Daniel Zhang: This year may be a "technology stock-friendly" fiscal year

Core Conclusions

Tech stocks may be the "pricing anchor" for Chinese assets this year (style influences the stock market, risk preference influences the bond market).

The performance of tech stocks can be divided into industrial trends and valuations, with fiscal policy affecting valuations through deficits (animal spirits) and expenditures (discount rates).

According to the fiscal budget announced during the Two Sessions, this year's "high deficit" and "medium expenditure" fiscal combination may be "tech stock friendly."

1. Empirical Rule 1: In the past decade, when "the deficit rate increases by 1 percentage point and hits a new high" or "the broad deficit rate increases by 2 percentage points and hits a new high," tech stocks have seen valuation boosts (2015, 2020, 2023) — this year, the fiscal deficit rate has increased by 1 percentage point to 4%, hitting a new high.

2. Empirical Rule 2: In the past decade, when the growth rate of fiscal expenditure approaches the economic growth rate, tech outperforms consumption (2013-2015); when it diverges, it underperforms (2016-2019, 2021-2024.9) — this year, the growth rate of fiscal expenditure may approach the nominal GDP growth target (4.9%).

3. Risk Challenges: Will fiscal policy deeply retreat, leading to a decline in systemic risk preference, affecting tech stocks and even the overall market valuation levels? The risk may be relatively small — from two budget signals, this year's fiscal expenditure support capacity appears strong: first, the central government has reserves, and second, the finances of major provinces are resilient.

Report Body

I. Characteristics of the 2025 Budget: "High Deficit" and "Low Income" Combined with "Medium Expenditure"

Based on the four accounts (Figure 1) to observe this year's fiscal budget, three main changes can be grasped:

First, high deficit: (narrow definition of one account) deficit rate at 4%, an increase of 1 percentage point from last year, reaching a historical high; corresponding to what Minister Lan mentioned about "making the deficit arrangements more robust. This year's deficit rate is set at 4%, with a deficit scale reaching 5.66 trillion yuan, an increase of 1.6 trillion yuan from last year. Both the deficit level and scale are at recent highs." The broad deficit rate (consolidating the first and second accounts, excluding debt repayment and capital injection on a comparable basis) is about 8.4%, an increase of over 1 percentage point from last year, basically on par with the historical high level (2020).

Second, low income: The growth rate of one account's income is only set at 0.1%, the lowest in recent years (excluding 2020): first, tax revenue continues to be suppressed by prices (last year's tax revenue decreased by 3.4%, nominal GDP grew by 4.2%; this year's tax revenue growth rate is set at 3.7%, lower than the nominal GDP growth target of 4.9% calculated from the deficit rate), second, non-tax one-time income has decreased (budget arrangement -14.2%, last year's actual growth was 25.4%, with the reduction coming from central units' special revenue contributions and local multi-channel resource asset revitalization) In addition, the secondary budget revenue remains uncertain (with a growth rate of 0.7% arranged, but the secondary budget is based on revenue to determine expenditure, and budget execution is not strict; 90% of its revenue comes from land sales, which have significantly underperformed the budget for three consecutive years: the budget targets for local secondary budgets from 2022 to 2024 are 0.6%/0.5%/0.1%, while the actual growth rates of land sales revenue are: -23.1%/-13.3%/-16%). The corresponding budget report states: “From the perspective of fiscal revenue, the continued recovery of the economy provides support for the growth of fiscal revenue, but there are still many constraining factors.”

Third, on expenditure (the combination of the first two): The expenditure growth rate for the primary budget is arranged at 4.4% (close to the average levels of 2023 (+5.4%) and 2024 (+3.6%)), corresponding to what Minister Lan mentioned about “being more forceful in expenditure intensity... fiscal expenditure will further expand, which will strongly promote the sustained and healthy development of the economy and society”; the growth rate of broad fiscal expenditure is about 5% (merging the primary and secondary budgets, excluding debt repayment and capital injection on a comparable basis; the final growth rate depends on the actual situation of the revenue side and the release of central fiscal reserve tools and policy space), close to the nominal GDP growth target of 4.9% calculated from the deficit rate (Figure 2, the comparable growth rates of broad fiscal expenditure from 2021 to 2024 are -1%/3.1%/1%/0.8%, while the nominal GDP growth rates are 13.4%/5.1%/4.9%/4.2%). The corresponding budget report states: “From the perspective of fiscal expenditure, the role of fiscal policy in counter-cyclical adjustment should be leveraged, with a need to strengthen guarantees in areas such as expanding investment, ensuring people's livelihoods, stabilizing employment, and promoting consumption, as well as rigid growth in key expenditures such as cultivating new productive forces, advancing comprehensive rural revitalization, and strengthening ecological environment protection; expenditures on grain reserves and government debt repayment continue to increase, with limited fiscal maneuvering space.”

II. How Does Fiscal Policy Affect Technology Stocks?

The performance of technology stocks mainly depends on industry trends (“technology”) and valuations (“stocks”), with the former belonging to the meso level and the latter being greatly influenced by macro factors (such as monetary, fiscal, and industrial policies), specifically reflected through two typical valuation methods for technology stocks: animal spirits and discount rates. Among them, the impact of fiscal policy is reflected in:

(1) Behavioral Finance Perspective: Deficits Affect Animal Spirits

From the perspective of behavioral finance, Keynes proposed “animal spirits” to reflect the irrational emotional fluctuations of investors (such as greed, fear, and herd mentality) that drive asset prices; the free market cannot automatically correct the irrational fluctuations caused by “animal spirits,” requiring government intervention, with the deficit rate being an important signal (2) Fundamental Perspective: Spending Affects Discount Rate

From a fundamental perspective, the higher the discount rate (risk-free rate + risk premium), the lower the intrinsic value of a company calculated by discounting future free cash flows to present value.

3. What is "Tech Stock Friendly" Fiscal Policy?

(1) Absolute Return Perspective: "High Deficit" Benefits Tech Stock Valuation

Under the animal spirits valuation method, an expansion of the deficit that does not interfere with the trend of tech stocks can be seen as a protection of animal spirits (e.g., if the deficit rate is below expectations or is viewed by the market as a suppression, it is negative).

(2) Relative Return Perspective: "Moderate Spending" Supports Tech Outperformance

Under the discount rate valuation method:

If the growth rate of fiscal spending is significantly higher than the nominal GDP growth rate, the absolute return of tech stocks is questionable, and relative returns are under pressure. The higher the growth rate of fiscal spending, the more likely it is to push up the risk-free rate (lowering tech stock valuations) and drive down the risk premium (investors are more optimistic about the macro environment, raising tech stock valuations); however, since fiscal spending mainly flows into rigid non-tech areas (such as social security and other livelihood expenditures), rather than directly and significantly investing in early-stage tech fields, macro conditions may be more favorable for non-tech stocks, putting pressure on the relative returns of tech stocks.

If the growth rate of fiscal spending is significantly lower than the nominal GDP growth rate, the absolute return of tech stocks is questionable, and relative returns are under pressure. The lower the growth rate of fiscal spending, the more likely it is to lower the risk-free rate (raising tech stock valuations), but it also pushes up the risk premium (even if tech stocks have their unique industry growth logic, macroeconomic concerns will suppress investor risk appetite, leading to downward pressure on valuations); if the market is worried about fiscal weakness, economic instability, leading to a decline in systemic risk appetite (reflected in a significant rise in risk premium), tech stock valuations may decline more sharply, and relative returns may be under pressure.

If the growth rate of fiscal spending approaches the nominal GDP growth rate, tech stock valuations may be closer to the "comfort zone":

First, it does not directly push up the risk-free rate (tech stocks can progress along their industry trends, and animal spirits are not interfered with);

Second, it does not directly push up the risk premium (can stabilize the economy and contain systemic risks);

Third, it does not directly push up non-tech stocks (does not weaken the relative returns of tech stocks).

4. Why This Year May Be a "Tech Stock Friendly" Fiscal Policy?

Based on empirical rules (not empirical research), the following observations can be made:

(1) Empirical Rule 1: In the past decade, when "the deficit rate increases by 1 percentage point and hits a new high" or "the broad deficit rate increases by 2 percentage points and hits a new high," tech stocks see a valuation boost.

2015: Broad deficit ✔ Deficit × → Tech stocks see a valuation boost 2020: Broad deficit ✔ Deficit × → Technology stocks overvalued

2023: Broad deficit × Deficit ✔ → Technology stocks overvalued

2025: Broad deficit? Deficit ✔ (This year's fiscal deficit rate increased by 1 percentage point to 4%, reaching a new high)

(2) Empirical Rule 2: In the past decade, when the growth rate of fiscal expenditure approaches the economic growth rate, technology outperforms consumption (when diverging, it underperforms)

2013→2015: Fiscal approaches economy, technology outperforms consumption

2016→2019: Fiscal (upward) diverges from economy, technology underperforms consumption

2021→2024.9: Fiscal (downward) diverges from economy, technology underperforms consumption

2024.9→?: Fiscal approaches economy (this year's fiscal expenditure growth rate may approach the nominal GDP growth target (4.9%)).

5. Risk Challenges: Will the fiscal policy be deeply absent? This year's expenditure support capacity may be strong

The above empirical rules need to hold this year, with an underlying assumption that the fiscal policy will not be deeply absent (or trigger a downward shift in systemic risk preference, affecting technology stocks and even the overall market valuation level). From two budget signals, we believe this year's fiscal expenditure support capacity may be strong, and the risk of deep absence may be small:

(1) Central fiscal reserves

This year may see a budget adjustment for the third consecutive year (in October 2023, an additional 1 trillion yuan of government bonds were issued, and in November 2024, a "6+4+2" debt resolution plan was passed), fiscal expenditure and deficit may still have room for increase in the second half of the year (to ensure economic stability and avoid systemic risks), corresponding to what Minister Lan mentioned: "To cope with possible uncertainties from both domestic and external factors, the central fiscal has reserved sufficient tools and policy space," which corresponds to the budget report stating: "Comprehensive judgment indicates that the impact of changes in the domestic and international environment will continue to transmit to the fiscal sector, and the fiscal revenue and expenditure contradictions will still be prominent in 2025. We must consider the difficulties and challenges more fully and prepare policy measures more comprehensively to provide a solid guarantee for promoting sustained and healthy economic development."


(2) Large Provinces' Finances Are Resilient

In China, for every 100 yuan spent by the government, 86 yuan is spent at the local level; the resilience of local finances mainly depends on whether large provinces can take on the heavy lifting; this year,

from the perspective of the revenue targets in the first budget, the 6 large provinces are relatively resilient: Compared to the actual growth rate in 2024, the 6 large provinces have the highest rebound (0.2%→2.7%), while the 12 heavily indebted provinces are the only ones to lower their targets (4.3%→2.8%); compared to the target growth rate for 2024, all three major regions have lowered their targets by more than 1 percentage point, with the 13 central provinces seeing the largest reduction (4.9%→3.1%); the year-on-year growth rates for the 6 large provinces/12 heavily indebted provinces/13 central provinces are 2.7%/2.8%/3.1% respectively (the actual figures for 2024 are 0.2%/4.3%/2.2%, and the targets are 4%/4.1%/4.9%).

From the perspective of the revenue targets in the second budget, the marginal recovery in the 6 large provinces is the most significant: Compared to the actual growth rate in 2024, the 13 central provinces and the 6 large provinces have both seen significant rebounds (-10.5%→10%, -18.5%→-5.3%), while the 12 heavily indebted provinces have seen a smaller rebound (-1.3%→3.1%); compared to the target growth rate for 2024, the 6 large provinces have the highest rebound (-9.7%→-5.3%), while the 12 heavily indebted provinces are the only ones to lower their targets (5.7%→3.1%); the year-on-year growth rates for the 6 large provinces/12 heavily indebted provinces/13 central provinces are -5.3%/3.1%/10% respectively (the actual figures for 2024 are -18.5%/-1.3%/-10.5%, and the targets are -9.7%/5.7%/6.5%) (see "Observation of 31 Provincial Budgets: Targets, Expectations, and Strength").

Authors of this article: Zhang Yu, Gao Tuo, Source: Yi Yu Zhong De, Original title: "Zhang Yu: This Year May Be a 'Technology Stock Friendly' Fiscal Year - Macroeconomic Series on Technology Stocks Part Two"

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