Economic growth is slowing the debt burden

In the second quarter of 2026, China's GDP grew by 4.3% in annual terms. For the whole year, the government set the goal of economic growth at the level 4.5–5%.

To achieve this figure, Beijing promises to support economic activity and stimulate consumption. However, the government's capabilities are limited by the increase in public debt and the cost of servicing it.

As reported by the Financial Times with reference to research on public finances, the problem is particularly felt at the local level, where debt payments are increasingly putting pressure on budgets and reducing space for new economic initiatives.

Interest on debts takes an increasingly large part of the budget

According to the Conference Board, in 2026 interest payments on debt will amount to 19.2% of China's central government budget. For comparison, in 2014, 12% of budget funds were allocated to these needs.

Total interest payments by central and local governments can reach 1.4 trillion yuan, or $209 billion. About nine years ago, the corresponding amount was almost four times smaller.

Local government expenses are growing especially fast: according to the above estimates, interest payments increased by an average of 16% every year. This limits the ability of regions to finance infrastructure, support businesses and launch programs to stimulate demand.

According to Morgan Stanley's forecast, by the end of 2026, China's public debt may grow to 122% of GDP. This is 48 percentage points more than before the pandemic.

How did China accumulate such debt

One of the main reasons for the increase in indebtedness was the model of economic development, which for a long time relied on state lending and investments. Significant funds were directed to infrastructure projects, construction and development of production.

The situation was worsened by a prolonged crisis in the real estate market. Due to the decline in the industry, local authorities have lost part of the income from the sale of land plots, which were previously an important source of funding for regional budgets. At the same time, the need to support the local economy forced the central government to increase financial assistance to the regions.

As a result, debt obligations continue to grow, and an increasingly large part of budget resources is directed not to new projects, but to servicing already accumulated debts.

Why new incentives may not produce the expected result

Against the background of weak retail sales and a reduction in fixed capital investment, the Chinese authorities announced additional support measures. Among them are subsidies for mortgage interest payments and rate reductions under one of the financing mechanisms.

At the same time, Beijing has increased the collection of taxes on interest income and dividends that wealthy citizens receive through offshore trusts.

However, analysts doubt that these steps will be enough to significantly revive the economy. At Barclays, the announced measures are considered more of an initial impulse than a turning point. Goldman Sachs also estimates the support as a relatively small fiscal subsidy, which could amount to 100 billion yuan over five years.

UBS representative John Lam, who researches the real estate markets of China and Hong Kong, also expressed doubts that the current policy will live up to the expectations of investors.

Beijing is betting on technology, not mass stimulation of consumption

Despite the problem of domestic demand, Chinese exports continue to grow. Electronics for artificial intelligence and other high-tech products remain one of the areas of development.

In competition with the United States for leadership in advanced industries, Beijing gives priority to the development of production, scientific research and technological independence. The President of the People's Republic of China, Xi Jinping, calls for strengthening these areas, which is also reflected in the budget priorities.

According to the Conference Board, the Chinese government mainly focuses on targeted support for science, technology and strategic sectors, rather than on large-scale programs that could quickly increase consumer spending.

Such an approach can help strengthen the country's long-term competitive position, but does not necessarily ensure a quick recovery of domestic demand.

Why China is in no hurry to increase the budget deficit

In theory, the central government could raise additional resources through the issuance of government bonds. Its debt burden is considered more moderate compared to the burden of local authorities.

However, a further increase in borrowing may create additional risks for public finances. За оцінкою Goldman Sachs, розширений дефіцит бюджету Китаю вже становить близько 10% of GDP.

Under such conditions, large-scale economic stimulation can further increase debt obligations and future costs of servicing them. Therefore, the authorities are forced to find a balance between supporting growth and controlling financial risks.

Instead of new programs, the government accelerates budget expenditures

Currently, Beijing is urging local governments to make more active use of the funds already provided for in the budgets. In the first half of 2026, the regional government spent them more slowly than expected.

Robin Sin, Morgan Stanley's chief economist for China, believes that one of the main steps will be to accelerate the implementation of budgets without significantly increasing the originally planned expenditures.

Thus, China is trying to support economic activity with the help of already available resources, without resorting to large-scale expansion of public borrowing.

The future dynamics of the Chinese economy will depend on whether the authorities can support domestic demand and at the same time curb the growth of debt. The high costs of its maintenance narrow the opportunities for large-scale incentives, so Beijing has to rely on point support and the development of strategic industries.