Hello, I’m Anique. I’m writing from Singapore with Evelyn, who reported from the Bund Summit in Shanghai last week. Welcome to the latest edition of The China Connection. A snapshot of what we’re seeing and hearing from China watchers at home and abroad.
Everyone wants China to increase spending. So why is government spending falling, and what happens when the most indebted cities can no longer afford to spend?
While governments from Washington to Brussels are being told to cut spending, Beijing is being asked to spend more.
At a meeting 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 perpetrators” of debt, summarizing the prescription: “China needs to spend more, the United States needs to save more, and Europe needs to invest more.”
Georgieva also called on the Chinese government to implement more meaningful fiscal stimulus as the country’s economy slides into deflation, predicting that China’s economic growth rate will slow from 5% last year to 4.5% this year and further slow to 4% in 2027.
The Chinese government has room to borrow, with general government debt amounting to about 68.4% of GDP, according to the IMF. But the debt crisis looms beyond the government’s balance sheet. Growth in government debt, including local government financing vehicles and off-balance sheet borrowing, rose to about 126.6% of GDP last year, comparable to developed markets including the United States and Europe, according to IMF estimates.
For decades, local governments have relied on selling land to developers to finance road, rail and industrial park development. Since the real estate recession began in 2021, that income has collapsed. Since then, the Chinese government has moved to prevent local governments from accumulating new hidden debt, curbing off-the-books borrowing and removing a key driver of growth.
Beijing think tank CF40, which co-hosted the Bund Summit in Shanghai last week, estimates that land sales revenue has more than halved from 8.7 trillion yuan to 4.2 trillion yuan (equivalent to about $590 billion) since 2021.
This pressure is also reflected in spending. Nomura’s chief China economist Ting Lu estimates that total government spending fell by 3.5% in the first eight months of this year after rising 3.6% last year, describing this as a “true fiscal cliff” that is weighing on the economy.
Fixed asset investment in urban areas fell for the first time in decades, falling by 3.8% last year, but the decline has since accelerated, falling by 7.2% in the first three quarters. The Chinese government has kept its official deficit target at around 4% of GDP, but the Institute of International Finance estimates that the actual deficit could reach up to 9%, which it says still looks insufficient.
The Chinese government has ordered state-backed borrowers to clear hidden debt by mid-2027 and transform into market-oriented, for-profit state-owned enterprises. According to S&P Global Ratings, hidden vehicle debt shrank from 14.3 trillion yuan in 2023 to 6.5 trillion yuan ($973.3 billion) last year. But many automakers still lack the cash flow to pay interest, leaving unprofitable utilities still burdened, according to S&P.
The IMF wants Beijing to circle around a medium-term fiscal framework that would see China “expand its finances in the short term (to revive the economy), but restore support in the medium term to ensure debt sustainability,” said Krishna Srinivasan, the fund’s Asia-Pacific director.
The fund also urges China to deviate from point growth targets, saying the targets encourage local authorities to overinvest to meet the numbers, leading to a “misallocation” of resources and an increase in local debt.
The stakes are high because allowing local governments to default could set a dangerous precedent. “Nobody wants to default to local government employees,” said Logan Wright, a partner at Rhodium Group. But if one place is implemented and Beijing intervenes, the rest of the country can expect similar relief, he said, meaning local authorities’ priorities can sometimes conflict with Beijing’s. “They actually want to default.”
Volvo Cars CEO says slump in China sales came ‘sooner than expected’
The Swedish carmaker blamed the third quarter’s weakness on “challenging” conditions in the Chinese market, and U.S. CEO Håkan Samuelsson said Chinese consumers were increasingly turning to domestic brands and the Geely-owned carmaker planned to revamp its business around “locally adapted vehicles.”
House committee claims Webull messages show China-based staff had access to U.S. customer data
The Communist Party of China’s House of Representatives Select Committee said Webull’s internal messages indicate that Chinese employees may have access to sensitive data of U.S. users, which the online brokerage said was restricted to U.S.-based employees. The panel says it increases national security risks for American finance.
Wealthy Chinese upset by Beijing’s increased taxation on the US
After the Chinese government imposed a retroactive tax on offshore trusts in July, wealthy Chinese are asking their lawyers and bankers about opening U.S. bank accounts and moving offshore assets to the United States. But lawyers warn that a paper trail of funds that leave CRS’s jurisdiction could still expose clients to retroactive taxes.
