China’s “Lianghui” points to leadership determination to rebuff Trump’s actions

China’s most important annual gathering, the so-called Lianghui(两会) will be ending on March 11 after over a week of meetings by the legislative body, the National People’s Congress (NPC), but also the most important consultative body, the Chinese People’s Political Consultative Conference (CPPCC). One of the key objectives of these “Two Sessions”, as they are generally referred to in English, is to offer the key economic targets for the year, as unveiled by the report of the Premier to the NPC. This year, Premier Li Qiang’s main objective was to guarantee that the Chinese economy would be resilient to Trump’s policies, starting with the 20% additional tariffs being slashed on Chinese goods since Trump came to office on January 20. The most obvious way to achieve this goal was to keep the same GDP growth target as last year, namely 5%, which is what Li Qiang did.Given that China barely reached 5% growth last year, even if by a huge trade surplus of USD 1 trillion, Li Qiang had no choice but to prove its commitment to such target in the Work Report. Three policy changes are worth mentioned: laxer policies, lower prices and more manufacturing supply.  The first was to increase the official fiscal deficit from 3% to 4% of GDP, the largest on record, while easing monetary policy with imminent interest rate cuts. This is not a real shift in policy any more since the change in tone started in September last year already. As has been the case so far, though, no bazooka should be expected since any massive fiscal expansion would only pile up more public debt, which has already reached 100%. The second change was to lower the inflation target from 3% to 2%. With this move, Li Qiang appears to indicate that China is ready to accept deflationary forces since lower prices, especially export price can continue to help China export its way out. In fact, export prices have been negative in 2024 and 2025 does not look better as February consumer prices suddenly turned negative (-0.7%) following producer and export prices. While pushing prices down to compete is not without risk (Japan’s experience in the 1990s is a good example), Trump’s additional 20% tariffs on China and the ongoing weakness of the USD does not leave China much space. The third and final important message from Premier Li was the confirmation that China will continue to step up its manufacturing capacity as a growth engine. In other words, China has no intention to correct is overcapacity by reducing supply. If we add that the announced increase in the fiscal deficit does not seem to be directed to boosting consumption but rather to supporting the debt restructuring of local governments, one should not expect consumption trends to improve substantially in 2025.  This is all the more the case as the labor market remains weak and disposable income stagnant. Against such backdrop, China will need to force exports to reduce its overcapacity problem even more so than in 2025 and with headwinds coming from a weaker US dollar and higher tariffs.These are all worrisome news for Europe both because of the potential further flooding of Chinese products into the European market. Beyond the trade channel, European companies operating in China are bound to face even stronger competition given strong deflationary pressure, which will continue to hurt their profits.A second way for China to rebuff Trump’s threats relates to self-reliance and, in particular, moving up the ladder in critical technologies so as to reduce dependence from the US. Trump’s largest scale investment programs like Stargate have been closely watched in Beijing and the reaction is clear.  Firstly, Chinese AI platform Deepseek’ success in late January has instigated a recovery in the stock market, both in the mainland and in Hong Kong, supported by Chinese tech names. With such long-overdue turn on positive sentiment, and given the crucial importance attached by President Xi to China’s self-reliance in technology, the Lianghui has devoted many discussions to announcing different types of support for critical technologies and, in particular AI. To catch up with the US huge investment announcements and support indigenous innovation in such technologies. Two new policies were announced at the Lianghui, namely the establishment of a RMB 1 trillion (USD 138 billion equivalent) national venture capital guidance fund aimed at strengthening AI, quantum technology, hydrogen energy, and energy storage. The second measure relates to the easing of the exiting constraints to pursuing initial public offerings (IPOs). In particularly, loss making companies in key sectors like AI will be allowed to access public capital markets. This should help the positive sentiment in the stock market, at least as far as these IPOs attract enough demand to invest.All in all, China’s leadership has used its Lianghui to respond to Trump’s threats with a rebuff both in terms on how much tariffs can hurt the Chinese economy but also how much China can do to reduce its technological dependence from the US.