China | A new Silicon Valley
Behind Deepseek lies a dazzling Chinese university
It is not often that the world’s two superpowers hold state-of-the-nation addresses back-to-back. But thanks to a quirk of scheduling and the magic of time zones, it happened this week. Li Qiang, China’s prime minister, gave his annual report to the country’s rubber-stamp parliament, the National People’s Congress, in Beijing on March 5th. A few minutes later, President Donald Trump began a fiery speech to a joint session of Congress in Washington. The contrast was instructive. Mr Trump’s speech, bombastic and bilious, was heckled by a congressman who had to be removed from the chamber for “disruption of proper decorum”. The president’s words were punctuated by chants of “USA, USA, USA!” and “Fight, fight, fight!” and “Na na na na, hey hey, goodbye!” ·
Mr Li’s speech had none of that. His audience—3,000 delegates assembled in the Great Hall of the People overlooking Tiananmen Square (pictured)— tried to look attentive. Tea was sipped, proper decorum preserved. Much of what Mr Li said was formulaic and predictable. As always, he heaped dutiful praise on his boss, Xi Jinping. But amid the platitudes and boilerplate, the fiscal numbers he provided were revealing about his government’s mindset at a difficult time. China’s economy faces a lingering property slump, chronic deflation and an intensifying trade war. The government’s response has too much of what Mr Trump sorely lacks: caution.
In his report, China’s prime minister announced the same official economic growth target as last year: about 5%. He also provided a catalogue of ten “major tasks” for the year ahead that echoed the list in 2024. Industrial modernisation, technological self-reliance and expanding domestic demand all featured prominently. But stimulating domestic spending was elevated from the third priority last year to the top task for 2025. Indeed, Mr Li mentioned consumption 32 times, a record. The previous peak (adjusted for the length of the speech) was 26 times in 2009, as China tried to revive spending in the aftermath of the global financial crisis.
America’s trade war will not help. Mr Trump hit China with a fresh 10% tariff on the day before Mr Li’s speech, following a similar duty a month earlier. Combined with older levies, they mean Chinese goods now face an average American tariff of about 34%, reckons Larry Hu of Macquarie, an Australian bank. China’s government swiftly retaliated by imposing tariffs on a narrower range of American goods, from chicken to soyabeans. It also added more American firms to a blacklist that could curb their dealings with Chinese firms. “If war is what the US wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end,” said the Ministry of Foreign Affairs.
To offset tariffs and deflation, China’s economy needs a more forceful stimulus. “It is better to act early than late,” as Mr Li put it. Most economists have been expecting an extra fiscal push this year of about 2% of GDP or more. That would be enough to stop deflation worsening, though probably not much more.
The fiscal package Mr Li actually announced had several parts. The target for this year’s headline budget deficit will rise from 3% of GDP last year to 4% this year. The headline figure covers only a fraction of China’s sprawling public finances, leaving out government-managed funds and financing vehicles sponsored by local governments, among other things.
But the headline number sends an important signal. By tradition, China has tried to keep the official deficit at 3% of GDP or below, in keeping with old-fashioned international norms. A 4% deficit shows that it is willing to abandon fiscal piety for the sake of rescuing the economy. That was a good first step.
As well as a bigger headline deficit, the central government will also loosen the financial reins on local governments. It will increase the quota of “special bonds” they can sell from 3.9trn yuan ($540bn) last year to 4.4trn this year. These securities were once reserved for infrastructure projects that can earn some revenue. But local governments can now use the money to buy unsold flats and idle land from property developers. The larger quota was close to expectations: a satisfactory second step.
But on the third step, the speech fell somewhat short. The central government will itself sell another batch of “special” bonds worth 1.8trn yuan, including 500bn yuan to help recapitalise China’s banks. That is more than it sold last year. But the figure is about 700bn yuan below expectations. All told, economists expect China’s broad fiscal deficit to increase by a little less than 2% of GDP (see chart 1).
The style of China’s stimulus was also mildly disappointing. In the past the government has lavished money on bridges to nowhere and other white elephants. Whereas America fights downturns by printing money, China pours concrete. In his speech Mr Li promised to give greater priority to “improving the people’s well-being” and “boosting consumption”. The central government will, for example, devote 300bn yuan to its “trade-in” scheme which encourages households to replace old appliances and cars with newer ones.
China has also given civil servants a pay rise. And it will up medical-insurance subsidies for rural folk and city dwellers who are not covered by work-based schemes. Annual subsidies would rise to 700 yuan per person, an increase of 4.5%, according to the budget. The same groups will receive an increase in their basic pensions of 20 yuan a month, similar to last year. That is a large rise in percentage terms (almost 40% over two years) but tiny in absolute amounts. Nonetheless, of the extra fiscal stimulus provided this year, only about a quarter is related to consumption, calculates Robin Xing of Morgan Stanley.
Boosting consumption is not the only priority. A new “guidance fund” will also mobilise 1trn yuan in venture capital for new technologies. The budget for national defence will rise by 7.2%, before adjusting for inflation. In the past, China’s economy has kept pace with increased military spending, through a mix of real growth and inflation (see chart 2). As a result, the official military budget has remained fairly steady as a percentage of GDP, fluctuating around 1.3%. But now that China has slower growth and deflation, the equation has changed. Last year, for example, GDP grew by only 4.2% in nominal terms, before adjusting for changing prices.
Will the same thing happen this year? The government does not give a growth forecast for nominal GDP. But the fiscal arithmetic in Mr Li’s speech implies he expects it to grow by about 4.9%. Since that is slower than the target for real, inflation-adjusted growth, the government must believe that economy-wide prices could fall again this year. Not even the government,then, expects their stimulus efforts to succeed in decisively defeating deflation.
In his very different speech in Washington, America’s president said he was looking forward to relentless success. “Our country is on the verge of a comeback the likes of which the world has never witnessed,” he said. More prudent leaders like to underpromise in the hope of overdelivering. But in the fight against deflation, that may be the wrong approach. Gloom can be self-fulfilling. In trying to restore confidence and revive animal spirits, then, a dash of bravado probably helps. The back-to-back speeches offered a stark contrast. Both would have been better if each had more closely resembled the other.
Chinese warships circumnavigate another island: Australia
Having built the world’s largest navy, China is keen to show it off. But officials from Australia and New Zealand have been startled in recent days by the way it has been flaunting itself in Oceania. On February 21st a commercial pilot flying over the Tasman Sea received a surprise warning from a Chinese navy task-force in international waters that it was engaging in live-fire drills. Airlines scrambled to divert planes. Since then, the two Chinese warships and one supply vessel have staged an unprecedented circumnavigation of Australia, fuelling political debate about a power that once seemed distant.
The task force includes a 10,000-tonne cruiser of a type that China hailed—with justification—as a “leap forward” in its naval modernisation when it joined service in 2020 (the year the Pentagon said China’s navy had surpassed its own in size). The ships may have been joined by a nuclear-powered submarine: in the past 15 years, China has been churning these out at the rate of nearly one a year, the Pentagon reports. China is not accused of behaving illegally, but one Australian intelligence chief, Andrew Shearer, said some of its activities “seem designed to be provocative”. This is the farthest south China has ever sent its navy for training. The firing drills seemed designed to highlight its ability to project force far from home. And they appeared to show indifference to the impact. Australia and New Zealand have complained that they did not get sufficient warning about the live firing.
Planning for the exercises may have predated Donald Trump’s election as America’s president in November 2024. But the timing of them, as America turns its back on European allies, has added to anxieties in Australia and New Zealand about their own security in the second Trump term. China may want to show that not only can it sustain its ships for long periods at sea, but also, in a conflict, interfere with the sea lanes that Australia relies on, says Jennifer Parker, a former naval officer now at the Australian National University.
In Australia the Chinese navy’s activities are causing rows ahead of federal elections, due within weeks. The centre-left Labor government, led by Anthony Albanese, says it has “stabilised” relations with China, which in the past couple of years has lifted restrictions imposed in 2020 on Australian exports worth more than A$20bn ($13bn) annually. China hawks in the opposition centre-right Liberal Party complain that Labor has gone too soft on China in order to restore that trade.
During Australia’s spell in the doghouse—for daring to call for an inquiry into the origins of covid-19—it found other buyers for its coal, barley and the like, enabling it to achieve a record trade surplus in 2022. But its concerns about China’s military behaviour kept growing. Australian officials acknowledge that their own armed forces operate in international waters and airspace close to China. But China’s response is sometimes dangerous. Last month a Chinese fighter jet released flares close to an Australian P-8A surveillance plane over the South China Sea.
Both Australia and New Zealand have another worry, that China may be strengthening its ability to deploy its forces in the region by cosying up to South Pacific microstates. In February the Cook Islands agreed to form a “comprehensive strategic partnership” with China and announced plans for Chinese investment, including port-building.
New Zealand’s foreign minister, Winston Peters, said his country was “blindsided”. It has close ties with the Cook Islands, including an arrangement to co-ordinate their security and foreign policies. Mihai Sora of the Lowy Institute, a think-tank in Sydney, says China has reason to be drawn to the Cook Islands (population: 16,800). It could, he says, become a good spot to refuel and resupply task forces—like the one sailing around Australia.
A new film is breaking box-office records in China
Film-makers in China have long tried to find the secret sauce for movies that wow audiences while pleasing the Communist Party. The epics that evolved became known as zhuxuanlu(主旋律), or “main melody” films, because they are in tune with the party line. But the heavy doses of patriotism that they usually involve have fallen out of favour. Instead, one Beijing studio has struck gold with a cartoon reimagining the tale of a “demon child” from a 16th-century novel.
The film, “Ne Zha 2”, is a sequel, in which the eponymous child battles monsters and immortals on a quest to save his friend and protect his family’s fortress. Launched over the Chinese New Year holiday, it has taken more than $2bn and become the most successful animated feature ever made anywhere. It has overtaken “Spider-Man: No Way Home” as the seventhhighest-grossing film ever. And it has done so by tapping deep into China’s cultural roots.
By the mid-2010s, film-makers were nailing the main melody of the patriotic blockbuster. Before “Ne Zha 2”, the two most popular films were “The Battle at Lake Changjin” from 2021 and “Wolf Warrior 2” from 2017. Both were action flicks involving the defeat of dastardly foreigners. Such films topped China’s charts from 2017 to 2023 (except 2019), according to data from Maoyan, a movie-ticketing service. The state invested in their rise. A law passed in 2016 to support the film industry listed “promoting core socialist values” as one key theme. But their popularity peaked in 2020, when they accounted for more than half of box-office receipts of the 20 highest-grossing films. This year, that share fell below 2%. Triumphant narratives of national strength seem detached from reality, with Chinese viewers now struggling in a depressed economy.
Enter the demon child. “Ne Zha 2” has perhaps caught on because it is not forcing anything on anyone. Chinese people know the character from folklore. The film is packed with humour delivered by endearing characters, and it resonates because of its messages of self-determination, the unconditional love of family and the pursuit of justice. The technical sophistication has amazed viewers and pitched domestic animation studios as serious competitors to their Hollywood counterparts.
At a cinema in the eastern city of Hangzhou Ms Zheng, a 20-year-old student, is watching the film with her friends. She says she found the hero epics too heavy—“They force-feed patriotism”—and has already seen “Ne Zha 2” three times. Like many young people disillusioned by the current paucity of job opportunities, Ms Zheng says she finds hope in the rebellious and righteous Ne Zha. “Nowadays we are overwhelmed by social pressure, but he tells you that you can define the type of person you want to be.”
To boost consumption during the holiday, local governments gave out cinema vouchers to attract more moviegoers. Once it was clear the film could break records, more people rallied to see it. Schools took students, and firms stopped production so employees could attend. One cinema in Sichuan province said that it would hold off screening the recently released “Captain America: Brave New World” in order to boost “Ne Zha 2” sales. “Our Chinese animation deserves to be seen by the world,” it said.
The world has not yet been won over, though. So far, less than 2% of ticket sales have come from abroad. That could be the next melody Chinese filmmakers learn to play.