CHINA needs to vastly step up its efforts to cleanse the balance sheets of the nation’s local governments, giving them the space needed to support consumer spending and strengthen the economy, one of the nation’s most prominent economists said.
The central government should take on at least 20 trillion yuan (S$3.7 trillion) worth of local sovereign debt, David Li Daokui, an economics professor at Tsinghua University and a regular adviser on policy to Beijing, said. The debt relief measures policymakers rolled out late last year are not strong enough, he said.
Burdened by debt loads accumulated during Covid and China’s previous property-and-infrastructure boom, many local authorities have taken actions including delaying payments to suppliers and withholding public workers’ paychecks – damaging the broader economy. Li estimates regional authorities owe a total of 10 trillion yuan in arrears to contractors and civil servants. That’s equivalent to 7 per cent of China’s gross domestic product last year.
To solve the problem, Li proposed that the central government sell more bonds and use the proceeds to buy regional authorities’ debt. Provincial and municipal agencies could transfer assets to Beijing in exchange, he said.
A swap at a scale of 20 to 50 trillion yuan would be effective in relieving debt burdens around the country, allowing local authorities to better support consumers, according to Li. This would also be helpful in the face of US President Donald Trump’s measures to curb Chinese exports, he indicated.
“No matter whether it’s pressure from Trump’s trade protection or from China’s own economic problems, the solution lies in fixing weak consumption,” Li said. “The key is to reduce local governments’ contractionary behaviours.”
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Encouraging domestic consumer spending may prove crucial to China this year. Export growth, which has surged since the pandemic, is under threat from Trump’s tariffs along with rising trade tensions with the European Union and other locations around the world. Weak domestic demand has led to persistent deflation, resulting in a downward spiral between residents’ income and corporate profits.
While local governments used to be a key driver of growth in the past, with big spending on infrastructure, they have turned into a drag in recent years as an historic property slump led to strained finances.
Many economists have called for the central government to increase borrowing, as China’s public debt-to-GDP ratio remains low compared with other major economies. But Beijing has so far resisted bailing out local authorities – worrying it will lead to moral hazard risks, encouraging irresponsible borrowing in the future.
Local governments had over 47 trillion yuan in on-balance sheet debt as at the end of 2025, according to official data. On top of that, they have about 60 trillion yuan in so-called hidden debt, according to International Monetary Fund estimates.
The Finance Ministry in November unveiled a plan to allow local authorities to sell 10 trillion yuan in bonds to refinance their off-balance sheet debt. That’s only led to temporary relief, according to Li, who anticipates problems may surface again in the future.
The economist also called on the central government to significantly expand its “upgrade” incentives for consumer products and equipment. He urged an expansion to 800 billion yuan to one trillion yuan from last year’s 300 billion yuan.
Even more effective would be handing out cash subsidies to households during major holidays, Li said.
Other highlights of the interview:
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President Xi Jinping’s meeting with Alibaba co-founder Jack Ma and other private entrepreneurs sent a signal to all government departments that they need to solve issues faced by private companies. Local governments will likely curb excessive fines and fees on companies, Li expects.
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China will likely lift the official budget deficit ratio target to 3.5 to 4 per cent of GDP this year, and issue a combined five trillion yuan in new special sovereign bonds and local government special bonds, he said.
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The central bank is acting cautiously with monetary easing recently, because of uncertainties over the US Federal Reserve’s policy path. It’s preserving policy room and opting for less visible tools to support the economy, he said. BLOOMBERG