted consumer price index (CPI) inflation of 2 percent for 2025, but the broader deflationary pressures in China’s economy have been evident in producer prices, because of the slowdown in property and infrastructure investment in recent years. China’s producer price index (PPI) declined by 2.2 percent in 2024, and the GDP deflator—a measure of inflation for the broader economy—fell by 0.8 percent.
In the formal 2025 budget, China publishes an official targeted level of its fiscal deficit relative to GDP (4 percent this year), and a corresponding nominal deficit total, which is 5.66 trillion yuan. Using those two numbers, one can calculate Beijing’s underlying expectations for nominal GDP growth, which would be 4.9 percent in 2025, below the targeted real GDP growth rate of 5 percent. Last year, China’s formal budget anticipated nominal GDP growth of 7.4 percent, but even within the official data, the economy only achieved nominal GDP growth of 4.2 percent, relative to real GDP growth of 5 percent (which is itself overstated). This year, Beijing appears far more cautious about the economy’s prospects, suggesting deflationary pressures will continue.
Similarly, China’s fiscal revenue targets were extraordinarily conservative, with overall fiscal revenue expected to rise by a paltry 0.1 percent. Last year, tax revenue in China actually fell by 3.4 percent as producer prices continued declining, and only rapid growth in non-tax revenues—much of it informal fines and fees levied by local governments—prevented a larger fiscal crunch. Tax revenues in China depend heavily upon investment activity, which is now slowing, rather than household consumption. China primarily collects value-added taxes and enterprise income taxes, with far lower proportions of domestic consumption taxes and individual income taxes. The decline in land sales revenues paid by property developers has created additional pressures on overall revenues.
The most important implication of this new caution in fiscal revenue projections is that Beijing appears to have recognized that China now faces extremely difficult choices in allocating spending. Combining the central and local budgets last year, China ran an aggregate fiscal deficit of around 7.7 percent of GDP, and that will likely expand to over 9 percent this year. If even the current pace of economic growth does not generate any fiscal revenue growth at all, then without fundamental changes to the tax system, it seems likely that China’s fiscal revenues will actually decline over the next decade. This has broad implications for China’s spending priorities, including the continued growth in defense spending (7.2 percent this year). But it also suggests the era of much sharper trade-offs has already arrived, which will require Beijing to make difficult choices sooner rather than later.
Ilaria Mazzocco, Senior Fellow and Deputy Director
The Government Work Report and the NDRC's Social and Economic Development Plan report brought no big surprises on climate and energy and signaled relative continuity despite China’s commitment to shift towards controlling absolute emissions in the course of the 15th five-year plan, which starts next year. The target of reducing energy intensity by 3 percent is relatively weak and signals continued prioritization of economic and traditional energy security goals. It also comes in the context of China likely missing its own energy and carbon intensity targets for the 2020-2025 period. Coal remains a challenging political issue and there seemed to be no indication that the government was ready to move towards curtailing the growth of sector. On the other hand, the government plans to continue supporting the expansion of renewable energy and supporting infrastructure, piloting carbon emission peaking trials and zero-carbon industrial parks and factories.
On the trade-climate front, zero-carbon manufacturing, carbon emission statistics, and the expansion of China’s emission trading system all look like clear responses to European regulation on the trade of carbon. Regulations such as the Carbon Border Adjustment Mechanism (CBAM) and the EU Battery Regulation have dramatic trade implications that are pushing China to introduce similar governance tools. This matters because, with the United States bowing out of the climate governance architecture and Europe 's struggling economy putting pressure on its own climate ambition, China is going to hardly feel any other pressure to step up its climate performance.
The documents from the Two Sessions also reflect how energy artificial intelligence (AI), and technological development are intertwined. The Two Sessions' documents reflect the fact that renewables and EVs have a lot of synergies with the technological goals of AI leadership and digitalization, and that cleantech is meant to drive economic growth and energy security. More broadly, the plan outlines an ambitious path forward for integrating AI more broadly in the economy, and more specifically in manufacturing including through the AI Plus initiative. The goal here seems to be to boost productivity and China’s recent successes with AI models like Deepseek on the eve of the two sessions have likely injected significant confidence in this approach.
Deborah Seligsohn, Senior Associate (non-resident)
The Chinese Government Work Report (GWR) showed a strong commitment to improving environmental quality for Chinese citizens and continuing to emphasize the development and deployment of green technologies, while making only modest climate goals. In the global context of United States backtracking and Europe focused on other issues, this lack of climate emphasis is perhaps unsurprising.
China continues to have its goal of peaking its carbon emissions by 2030, and this report suggests stately progress toward that goal, with a goal of reducing energy consumption per unit GDP by 3 percent, while increasing GDP by 5 percent. Whether and how much of an increase in carbon emissions results depends on how much of that 2 percentage-point gap in goals is made up by non-fossil energy sources, and Chinese progress in that area in recent years has been dramatic. The GWR touts China’s “almost 40 percent” of electricity now generated by non-fossil sources, considerable progress for a coal-reliant country. It also points to the 13 million “new energy vehicles” (this would include both electric and fuel cell, with the former the vast majority) now on China’s roads.
While the GWR does not emphasize carbon reduction, it does focus on the tools that will get China there. There is major emphasis on developing new green technologies, such as zero-carbon industry and new types of energy storage. The push to deploy renewables and electric vehicles continues. The result is China can, in fact, make more ambitious commitments when it chooses to, and that is likely to depend on the international environment. Moreover, countries, such as the United States, should not take any comfort from the weak carbon goals. China is continuing to make technological and deployment breakthroughs at breakneck speed. If other countries back off such technologies, as apparently the U.S. is now doing with offshore wind, an area specifically mentioned in the GWR, they are likely to find themselves very much behind.
Jeannette Chu, Senior Associate (non-resident)
Export controls, sanctions and foreign investment curbs received little direct mention during the Two Sessions and the GWR. However, one of the themes running through the gathering was a clear recognition that China's national security is tied to rapid indigenization of advanced technologies including semiconductor manufacturing, advanced manufacturing, medicine development, biotechnology and commercial spaceflight. China will aggressively implement industrial policies to support national champions in these areas. These priorities also correspond to areas of national security concern and perceived threat by the United States.
The Two Sessions took place against a backdrop of increasing tensions with the U.S. On March 4, the Ministry of Commerce (MOFCOM) designated 15 American companies on its “Export Control Party List,” which was established within China's Export Control Regulations published October 19, 2024. This was the first time that the “Export Control List” has been used and the timing falls between the doubling of tariffs from 10-20 percent by the U.S. on Chinese goods and the Two Sessions. China had already responded to the initial 10 percent tariffs with retaliatory tariffs, new export controls on critical minerals, designating for the first time U.S. non-defense companies (Illumina and PVH Corp. on February 4) as well as ten defense-related companies to the "Unreliable Entity List" (March 4) and launching an antitrust investigation into Google.
While China's actions may still appear measured, the creation of and willingness to use these measures is demonstrative of a China that sees itself as an equal to the United States.
John Holden, Senior Associate (non-resident)
A Chinese phrase, “changes unseen in a hundred years,” may appropriately be applied to actions taken by President Donald Trump since his second inauguration.
Its origin dates to an analysis by Yuan Peng, the head of China Institutes of Contemporary International Relations (CICIR), the think tank of China’s Ministry of State Security, in the wake of the 2007-2008 financial crisis, and came into prominent Chinese government use in 2017. Yuan Peng’s concept refers to global population change, a 4th Industrial Revolution, climate change, energy transitions, and shifts in geopolitical power from West to East. Readers may recognize the locution from press reports of meetings between Chinese president Xi Jinping and Russian president Vladimir Putin.
Premier Li Qiang’s GWR to the National People’s Congress leads off its discussion of the international “problems and challenges that confront [China]” by asserting that “changes unseen in a century are unfolding across the world at a faster pace.” That “faster pace” will be interpreted to refer to changes initiated in the United States. He goes on to say: “The factors causing geopolitical tensions remain numerous, and they are affecting global market expectations and investment confidence and fueling the risk of volatility in global markets.”
Faced with a rapidly evolving geopolitical environment, China’s leaders have characteristically avoided overreaction while seeking to project confidence that they understand the challenges – both international and domestic – and have the requisite toolkit to deal with them. Some commentators have speculated that there is a sense of panic in Chinese leadership circles.
A better analysis is that China’s leaders believe that they have the means to successfully deal with external chaos by relying on the comprehensive system of economic management tools and “stability maintenance” that the CCP has at its disposal. China’s official response to President Trump’s trade and investment measures was, “If war is what the U.S. wants, be it a tariff war, a trade war or any other type of war, we're ready to fight till the end.”
"China’s Annual Two Sessions: Meaningful Reform or Missed Opportunities?," CSIS Event, March 14, 2025.
Ryan Featherston and Scott Kennedy, “One Moment, Two Speeches,” Trustee China Hand Blog Post, March 12, 2025.
Scott Kennedy, Managing U.S.-China Tensions over the Global Economic Order: Tentative Proposals, CSIS Report, November 20, 2024.
Staying Ahead in the Global Technology Race: A Roadmap for Economic Security, CSIS Digital Report, October 29, 2024.
Jude Blanchette, Scott Kennedy, Ilaria Mazzocco, Lily McElwee, Claire Reade, Daniel H. Rosen, and Logan Wright, “Third Plenum Hot Takes; Skepticism and Concern,” Trustee China Hand Blog Post, July 22, 2024.
Scott Kennedy, “Why is Xi Not Fixing China’s Economy?,” Foreign Policy, June 3, 2024.
Scott Kennedy and Qin (Maya) Mei, “China’s Two Sessions: Ready, Aim, Spend,” Trustee China Hand Blog Post, March 9, 2022.
