China’s growing debt pile is constraining the government’s fiscal capacity for sweeping new stimulus to revive flagging domestic demand and strengthen economic growth, studies of state finances show.
Debt servicing payments alone are expected to account for 19.2 per cent of the central government’s general public budget this year, up from 12 per cent in 2014, according to a new study from the Conference Board.
The problem is especially acute at the local government level, where debt interest payments have risen 16 per cent annually over the same period.
Together, central and local government debt interest payments are projected to amount to Rmb1.4tn ($209bn) in 2026, up from about Rmb348bn in 2014.
“Debt servicing is becoming a material constraint on fiscal space at the local level,” said Yuhan Zhang, principal economist at the Conference Board’s China Center.
China’s debt has grown rapidly in recent years as a result of its investment-driven growth model, which relies on state loans and incentives for government-favoured projects. Public debt-to-GDP is set to hit 122 per cent by the end of 2026, up 48 percentage points from its pre-pandemic level, according to Morgan Stanley analysts.
Beijing has pledged to do more to stimulate moribund domestic demand, as a five-year property sector slowdown has depressed household and local government finances.
Economic growth slipped to 4.3 per cent in the second quarter, below the official full-year target range of 4.5 to 5 per cent, on the back of weakening retail sales and sharp falls in fixed-asset investment.
China unveiled some measures late last month, including subsidies for mortgage interest payments and cuts to interest on a funding facility, days after the State Council, or cabinet, called to “intensify” efforts to “implement countercyclical adjustments in macro policies”.
Chinese authorities have also increased efforts to claw back taxes on interest and dividends earned from offshore trusts, refilling government coffers by squeezing its wealthiest citizens.
But several analysts questioned the impact of the stimulus measures. Barclays described the moves as “a nudge, not a game-changer”, while Goldman Sachs estimated they amounted to a “small” fiscal subsidy of potentially up to Rmb100bn over five years.
“In our view, the policy is likely to fall short of investor expectations,” said John Lam, head of China and Hong Kong property research at UBS, pointing to its housing value cap of Rmb1.5mn.
And with China’s export growth, particularly of AI-related electronics, still roaring ahead, Beijing has indicated it will prioritise investing in advanced technology over setting aside significant sums for stimulus as it competes with the US for supremacy in emerging industries.
“We must . . . continuously expand and strengthen advanced manufacturing, [and] improve the level of self-reliance,” President Xi Jinping said in instructions conveyed to the National Advanced Manufacturing Conference in Beijing last month.
Economists argue that if Beijing wanted to mount a determined stimulus, it could issue extra bonds from the central government, which is considered less indebted than local administrations.
But China’s leadership may be reluctant to take on further leverage. While the central government runs a fiscal deficit of about 4 per cent, the augmented deficit, a wider measure of state spending, is running at about 10 per cent of GDP, according to Goldman Sachs.
Since the property crisis, the central government has also had to transfer increasing amounts of revenue to lower authorities, which previously relied on land sales for growth.
“Spending on debt interest payments rose 341 per cent” between 2013 and 2025, according to the Washington-based Center for Strategic and International Studies, “faster than any other major budget category”.
The think-tank noted that about 14 per cent of US government spending went towards interest payments this year while Japan, one of the world’s most indebted governments, spent almost 26 per cent.
Zhang at the Conference Board noted that the budget pointed to targeted fiscal support for science, technology and other strategic priorities “rather than a large-scale, broad-based stimulus aimed primarily at boosting near-term growth”.
Of central government expenditure, which accounts for 15 per cent of the general public budget, military spending makes up 42 per cent, up from almost 36 per cent in 2014, while the shares of science and technology, education, general public services and social welfare and employment all declined slightly.
Social security spending by local governments has also grown to about 18 per cent, as China’s population has aged. Healthcare spending has also increased slightly.
Economists said that instead of additional stimulus, Beijing is urging local governments to speed up allocated budget spending this year. Local authorities’ fiscal outlays were slower than expected during the first half.
“The policy response will be to speed up the pace of execution, but it will remain within the fiscal budget allocated at the beginning of the year,” said Robin Xing, Morgan Stanley chief China economist.