Chinese economist Liu Xiaoshu, chief economist at Qingdao Bank and director of the China Chief Economist Forum, publicly sounded the alarm in Beijing in early December, warning that the growing reliance of authorities on fiscal stimulus and unprecedented government borrowing could lead in the coming years to a debt crisis which, in his view, will cause “long-term and serious economic damage” in the world’s second-largest economy unprecedented government borrowing could trigger a crisis[1]. This warning came at a moment when China is simultaneously facing deflationary pressure, a prolonged slump in the real estate market, and weakening consumer demand, while the central government responds to these problems with an increasingly loose fiscal policy, going much further with it than in previous cycles Beijing’s growing dependence on fiscal stimulus[5].
Record Deficit and Downgraded Rating: How Far Has Beijing Gone
In his sharp analysis, Liu Xiaoshu argued that short-term stimulus packages will not provide China with sustainable, stable growth if they are based on ever-increasing public debt short-term stimulus measures are unable to ensure lasting growth. He emphasized that the current model—based on continuously adding new spending programs—might offer temporary relief in macroeconomic data, but at the same time pushes the country toward a scenario where debt servicing begins to crowd out spending on ordinary public services and the social welfare system. In such a setup, the economy ceases to resemble a growth-generating machine and becomes increasingly vulnerable to any fluctuations in investor confidence regarding the stability of state finances may trigger a debt crisis.
The scale at which Beijing has resorted to deficit spending is historic. For 2025, the government set an official budget deficit target at 4% of GDP, the highest since such statistics began to be recorded and a full percentage point higher than the threshold applicable in 2024 China set the official deficit target for 2025 at 4% of GDP[2]. For comparison, a few years ago, Chinese authorities declared their intention to keep the deficit around 3% of GDP, treating this limit as a safe cap. Now this informal barrier has clearly been crossed, which in itself signals a shift in the government’s approach to state borrowing.
Local Governments on Credit and the Hidden Burden of Local Debt
Rating agencies are responding to these decisions. Fitch Ratings estimates that the so-called deficit of the government and local government institutions—that is, the combined deficit of the central government and local authorities—will rise to 8.4% of GDP in 2025, compared to 6.5% of GDP in 2024 the deficit of the government and local government sector will actually reach 8.4% of GDP this year[3]. According to the same forecast, total public debt in China will increase to 68.5% of GDP, which until recently seemed a level reserved for countries with a much longer history of ‘living on credit’ total public debt will rise to 68.5% of GDP. In April, Fitch Ratings downgraded China’s long-term credit rating from A+ to A, citing “the continual deterioration of China’s public finances and the rapidly rising trajectory of public debt” in April the rating agency downgraded China’s credit rating from A+ to A[4]. This is an official signal to global investors: the risk associated with Chinese debt is increasing.
Simultaneously with the central government’s rising borrowing, the issuance of debt at the provincial and city levels has accelerated. The issuance of local government bonds exceeded 10 trillion yuan in 2025, reaching an unprecedented level and surpassing this symbolic barrier for the first time in history local government bond issuance rose to an unprecedented level, exceeding 10 trillion yuan for the first time[6]. For local authorities, this is a way to cover a serious budget gap that appeared after the collapse of land sale revenues, which for years had been the primary source of funding for local investment and infrastructure spending collapse of land sale revenues[9].
Behind the official figures, a harder-to-assess problem is growing: the debt of local government financing platforms, entities created to finance municipal projects outside the direct balance sheets of local governments. The International Monetary Fund estimates that this debt reached 65 trillion yuan in 2024 debt of local government financing platforms reached 65 trillion yuan in 2024[7]. However, some Chinese analytical firms assess that the actual value of these entities’ liabilities is much higher and may approach 87 trillion yuan some Chinese data providers report values as high as 87 trillion yuan[8]. The discrepancy between these estimates shows how difficult it is to precisely measure the full debt burden, which ultimately could rest on the state’s shoulders anyway.
Economists Dispute: Liu’s Caution vs. Deficit Supporters’ Optimism
Against this backdrop, the voice of Liu Xiaoshu sounds sharper because it goes against the opinion of some Chinese economists who accept, or even support, further deficit increases. The opposing camp is represented, for example, by Lian Ping, a professor at the East China Normal University and a known supporter of utilizing fiscal space. Lian Ping assesses that “China’s fiscal situation and debt levels are generally stable and healthy”[10]. In his view, the state still has a significant margin before debt truly threatens economic stability.
Lian Ping expects Beijing to maintain both a mild fiscal policy and a loose monetary policy at least until 2035, in order to achieve the goal of joining the group of middle-income countries by per capita income Beijing will maintain loose fiscal and monetary policies until 2035. In his scenario, the so-called broad deficit—including not only the official central government budget deficit but also the issuance of special treasury bonds and local bonds—will approach 10% of GDP in 2025 “broad deficit” – including special treasury bonds and local bonds – will approach 10% of GDP in 2025[11]. Advocates of this approach assume that rapid economic growth will keep the debt-to-GDP ratio under control, and financial markets will accept higher debt in exchange for a stronger growth prospect.
For Liu Xiaoshu, this is precisely where the greatest risk begins. In his writing, he plainly stated that when total public debt crosses a certain threshold, the state must allocate an increasing portion of its revenues to interest payments, which automatically limits maneuverability for other budgetary expenditures when debt reaches a certain level, the government must use a large part of funds for interest payments. The consequence is crowding out budget funds for public services, investments in education, health, and the social security system. In such a configuration, a formal debt crisis is not even necessary for the real living standards of some parts of society to begin falling.
Lessons from Japan and Greece: What Liu Xiaoshu Fears
To demonstrate he is not warning in a vacuum, Liu Xiaoshu cited two prominent examples from recent decades. First, Japan and its so-called “Lost Thirty Years”—a period of prolonged economic stagnation following the bursting of the real estate and stock market bubble, during which, despite successive stimulus packages, the economy remained stuck in low growth and high debt he referenced Japan’s “Lost Thirty Years”. The second example is the debt crisis in Greece, where a rapid increase in debt servicing costs and loss of market trust led to deep spending cuts, recession, and social tensions Greece’s debt crisis as a warning. For the Chinese economist, these stories are a caution that debt may initially help but later easily become a burden.
In both cases—Liu Xiaoshu explains—the economies fell into a “vicious cycle” where rising debt weakens investor confidence and increases borrowing costs. The higher the debt, the more nervously investors react, demanding higher interest rates. The higher interest rates, the larger the part of the budget is swallowed by repayments, leaving fewer resources for pro-growth actions that could improve the situation. At some point, the borrowing mechanism itself becomes a brake instead of serving as a tool to ease a slowdown.
Hence the question facing Chinese authorities and economists today: is the current course—a record deficit, growing central debt, enormous local government obligations—still a reasonable use of fiscal space, or already a step toward the scheme Liu Xiaoshu warns against? The answer is not simple as it depends on many variables: GDP growth rate, investor confidence, strength of the private sector. But one thing is clear: if China continues to put out every fire with another portion of debt, at some point another question will arise—not “if,” but “when” the bill for this strategy will hit the entire economy.