China’s Debt Hits Record, Leaving Beijing Struggling to Deploy New Stimulus

BEIJING — China’s growing debt burden is limiting the government’s fiscal capacity to launch a large-scale stimulus package. Such support is needed to revive sluggish domestic demand and strengthen economic growth.

According to a new study by the Conference Board, debt repayments alone are expected to account for 19.2 per cent of the central government’s general budget this year. The problem is particularly acute at local government level, where debt interest payments have risen by 16 per cent a year over the same period.

Interest payments on central and local government debt are projected to total 1.4 trillion yuan (US$209 billion) in 2026, up from about 348 billion yuan in 2014. “Debt payments are now a real constraint on fiscal space at the local level,” said Yuhan Zhang, chief economist at the Conference Board’s China Center, as quoted by the Financial Times.

China’s debt has ballooned in recent years as a result of an investment-driven growth model that relies heavily on government borrowing and incentives for state-backed projects. Public debt is forecast to reach 122 per cent of GDP by the end of 2026, up 48 percentage points from its pre-pandemic level, according to Morgan Stanley’s analysis.

Beijing has pledged to do more to boost stagnant domestic demand, as a five-year slowdown in the property sector has put pressure on the finances of households and local governments. Economic growth slowed to 4.3 per cent in the second quarter, below the official annual target range of 4.5 to 5 per cent, as retail sales weakened and fixed-asset investment fell sharply.

China introduced several measures late last month, including subsidies for mortgage interest payments and cuts to rates on funding facilities. The moves came days after the State Council, or cabinet, called for greater efforts to “implement counter-cyclical adjustments in macroeconomic policy”. Chinese authorities have also stepped up efforts to recover taxes on interest and dividends earned from overseas trusts, seeking to replenish government coffers by collecting funds from the country’s wealthiest citizens.

However, some analysts have questioned the impact of the stimulus measures. Barclays described them as “a small nudge, not a game-changer”, while Goldman Sachs estimated that they amounted to a “small” fiscal subsidy that could reach 100 billion yuan over five years.

“In our view, this policy is unlikely to meet investors’ expectations,” said John Lam, head of China and Hong Kong property research at UBS, pointing to the policy’s 1.5 million yuan cap on home values.