Hello, this is Anniek, I’m writing to you from Singapore, with Evelyn, who reported on the Bund Summit in Shanghai last week. Welcome to the latest edition of The China Connection – a look at what we’re seeing and hearing from China watchers inside and outside the country.
Everyone wants China to spend more. So why is the government spending less, and what will happen if the most indebted cities can no longer afford it?
Governments from Washington to Brussels are being asked to spend less, but Beijing is being asked to spend more.
At meetings of the International Monetary Fund and the World Bank in Bangkok earlier this month, Managing Director Kristalina Georgieva called the United States and European countries the “worst offenders” on debt and summarized her recommendation: “China must spend more, the United States must save more, and Europe must invest more.”
Georgieva also urged Beijing to implement more significant fiscal stimulus measures while its economy is in deflation, expecting China’s economic growth to slow to 4.5% this year, from 5% last year, and slow further to 4% in 2027.
Beijing has room to borrow, with overall public debt standing at around 68.4% of GDP, according to the IMF. But a debt crisis looms outside the government’s balance sheet. The increase in public debt, including local government financing instruments and off-balance sheet borrowing, climbed to around 126.6% of GDP last year, according to IMF estimates, a figure comparable to that of developed markets including the United States and Europe.
For decades, local authorities have relied on land sales to developers to finance the development of roads, rail lines and industrial parks. These revenues have collapsed since the start of the real estate crisis in 2021. Beijing has since taken steps to prevent local governments from accumulating new hidden debts, thereby limiting informal borrowing and removing a key driver of growth.
CF40, a Beijing think tank that co-hosted last week’s Bund summit in Shanghai, estimates that revenue from land sales has fallen by more than half since 2021, from 8.7 trillion yuan to 4.2 trillion yuan, the equivalent of about $590 billion.
This reduction has had an impact on spending. Combined fiscal spending fell 3.5% in the first eight months of the year, after rising 3.6% last year, said Ting Lu, chief China economist at Nomura, describing it as a “veritable fiscal cliff” that has become a drag on the economy.
Urban investment in fixed capital declined for the first time in decades, falling 3.8% last year, and has since deepened its decline, falling 7.2% in the first three quarters. Beijing has kept its official deficit target at around 4% of GDP, but the Institute of International Finance estimates the actual deficit could be as high as 9% and says even that figure appears insufficient.
Beijing has ordered state-backed borrowers to eliminate their hidden debts and transition to market-oriented commercial SOEs by mid-2027. Debt hidden in these vehicles fell to 6.5 trillion yuan ($973.3 billion) last year, from 14.3 trillion yuan in 2023, according to S&P Global Ratings. But many vehicles still lack the cash to pay interest and remain burdened by unprofitable public projects, S&P said.
The IMF wants Beijing to square the circle with a medium-term fiscal framework, which would allow China “to expand fiscally in the short term (to revive the economy) but recover support in the medium term to ensure debt sustainability,” said Krishna Srinivasan, director of the fund’s Asia and Pacific department.
The fund also urges China to move away from one-off growth targets, which it says pressure local officials to overinvest to meet that figure, leading to a “misallocation” of resources and rising provincial debt.
The stakes are high, because letting a local government fail could set a dangerous precedent. “No one wants to be the first local government official to default,” said Logan Wright, a partner at Rhodium Group. But once one does and Beijing intervenes, the others can expect the same bailout, he said, meaning local authorities’ priorities can sometimes run counter to Beijing’s. “They actually want to default.”
Volvo Cars CEO says China sales decline happened ‘faster than we thought’
The Swedish carmaker blamed a weaker third quarter on “more difficult” market conditions in China and US CEO Håkan Samuelsson said Chinese consumers are increasingly turning to domestic brands and the Geely-owned carmaker plans to reorganize its business around “regionally tailored cars”.
House committee says Webull messages show China-based staff could access U.S. customer data
The House Select Committee on the Chinese Communist Party says internal Webull messages indicate employees in China could access sensitive U.S. user data that the online brokerage said was restricted to U.S.-based staff. The panel says this raises national security risks for American finance.
Rich Chinese shaken by Beijing’s growing tax hunt turn to the United States
Wealthy Chinese are asking lawyers and bankers to open U.S. bank accounts and move assets overseas there, after Beijing imposed retroactive levies on offshore trusts in July. But lawyers warn that the paper trail of funds leaving CRS jurisdictions could still expose clients to retroactive taxes.
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