China set an annual GDP growth target of 5 percent in March. But in the fallout of the trade war launched by the US, the path to achieving this goal has become murky. On April 22, the IMF lowered its 2025 projection for China’s GDP growth rate to 4 percent, down from 4.6 percent in January. While the agreement the US and China reached on May 12 to roll back reciprocal tariffs provided relief to the export sector, the Chinese government needs to take bolder and more targeted actions to meet its ambitious target.
Last year, among China’s 5 percent GDP growth, consumption contributed 2.2 percentage points, while capital formation and net exports accounted for 1.3 points and 1.5 points respectively. Many economists emphasized the importance of boosting consumption. The problem is that consumption growth depends on income rises and strong consumer confidence, which in turn depends on a high growth rate.
The answer may lie in infrastructure investment. Infrastructure projects financed by public funds can directly jump-start growth. At a time of insufficient private demand and weak market confidence, public investment should become the anchor of economic growth.
After decades of enormous investment in infrastructure, many argue that China’s infrastructure sector has become saturated. This is far from reality. Vast opportunities remain in areas like urban renewal, green energy bases, digital connectivity and eldercare facilities, all of which are aligned with long-term strategic goals. Moreover, reinvigorating the “Two New and One Major” initiative, which centers on new urbanization, new infrastructure and major national projects, can produce both short-term economic stimulus and lasting productivity gains.
This is why China should seriously consider a stimulus package similar to the 4 trillion yuan (US$570b) package released in response to the global financial crisis in 2008, but with sharper, more future-oriented targeting. A modern version could focus on the expansion of economic corridors, such as deepening its strategy of developing the country’s west and extending it through Central Asia. This would not only fuel domestic demand in the short-term but also set a foundation for long-term economic sustainability.
Admittedly, bold moves carry risks. As local governments remain burdened, there are genuine debt risks. But in extraordinary times, there must be extraordinary measures. The alternative is a mediocre growth trajectory that undermines employment, confidence and longer-term reform.
It appears that the government is moving in that direction. The National Development and Reform Commission announced on May 20 that it has set aside 500 billion yuan (US$69.4b) to support major projects including transportation infrastructure along the Yangtze River, the urbanization of migrant agricultural populations, high-standard farmland development, urban underground pipeline networks and the Three-North Shelterbelt Project (or Great Green Wall), pledging to release the full list of the 2025 “Two New and One Major” projects by the end of June. As almost half of 2025 has passed, China must swiftly translate these pledges into action.
In the blowback from intensified trade conflicts, this is not the year for macroeconomic prudence, which has been the watchword in the past few years. It is the year for decisive and strategic public investment. If China wants to meet its 5 percent target, maintain its growth momentum and show the resilience of its economy, it must be ready to adopt bolder and more expansive macroeconomic policies.
Old Version
