China’s Finance Minister Lan Foan recently outlined Beijing’s cautious approach to economic stimulus amid mounting domestic and external challenges. His remarks, issued ahead of the Central Committee’s fifth plenum scheduled for late October, reveal the government’s priority to balance targeted fiscal support with efforts to address the fragile financial health of local governments.
Lan emphasized the need for precision and effectiveness in stimulus measures, signaling a deliberate departure from the broad, debt-fueled expansions seen in previous years, notably in September 2024. The current policy package, while still substantial, is more focused and includes steps such as interest rate cuts for policy banks and the introduction of interest subsidies for first-time homebuyers on new commercial mortgages. These measures aim to spur demand without undermining financial stability. With China’s growth hovering near official targets and prior stimulus tools—like ultra-long special government bonds—still in circulation, broad-based rate cuts could exacerbate banking sector challenges, especially given banks’ net interest margins are at a historic low of 1.4 percent.
A significant concern addressed by Lan is the ongoing local government debt problem. Roughly 5.8 trillion yuan of a 6 trillion yuan bond swap program intended to convert hidden local government debt into more transparent liabilities has been issued. This indicates progress in resolving legacy debt issues, yet Lan issued stern warnings against the creation of new hidden debts and false claims of debt reduction, pledging strict investigations and penalties. The government remains committed to deleveraging and risk control rather than relying on large-scale cash injections for short-term growth.
Lan also highlighted deeper structural fiscal challenges facing local governments. Despite bearing primary responsibility for social welfare and infrastructure spending, local governments depend heavily on volatile land-sale revenues and transfers from the central government. From January to August, central government spending rose by 6 percent, while local government spending increased a mere 0.3 percent, resulting in a modest 1.2 percent overall rise in general public budget expenditures. The general budget deficit has more than doubled since 2019, reaching a record 5.89 trillion yuan planned for 2026.
In response, authorities have recently tightened tax policies, including imposing a 20 percent tax on gains from offshore trusts linked to mainland beneficiaries and rescinding a long-standing dividend tax exemption for foreign individuals. Nonetheless, these are considered short-term measures. In late September, a cabinet meeting chaired by Premier Li Qiang urged local governments to make fuller use of their unused borrowing quotas. However, historical patterns suggest that simply increasing borrowing capacity may not resolve funding gaps.
Lan’s commentary reflects a broader push by Beijing to shift local governments away from an overreliance on GDP-driven growth and property speculation toward enhanced public service delivery. Policies are being developed, such as a “negative list” barring local authorities from subsidizing certain entities, to curb inefficient spending and foster sustainable development. Yet without stable and expanded revenue streams, local governments’ ability to carry out these roles remains constrained.
As China’s fixed-asset investment has declined 7.2 percent this year—an indication that traditional growth drivers are weakening—Lan’s remarks underscore the urgency of fiscal reforms. With the upcoming plenum, Beijing faces pressure to translate policy signals into concrete actions designed to restore local government finances and stimulate domestic demand for sustainable long-term growth.