China has set an annual growth target of “about 5 percent”, promising to make domestic demand its main economic driver as an escalating trade war with the United States hit exports.

The headline growth figure announced by Premier Li Qiang at an annual Communist Party conclave on Wednesday also included a rare rise in fiscal funding, allowing China’s budget deficit to reach 4 percent this year as it battles stuttering employment for young people, low consumer demand and a property sector debt crisis.

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Under the plans, some 12 million new jobs will be created in Chinese cities as Beijing pushes for 2 percent inflation this year.

“Budget deficit ratio from 3 percent to 4 percent doesn’t seem much, but that’s the highest that has been set in three decades. So the government is committing to spending more,” Al Jazeera’s Katrina Yu said, reporting from Beijing.

The Chinese government also pledged to make domestic demand the “main engine and anchor” of growth, adding that Beijing should “move faster to address inadequate domestic demand, particularly insufficient consumption”.

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In a rare move, Li said China would hike its fiscal deficit by one percentage point, something that analysts have said will give Beijing more latitude to tackle its economic slowdown.

Addressing nearly 3,000 members of the National People’s Congress, Li in his 55-minute talk acknowledged both international and domestic challenges.

“An increasingly complex and severe external environment may exert a greater impact on China in areas such as trade, science, and technology,” the 32-page report said.

“Domestically, the foundation for China’s sustained economic recovery and growth is not strong enough. Effective demand is weak, and consumption, in particular, is sluggish.”

Defence budget hiked

China also said in a draft budget that defence spending would rise 7.2 percent this year as it rapidly modernises its armed forces in the face of regional tensions and strategic competition with the US.

Since Xi Jinping became president and commander-in-chief more than a decade ago, China’s defence budget has ballooned to 1.78 trillion yuan ($245bn) this year from 720 billion yuan in 2013.

“President Xi Jinping has made it very clear that he wants to modernise China’s military by the year 2035 and a lot of that money will go towards military technology, better missiles, better submarines and missile surveillance technology,” Al Jazeera’s Katrina Yu said.

At the same time, the Chinese military is trying to improve combat readiness through more rigorous training and drills, according to official reports – many of which involve Taiwan scenarios and territorial claims in the South China Sea.

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Beijing considers Taiwan part of its territory, but the Pacific island has had an independent government since 1949. Xi has repeatedly said he does not want to postpone unification indefinitely – and would use force, if necessary.

China remains the world’s second-largest military spender behind the US, whose proposed military budget for 2025 is $850bn.