The Chinese Ministry of Finance recently arranged the use of 550 billion yuan in local government debt balance limits to help local finances and infrastructure projects in distress. However, with the dual impact of weak domestic demand and continued downturn in the real estate sector, the Chinese authorities are now facing a severe test as public debt has surged to over 120% of GDP.
Industry experts analyzed that the increasingly heavy interest expenses are squeezing fiscal policy space, making it difficult to implement breakthrough stimulus measures, leading to the overall economy being trapped in a deep structural crisis.
According to reports from Chinese media on October 9, the Ministry of Finance arranged the use of the remaining 550 billion yuan in local government debt, with 300 billion yuan allocated to support county-level and district-level government general public budgets to ensure the operation needs of grassroots finances. The remaining 250 billion yuan was earmarked to support infrastructure projects with actual funding needs in the fourth quarter, with priority given to projects already under construction.
Reuters reported that this measure was taken as a countercyclical adjustment measure after China’s second-quarter economic growth rate dropped to 4.3%, below the official annual target of 4.5% to 5%.
Despite the Chinese State Council’s promises to strengthen policy measures, such as introducing subsidies for housing loans, lowering financing tool interest rates, and enhancing the collection of interest and dividend taxes on overseas trusts, international financial institutions generally remain skeptical of such minor stimuli.
Barclays described these measures as merely providing a “gentle nudge” rather than being a key change in the situation. Goldman Sachs estimated that the fiscal subsidies scale was relatively small, with a maximum of only about 100 billion yuan within five years. The authorities’ attempt to rescue weak consumption and investment with limited funds is struggling to gain market confidence.
According to reports from the Financial Times, the Conference Board and the IMF highlighted the Chinese authorities’ growing debt burden resulting from long-term reliance on investment and borrowing to drive growth, escalating like a snowball.
Morgan Stanley predicted that by the end of 2026, China’s public debt-to-GDP ratio will rise to 122%, a staggering 48 percentage points increase from before the pandemic. Data from the Center for Strategic and International Studies (CSIS) in the United States show that between 2013 and 2025, the Chinese government’s debt interest expenses surged by 341%, outpacing all budget categories.
The Chinese Center of the Conference Board bluntly stated that debt repayment is limiting local fiscal space. The institution estimated that by 2026, total debt interest expenses for central and local governments will amount to 1.4 trillion yuan, equivalent to about 19.2% of the size of the central government’s general public budget, reflecting an increasingly heavy overall government debt repayment burden.
Amid the sharply deteriorating fiscal situation, the Chinese authorities have not prioritized resources for social livelihood security but have instead tilted towards military and high-tech sectors. Military spending now accounts for 42% of the central budget, while the allocation for education, social welfare, and employment has decreased. Chinese leader Xi Jinping emphasized at the National Conference on Advanced Manufacturing last month, “Continuously expanding and strengthening advanced manufacturing, enhancing the level of industry chain autonomy and control… providing strong support for promoting China’s modernization.”
The massive accumulation of implicit debt by local governments has become a fatal crisis for the financial system. Vice Minister of Finance Lin Zechang presented a report to the Standing Committee of the National People’s Congress at the end of August this year, showing that by the end of 2025, the national government debt balance was 102.5 trillion yuan, with a debt ratio of 73.2%. The officially recognized implicit debt was 6.5 trillion yuan.
IMF’s report in February this year revealed that China’s broad sense debt ratio reached a staggering 126.6%, with a total debt of 177.5 trillion yuan, including off-balance sheet debts such as local government financing platforms (LGFVs) amounting to 71 trillion yuan.
While China’s domestic savings are high, non-resident savings are low. According to official data cited by mainland media First Financial at the end of 2025, the total household deposits across the country were 167 trillion yuan. However, IMF data indicates that the ratio of “non-residents holding Chinese government debt” in 2025 was only about 2.2%.
Therefore, local government financing largely relies on the domestic financial system or will be filled by citizens’ savings.
Moreover, facing a potential banking crisis, the Chinese authorities have requested all provinces to “clear” local implicit debts by 2028 and issued an administrative directive to close all local bond issuance institutions, local financing platforms, by June 2027 to complete the “platform withdrawal” work.
Analysts suggest that these “platform withdrawals” and “debt clearance” are merely deceptive tactics. International credit rating agencies like Fitch Ratings and United Credit also issued warnings, indicating that policy initiatives of “platform withdrawals” do not necessarily mean substantial debt clearance. The debt crisis accumulated by the Chinese system has essentially reached an unsolvable dilemma.