The Chinese government announced its much awaited budget for 2025 in the middle of last week. S&P Global Ratings believes the government largely delivered what it had indicated since late last year: a budget that would include significant support for the economy.
Businesses and investors are reportedly looking forward to such support as Chinese economic growth continues to be weighed down by the weaknesses in real estate activities and a crackdown on off-budget local government spending.
In the following, we answer some questions that may be on investors' minds regarding what the greater willingness to take on more debt means for the economy and government finances.
Frequently Asked Questions
The Chinese growth target of 5% in 2025 is unchanged from last year. Do Chinese provinces also share similarly stable expectations for economic growth this year?
There are significant differences, in our view. Provincial-level governments have become more realistic in projecting growth this year. Nearly half of them lowered their growth forecasts for 2025, compared with forecasts for 2024 made early last year. Only Tianjin municipality raised its growth projection to 5.0%, from 4.5% last year.
Nevertheless, almost all provincial-level governments continue--as is common--to project growth rates at, or above, the national target. Qinghai province is the sole exception. The Qinghai government expects growth to be around 4.5% in 2025.
Even the reduced growth targets are a challenge for some. A few provincial regions, especially in western and northeastern China, grew well below 5% in 2024. Six of them, including the large Guangdong economy, expanded by less than 4%. Achieving the growth targets this year will need a strong rebound in economic activity in these regions.
What is the effective fiscal deficit in 2025, considering off-budget issuances?
Total Chinese government debt will rise by about Chinese renminbi (RMB) 11 trillion in 2025, up from an increase of about RMB8.2 trillion last year. In addition to the new debts required to finance the budget deficit, we further add the central government special treasury bonds and subnational government special purpose bonds (SPBs). These numbers, however, exclude the RMB800 billion of debt issued to refinance off-balance sheet debts in both years.
Depending on final economic performance, debt-to-GDP ratios could amount to between 7.5% and 8% of GDP in 2025. This measure of the fiscal deficit expanded by a lower 6% in 2024, by our estimate, and the 2024 increase in net debt in 2024 was also likely lower, given the government's financial assets probably increased with lower interest rates and higher equity prices.
Does the large fiscal deficit in 2025 mark the beginning of a trend of unsustainable increase in Chinese government debt?
The 2025 budget does not materially increase structural spending that will drag on future government budgets. Nevertheless, Chinese fiscal deficits will likely return to a more normal level only on the back of a sustainable improvement in economic growth.
A significant part of the government spending in 2025 will likely be temporary items, unless the Chinese economy fails to return to sustainable growth of around 4%-5%. These include the RMB500 billion for the recapitalization of large Chinese banks.
Part of the local government SPBs to be issued will be used to repay arrears owed by local governments to suppliers and to purchase idle land and unsold apartments from developers. Guangdong province already announced SPBs for repurchasing idle land of RMB30.7 billion last month. We expect more of such bonds to be issued to push forward meaningful destocking for the sector.
The central government special treasury bonds are also earmarked for strategic projects to upgrade environmental infrastructure and to subsidize consumer purchases of energy-saving appliances. The budget document did not rule out that the amount of off-budget debt to be refinanced using government bonds could exceed the RMB800 billion already planned.
Past issuances of local government special purpose bonds resulted in underutilization of funds owing to the lack of suitable projects. Will this problem continue to hamper the government's effort to increase demand?
Not as much as previous years. Over the past year, the central government has made changes to the framework governing the use of SPB proceeds to increase their effective usage:
- It expanded the types of projects that can be financed by moving to a "negative list" approach from a "positive list" one.
- It liberalized the approval process for new bond issuances for ongoing projects.
- It allowed 10 provinces to approve projects using SPB financing within their regions
- It expanded the permitted sources of funds that can be used to repay the bond borrowings, increasing the number of projects that can qualify.
- It increased the number of project types that can count special purpose bond financings as capital, allowing them to leverage up further. It also raised the ratio of bond proceeds that can count as capital to 30%, from 25%.
With local government debt burdens already considered to be heavy in many cases, why is the central government allowing large new local government bond issuances?
The latest Chinese budget plans for debt at local governments to increase by RMB5.2 trillion. This is approximately 44% of the total increase in government debt for the year, down from about 51% in 2024. Much of this amount reflects the RMB4.4 trillion increase in SPBs, RMB500 billion more than in 2024.
The sizable increase reflects the fact that the central government relies on local governments to drive many of the policy initiatives to revive economic confidence. These initiatives are designed to bring amplifying benefits across different areas from consumption power to housing needs to employment.
Targeted areas of spending will continue to revolve around key investment initiatives, such as major projects including infrastructure and security. There are also higher targets of urban redevelopment involving 1.5 million to 2 million housing units. Despite the elevated debt burdens faced by local governments, they will remain pivotal in executing these local initiatives.
The of the local government debt burden has fallen as the central government takes on more debt to help fund some of these initiatives, even if they are implemented locally.
Local governments have been driving the implementation and providing part of the funding for the trade-in of consumer goods since last year to boost domestic consumption. This year, another RMB300 billion in ultra-long central government special treasury bonds will be allocated to support local consumption and manufacturing through home appliances, consumer electronics, and automobiles.
Local governments' roles in delivering infrastructure and social goods will remain important. How can they lower their debt risks to more sustainable levels?
China's pursuit of fiscal sustainability is contending with other pressing needs, such as rebalancing the demand-supply of the property sector and making essential investments. For now, the central government will focus on mitigating the risks of the continual increase in local government debts. Longer term, fiscal discipline remains a key priority of the central government
Short-term management to mitigate impact of fiscal expansion: Until China can deleverage local governments, the central government is acting to manage the risks of growing debt. While it allows local government SPBs to grow quickly, it keeps the issuance of general bonds relatively low.
The central government sees SPBs as less risky because they are supposed to only finance projects where relevant sources of revenues for debt repayment have been identified. Even for such bonds, issuances by the most indebted provinces are restricted by the central government.
In the meantime, the central government has also implemented a program to swap costly off-budget debts to SPBs.
Longer-term measures to put local government finances on a more stable footing and reduce their reliance on debt financing. According to the budget document, China is also considering reforms to improve the structural fiscal performance of local governments, especially governments at the lowest levels. These include:
- Gather all government-related revenues into budgetary management.
- Further increase general fiscal transfers to weaker local governments.
- Change the ratios for shared taxes in favor of local governments.
- Allow local governments to set local tax rates independently within defined ranges.
- Transfer some spending responsibilities from local governments to the central government.
What are the risks that local government finances will continue to worsen?
On the revenue side, pretty high. We've already discussed spending increases above. Against this, for 2025, we expect a modest 2.9% growth in general revenue (which includes tax and non-tax revenues such as fees, fines, and income from government assets, but excludes land sales). This is a small increase from a realized growth of 1.7% in 2024.
Local taxes are likely to underperform relative to economic growth targets due to tax incentives for businesses and challenges related to corporate profitability.
Local government revenue is also weighed down by a sluggish land market. Despite early signs of stabilization, land revenue still dropped 16% in 2024. This has been somewhat offset by the surge in non-tax revenue as local governments strived to cushion the fall. Some of these revenues may reflect the excess fines and taxes that local governments imposed on businesses.
Consequently, without a recovery in the economy and the real estate market, local government finances are unlikely to happen this year.
Related Research
- Sovereign Debt 2025: China Stimulus To Help Push Asia-Pacific Central Government Borrowing To US$4.2 Trillion In 2025, March 4, 2025
- China's Upper-Tier Local Governments Are Not Immune From Debt Buildup At Lower-Tiers, Jan. 15 2025
- Asia-Pacific Sovereign Rating Trends 2025: Brace For Change, Dec. 18, 2024
- China's Local Governments: Downside Risk Is Rising For Fiscal Consolidation, Dec. 16, 2024
- China, Dec. 5, 2024
- China Brief: More Transparency Means More Official Debt For Local Governments, Nov. 11, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | KimEng Tan, Singapore + 65 6239 6350; kimeng.tan@spglobal.com |
| Christopher Yip, Hong Kong + 852 2533 3593; christopher.yip@spglobal.com | |
| Wenyin Huang, Singapore +65 6216 1052; Wenyin.Huang@spglobal.com | |
| Secondary Contact: | Rain Yin, Singapore + (65) 6239 6342; rain.yin@spglobal.com |
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