Under the pressure of economic downturn, the Chinese Communist Party (CCP) has proposed to increase the deficit rate in 2025. The fiscal deficit rate is planned to be around 4%, which is 1 percentage point higher than the 3% of last year, with the deficit scale reaching 5.66 trillion yuan (RMB), an increase of 1.6 trillion yuan over last year, setting a historical record. The latest report by the internationally renowned credit rating agency Fitch Ratings maintains the outlook of China’s sovereign credit rating as “negative.”
At the National People’s Congress held on March 5th, Premier of the State Council Li Keqiang delivered the government work report. According to the report, this year’s general public budget expenditure scale is 29.7 trillion yuan, an increase of 1.2 trillion yuan annually. The CCP government plans to issue long-term special national bonds of 1.3 trillion yuan, an annual increase of 300 billion yuan, and special national bonds of 500 billion yuan. It plans to arrange local government special bonds of 4.4 trillion yuan, an increase of 500 billion yuan annually.
This year, the total newly added government debt amount is 11.86 trillion yuan, an increase of 2.9 trillion yuan from last year.
The CCP Central Economic Work Conference held in December of last year called for an increase in the fiscal deficit rate in 2025, the issuance of long-term special national bonds, and an increase in the issuance of local government special bonds. The National Fiscal Work Conference held at the end of last year also mentioned the increase in the fiscal deficit rate and the arrangement of a larger scale of government bonds.
According to financial news reports, before the outbreak of the COVID-19 pandemic in 2020, the official publicly announced deficit rate in China had not exceeded 3%. In response to the impact of the epidemic, the deficit rate increased to a historical high of 3.7% in 2020, decreased to 3.2% in 2021, further dropped to 2.8% in 2022, and returned to within 3%.
In 2023, the CCP issued an additional one trillion yuan in national debt, reaching a new high fiscal deficit rate of 3.8%. In 2024, the deficit rate was set at 3%. In 2025, the deficit rate increased to around 4%, setting a new historical high.
The Ministry of Finance of the CCP published the national local fiscal revenue and expenditure situation for July and the first half of the year on September 9th last year. Among the 31 provincial-level administrative regions, 30 showed fiscal deficits, with only Shanghai recording a surplus of about 70 billion. The total fiscal deficit amounted to 5.7 trillion yuan, highlighting that under the impact of slowing economic development, various local finances are in difficulty.
Among the provinces with fiscal revenue and expenditure gaps exceeding one trillion, 23 provinces were listed, with Beijing among them. There were 15 provinces with gaps exceeding two trillion, including Guangdong, the largest provincial economy, with a deficit of 212.9 billion. Four provinces, namely Sichuan with a deficit of 413 billion, Hebei, Henan, and Hunan, had fiscal deficits exceeding three trillion. Overall, the situation showed that expenditures exceeded income.
According to data released by the Ministry of Finance of the CCP, as of the end of July 2024, local government debts nationwide had reached 42.8 trillion yuan, and urban investment bonds were close to 60 trillion yuan. The total outstanding debt of urban investment platforms nationwide amounted to 59.6 trillion yuan.
The above data released by the Ministry of Finance of the CCP has shocked the mainland Chinese people.
The globally renowned credit rating agency Fitch Ratings announced on its official website on March 5th that it rated China Export Credit Insurance Corporation (Sino Assurance) with an insurance financial strength rating of A+, with a “negative” outlook. The outlook for China’s sovereign credit rating was also “negative.”
It is important to note that although Sino Assurance’s financial strength rating is “A+,” the negative outlook may reflect the concerns of the rating agency about the potential impact of macroeconomic conditions and financial changes on Sino Assurance’s future financial situation.
Sino Assurance is a central financial enterprise, one of China’s four policy financial institutions, and a unit under direct central management. In November 2011, approved by the CCP Central Politburo Standing Committee, the leadership of Sino Assurance was included in central management. On March 17, 2012, Sino Assurance was upgraded to a deputy ministerial-level central enterprise.
The financial situation of Sino Assurance is closely related to the credit status of the CCP government, hence Fitch’s outlook on the rating of Sino Assurance is kept at “negative.”
In May 2024, Fitch downgraded China’s “A+” sovereign rating outlook from “stable” to “negative” due to the increasing public fiscal risks in China.
According to Fitch’s report, the main reason for the rise in the deficit rate is the decline in fiscal revenue. In 2024, China’s fiscal revenue as a percentage of GDP dropped from around 30% in 2018 to about 23%. The implementation of tax reduction and fee reduction policies since 2018 has affected central fiscal revenue, while the significant downturn in the real estate market has eroded local government fiscal revenue, exacerbating the worsening of the deficit rate.
Fitch believes that the fiscal risks China is facing at present should be higher than what debt indicators show. The substantial size of the outstanding debt of local government financing platforms (urban investment) poses increasing risks to the balance sheets of local governments, though Fitch believes the migration of urban investment debt onto central balance sheets is likely to be a gradual process.