China ‘mini’ stimulus likely as debt weighs on Beijing’s options
As economists look ahead, most now expect the People’s Bank of China to deliver a restrained policy rate cut of 10 basis points in the final quarter
[BEIJING] For the past two years, Chinese officials unleashed major fiscal and monetary stimulus after disappointing data in the final quarters. This time around, Beijing has fewer options.
In a warning sign to the economy, industrial output and consumption both had their worst performance of 2025 last month, following a weak performance in July. Most worryingly, growth in fixed-asset investment decelerated in the first eight months to its lowest reading on record for that period outside the pandemic.
While that raised analyst calls for more government support, Chinese policymakers have already boosted this year’s budget deficit to a record high to safeguard the economy against US President Donald Trump’s trade war. With tariff uncertainty lingering, Beijing could also become more tolerant of an annual growth rate weaker than around 5 per cent, a target set before the escalation in trade tensions.
“Incremental and targeted easing is necessary in coming quarters, though significant and broad-based stimulus appears still unlikely in the near term,” Goldman Sachs economists, including Lisheng Wang, wrote in a Monday (Sep 15) note.
As economists look ahead, most now expect the People’s Bank of China to deliver a restrained policy rate cut of 10 basis points in the final quarter. But the near-consensus is for only modest additional fiscal stimulus before the end of December.
Morgan Stanley predicts a “modest” package of up to 0.5 trillion yuan (S$90 billion) to one trillion yuan to fund infrastructure spending, spur consumption and tap “quasi-fiscal” tools to repay local government arrears owed to private companies.
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“New mini-stimulus could come soon if Beijing doesn’t want to miss 5 per cent GDP target,” according to Larry Hu, chief China economist at Macquarie Group, who said the measures should be incremental. “They don’t want to miss the target, but they won’t want to over-achieve it either.”
Alternatively, the government could bring forward next year’s bond quota for swapping so-called hidden local debt, according to Ding Shuang, chief economist for greater China and north Asia at Standard Chartered.
“The chance of another budget review and amendment is low,” said Ding, referring to adjustments that allowed the government to deliver a bigger fiscal punch in 2023.
Growing debt is emerging as a major constraint on Beijing as it confronts the risks of another economic slowdown.
Combined interest payments under the country’s two major budgets grew to nearly 2.2 trillion yuan in 2024, equivalent to 5.7 per cent of total government spending and over five times the amount in 2015, according to Bloomberg calculations based on the Ministry of Finance’s data.
That’s more than what China spent on health care last year and nearly double its expenditure on science and technology.
The current debt load is, in part, a consequence of the enormous costs to contain the Covid-19 pandemic, which left local government finances severely strained. The nation’s yearslong housing crash also slashed income for local officials who had relied on revenue from land sales, forcing them to borrow even more.
National authorities have been taking over more spending responsibilities from provincial officials to contain local debt risks, driving up central government borrowing as an offset for tepid growth in tax revenue.
China’s augmented government debt, including borrowing by local government financing vehicles and obligations tied to special construction and government-guided funds, is projected at 181.4 trillion yuan this year, according to the latest available forecast by the International Monetary Fund (IMF). That’s equivalent to 129 per cent of the nation’s GDP and more than double the level in 2019.
“If large-scale borrowing continues, the resulting severity of the debt servicing pressure cannot be overstated,” said Wen Laicheng, a professor at Central University of Finance and Economics in Beijing.
Many local governments once counted on land sales as a crucial source of revenue. They can now only afford to pay the interest on their debts and repay the minimum amount of principal required each year. Some cities and counties even relied on their provincial governments to repay special local bonds, Wen added.
For its part, the Ministry of Finance in Beijing puts China’s debt at 68.7 per cent of GDP as at 2024. It recognises just 10.5 trillion yuan worth of the so-called hidden debt, versus the IMF’s estimate of more than 80 trillion yuan in broader borrowing than what’s on the government’s balance sheet.
At a briefing on Friday, Finance Minister Lan Fo’an hinted at more accommodative measures that were already planned. Authorities have learned to “seize the critical window of opportunity to introduce policies as early as possible, ensuring they are delivered sufficiently in one go”, he said in answer to a question about changes in fiscal policy making in recent years.
That might not mean borrowing more this year. Beijing has 1.5 trillion of bond funding that’s been raised in 2025 but is yet to be spent on projects, according to Bloomberg calculations based on official figures.
On top of that, the government still has about 4.8 trillion yuan in new central and government bond issuance quota to tap for this year.
Caution should be maintained regarding the size, pace, and investment of bond issuance by public authorities, according to Zhang Yiqun, director of Jilin Research Institute of Fiscal Sciences, an institution in northeast China that’s affiliated with the local branch of the Ministry of Finance.
That would help “to avoid prolonged and excessive leveraging, and to ensure that fiscal and economic measures remain within sustainable limits”, Zhang said. BLOOMBERG
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