A great wall of debt may not be an obstacle to Xi Jinping’s effort to boost spending in the world’s second-largest economy. By some measures, China’s president has already dug deep to prop up slowing GDP growth. Now officials are taking a broader view of the country’s balance sheet. This may open up a new fiscal chapter for the People’s Republic.
Despite a de-escalation this month of a global trade war, China still faces additional 30% tariffs on its exports to the United States. A property crisis, deflationary pressure and unemployment fears mean savers are hoarding money instead of spending it.
Yet there is limited space to unleash further stimulus according to orthodox rules. In the past, the State Council rarely budgeted a deficit larger than 3% of GDP, a threshold similar to the now-defunct Maastricht criteria for the euro zone. Yet China has breached that limit three times since the Covid pandemic.
This year, Premier Li Qiang plans to increase the deficit to 4% of national GDP. Overall, factoring in other public accounts the central government uses to fund spending in social security, infrastructure and other areas, China’s actual deficit could climb to 9.9% of GDP this year from 7.7% in 2024, HSBC estimates.
So far, Beijing has had no trouble financing extra spending. Issuances of special sovereign bonds in 2024 and 2025 have topped 11.2 trillion yuan ($1.55 trillion), or nearly 10% of GDP. Proceeds have funded schemes including cash subsidies to consumers who replace old appliances, vehicles, and electronics. That is on par with the ratio of stimulus China spent over two years to mitigate the impact of the 2008 global financial crisis.
Although China’s overall government debt is as high as 124% of GDP per International Monetary Fund estimates, opens new tab, Beijing insists it can still spend more. One source for this confidence may be a new willingness to focus on what China owns as much as on what it owes.
NEW CHAPTER
Alongside discussions of debt, officials are suddenly talking up the value of the government’s assets. These include stakes it holds in giant companies such as the $214 billion Bank of China (601988.SS), opens new tab and $203 billion PetroChina (601857.SS), opens new tab.
In a report, opens new tab presented to lawmakers in December, the State Council noted net assets of China’s public sector in 2023 amounted to 184 trillion yuan, roughly $25 trillion, or 136% of Chinese GDP by the end of last year. The People’s Bank of China is emphasising a similar point. In its monetary policy report for the first quarter, the central bank compared China, the United States and Japan by weighing up not only their government debt but also their state assets.
Citing a report by the Chinese Academy of Social Sciences, the central bank suggests China’s gross government assets amounted to 166% of GDP by the end of 2022, and further that its equity interest in state-owned enterprises is 119% of GDP or five times the international average. Based on that measure, the central bank concludes its government’s debt expansion is “more sustainable” than those by other large economies.
China would not be the first country to take a broader measure of its balance sheet. In October, the UK changed its headline government debt target as its finance minister, Rachel Reeves, pledged to “invest, invest, invest”. She said the government will focus on public sector net financial liabilities. That includes public sector assets like student loans as well as liabilities.
In New Zealand, which changed its fiscal anchor in 1989, public net worth has improved every year, aside from four years after the 2008 financial crisis, the 2011 earthquakes and the pandemic. It’s difficult to directly link the new accounting method to economic growth, but a strong balance sheet may have helped New Zealand respond effectively to huge shocks.
Chinese leaders hinted at a similar shift as far back as July: a resolution after the Third Plenum, a key meeting held once every five years, stipulated, opens new tab the potential introduction of “national macro balance sheet management”.
SWEAT IT
A new model to think about China’s public finances would be helpful. Local governments’ revenue has relied heavily on land sale income since the 1990s. They’ve been badly squeezed by a property market slump that began in 2020. If Beijing now wants state assets to anchor fiscal policy, there are multiple ways it can leverage them.
One option is for local governments to pledge state assets, instead of property projects, as collateral to obtain loans. In December 2020, Guizhou, a mountainous province in southwest China, transferred, opens new tab part of its stake in $275 billion Kweichow Moutai (600519.SS), opens new tab, a winemaker, to a new government vehicle and has been using that entity’s healthier balance sheet to pay down debt and secure financing. Jiangsu, a coastal province north of Shanghai, among others, is taking similar steps.
China can also sweat its assets harder. China Securities Regulatory Commission is pushing listed firms to boost payouts. Dividend payments of state-owned enterprises to the central government amounted to 1.2 trillion yuan, up more than 15% on the year, according to Securities Times, a state-run financial newspaper. Proactive ‘market value management’ is now a top criteria for appraising the performance of executives of public sector firms.
Asset disposals can help too. Selling off 10% of state-owned enterprises’ assets could raise revenue equivalent to 11% to 21% of GDP, according to Rhodium Group. China went down this path in the 1990s, privatising national heavyweights such as China Mobile and PetroChina to tap U.S. dollars.
Dag Detter and Ian Ball, authors of the book Public Net Worth, opens new tab, advocate for the more productive use of government assets but insist reliable data is a prerequisite to this approach. Beijing did not respond to a request from Reuters Breakingviews for a detailed breakdown of its state assets, but China has promised more transparent reporting of its financial accounts.
To be sure, over the years China has found ways to crank up debt, and it is not clear if it is ready to kick that habit. Effective management of its assets also will require Beijing to interfere less with how they are run. These days American investors also are lukewarm on Chinese equities, and many companies trade at multiples below their book value, making it politically fraught to execute sales. Even if it can generate proceeds, the government cannot fund ongoing spending from one-time asset disposals.
Ultimately, by convincing others to take a broader view of its balance sheet, Beijing might hope to improve perceptions of China’s creditworthiness and set the tone for bigger fiscal stimulus. Measuring its state assets is a good start, the next challenge will be managing them.