(Bloomberg) -- China raised its general budget deficit to the highest level in more than three decades, as Beijing ramps up spending to counter the effects of rising US tariffs.

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The government set this year’s fiscal deficit target to 5.66 trillion yuan ($780 billion), or around 4% of gross domestic product, according to an annual work report Premier Li Qiang delivered to the national parliament on Wednesday.

That’s the highest level since a major tax overhaul in 1994 revamped the government budget, and roughly in line with an estimate of 4% by economists in a Bloomberg survey. Li also set a growth goal of about 5%, an ambitious target that would require more stimulus than last year to achieve.

“Growth target at 5% looks robust and 4% budget deficit means the government is willing to support the economy. This should be reassuring to the markets,” said Vey-Sern Ling, managing director at Union Bancaire Privee.

The benchmark CSI 300 index of Chinese stocks closed 0.5% higher, the first gain in four sessions. The offshore yuan edged 0.2% weaker against the dollar.

China has for decades tried to keep the official deficit at no more than 3% of GDP to demonstrate fiscal discipline. Crossing that implicit red line signals President Xi Jinping is willing to take unconventional steps to boost domestic demand as a trade war with Donald Trump threatens exports, which made up nearly a third of the economy’s expansion last year.

The broad deficit rose to a record 9.9% of GDP, according to calculations by Bloomberg based on official figures. The measure refers to the gap between revenue and spending combined under China’s general public budget and the government-managed fund budget.

The government will issue 1.3 trillion yuan of ultra-long special sovereign bonds, more than the one trillion yuan sold last year.

Some 300 billion yuan will fund a trade-in program that subsidizes consumer purchases of cars and home goods, doubling last year’s amount. That increase signaled an emphasis on boosting consumer spending, which the work report named as the top priority for the first time since 2012.

The initiative lifted sales of electric vehicles and appliances last year and was expanded in January to cover mobile phones and smart watches, although some economists question the sustainability of the boost.

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“The trade-in program is a short-term policy and its effect will taper off rather quickly, because it targets mainly durable goods rather than services,” said Lu Ting, chief China economist of Nomura Holdings Inc.

The work report presents the first opportunity since Trump took office for top Communist Party leaders to reveal their blueprint for shielding the world’s No. 2 economy from tariffs and investment restrictions. Hours earlier, Beijing continued its cautious response to blanket US levies — hiked by 20% since February — with targeted duties that avoided blowback on China’s economy.

The report detailed how much the government looks to borrow this year as it vows to “sharply” increase the strength of fiscal spending:

1.3 trillion yuan of ultra-long special sovereign bonds 500 billion yuan of special sovereign debt to recapitalize state banks 4.4 trillion yuan of new special local notes for Chinese provinces, higher than 2024’s 3.9 trillion yuan A total bond quota at 11.86 trillion yuan, 2.9 trillion yuan higher than a year ago

The special-purpose bonds are not included in the official deficit, but they are closely watched by investors to gauge the strength of overall fiscal stimulus.

The expansion of government bond issuance comes as Beijing takes its most aggressive effort in years to rein in borrowing by companies linked to local authorities to fund infrastructure investment, or “hidden debt,” to curb financial risks. In his work report, Li repeated a vow to “firmly contain the desire of raising debt in violation of rules.”

The likely decrease in off-balance-sheet local government deficit means “the net fiscal impulse should be lower than 2020,” when China stepped up stimulus to counter economic damages caused by the pandemic, according to Jacqueline Rong, chief China economist at BNP Paribas SA.

What Bloomberg Economics Says...

“China’s resolve to keep growth going is loud and clear... The macro objectives are also coupled with additional capital for banks and continued debt relief for local governments, which should help to improve policy traction.”

— Chang Shu, Eric Zhu and David Qu

Read the full note here.

Local debt risks are also forcing the central government to take on more borrowing responsibility from regional authorities. Out of the total government bond quota set for this year, 56% will be shouldered by the central government, up from 48% last year, according to Bloomberg calculations.

Finance Minister Lan Fo’an and other officials have said the central government has “large room” to borrow more and expand the official deficit. Some experts have cautioned against continued accumulation of fiscal deficit in the long run due to concerns over debt servicing burden and inflation risks.

Trump’s tariffs cast great uncertainty over China’s growth outlook this year as the country grapples with a range of domestic challenges, from a years-long housing slump to deflation and weak consumption.

A hike of as much as 60% in US tariffs could reduce China’s growth by two percentage points in the next 12 months following the implementation, according to an estimate by Larry Hu, chief China economist with Macquarie Group Ltd.

“If that happens, Beijing will have no choice but to escalate stimulus, especially in housing,” he said. “I don’t doubt that Beijing has both the will and ability to deliver that. Otherwise they will not announce 5% as the GDP target this year.”

--With assistance from Jing Zhao, James Mayger, Jing Li, Winnie Hsu, Wenjin Lv and Yujing Liu.

(Updates with more details and comments.)

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