China's Proactive Fiscal Policy in Transition

Since the global financial crisis in 2008, China has implemented its second round of proactive fiscal policies. Prior to 2015, in addition to the deficits incurred by the central government, Chinese local governments also incurred debts primarily through financing platform companies. This practice substantially amplified the impact of macro fiscal policies and rendered them uncontrollable. After the revision of the Budget Law in 2015, China established the basic principle of "opening the front door and closing up the back door", allowing local governments to incur debts in the form of regulated bonds, while explicitly prohibiting borrowing through any other means. In practice, however, influenced by various factors, local governments still needed to borrow through local financing platform companies or other enterprises and institutions for public welfare expenditures. This gave rise to the issue of hidden debts and the associated challenges of risk prevention and control. Following the National Financial Work Conference held in 2017, China established the goal of defusing the risks associated with local governments' hidden debts over a ten-year period starting from 2018, marking a shift in the foundation of China's macro fiscal policy operations. From the perspective of macroeconomic performance, the COVID-19 pandemic has impacted external demand since 2020. Furthermore, the real estate market has entered a significant adjustment period since 2021, characterized by prolonged weakness in price indices. These developments have necessitated a more forceful and efficient fiscal policy response from China. Given both the needs of the macroeconomy and the impact of resolving local debt risks on the foundation of fiscal policy operations, China's fiscal policy is faced with a pressing need to accelerate its transition.

During the 14th Five-Year Plan（FYP）period (2021-2025), China's proactive fiscal policy, while maintaining its proactive stance, exhibited distinct transformational characteristics that place equal emphasis on the innovation of financing instruments, the strengthening of debt control mechanisms, and the enhancement of implementation efficacy. The Recommendations of the Central Committee of the Communist Party of China for Formulating the 15th Five-Year Plan for National Economic and Social Development (hereinafter referred to as the "Recommendations") specifies that during the 15th FYP period (2026–2030), efforts shall be made to "promote higher-quality economic growth while achieving an appropriate increase in economic output". To achieve this objective, more proactive measures are necessary for fiscal policy, to effectively fulfill its dual functions of supporting output growth and facilitating structural adjustment. It is clear that China still has a long way to go to advance the transition of its macro fiscal policy.

Transition of China's Fiscal Policy During the 14th Five-Year Plan Period

Innovating Debt Financing Instruments to Sustain a Robust and Proactive Expansion Stance

To ensure sufficient expenditure intensity to offset the impact of the pandemic outbreak and the downward pressure on the economy, China established a diversified government financing system composed of "budget deficits + special-purpose bonds + special treasury bonds". In 2020, China raised its deficit-to-GDP ratio from 2.8% to above 3.6%, and then adjusted it to a dynamic range of 3%-3.2% for the period from 2021 to 2024. As a result, China's cumulative deficit exceeded 18 trillion yuan over the five-year period. Meanwhile, local governments continued to expand their special-purpose bonds, with an annual new quota of more than 3.5 trillion yuan from 2020 to 2024, and a cumulative issuance of over 18 trillion yuan over the five-year period. Particularly, in 2020, special treasury bonds for COVID-19 control totaling one trillion yuan were issued to support pandemic response and address weaknesses in the Chinese public health system. In 2023-2024, an additional two trillion yuan of ultra-long special treasury bonds was earmarked, designated for post-pandemic reconstruction and national major strategic projects, respectively. Simultaneously, fiscal resources were pooled through various channels, including requiring specific state-owned enterprises (SOEs) to turn over their profits, transferring funds from the Central Budget Stabilization Fund, and speeding up the use of idle funds. China's national general public budget expenditure increased from 23.89 trillion yuan in 2019 to over 28.46 trillion yuan in 2024. Including the government-managed funds budget, total government expenditure rose from 33.03 trillion yuan in 2019 to 38.71 trillion yuan in 2024.

Stringently Controlling the Increase in Local Governments' Hidden Debts and Defusing Risks Associated with Existing Local Debts

China focuses on containing the increment and resolving the stock of hidden debts, even as it allows for an expansion of explicit debts, so as to resolutely safeguard against the occurrence of systemic risks. Local governments are strictly prohibited from incurring new hidden debts through channels such as financing platforms or providing guarantees in violation of regulations. The Ministry of Finance issued four rounds of public disclosures on accountability for 32 hidden debt violation cases from 2020 to 2024, enforcing the principle of "lifetime accountability and retroactive investigations". In mid-2023, the formulation and implementation of a package of debt risk mitigation measures was proposed for the first time at a meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee. At the end of 2024, an incremental "hidden debt replacement or restructuring" scheme — structured as "6+4+2" — was introduced to cover 12 trillion yuan out of the 14.6-trillion-yuan hidden debt balance confirmed and reported by local governments at the end of 2023. After such replacement, the average interest cost for the relevant debts was reduced by over 2.5 percentage points.

Optimizing the Structure of Expenditures and Enhancing the Efficiency of Fund Utilization

During the 14th FYP period, China continued the core policy of tax and fee reductions initiated during the 13th FYP period (2016-2020), but the primary tool for proactive fiscal policy shifted to the expenditure side. On the one hand, expenditures on people's livelihoods and emergency response were consistently prioritized. During the COVID-19 pandemic, this was reflected in a significant increase in healthcare spending, and concurrently, baseline standards were raised by an annual average of 3% to 5% in key social areas, such as basic pension benefits and government subsidies for basic medical insurance for urban and rural residents. On the other hand, following the initial exploration in 2020, a regular mechanism to directly allocate budgetary funds to prefecture- and county-level governments was institutionalized in 2021. This mechanism ensured policy benefits reached end recipients through efficient fund allocation and targeted supervision. Furthermore, proactive efforts were made to promote policy synergy. For example, special-purpose bonds and special treasury bonds deployed in tandem to support projects in key sectors; initiatives to pair special-purpose bond projects with bank loans and provide interest subsidies for relending for equipment renewals were advanced, creating a synergistic policy multiplier effect of "1+1>2".

Outlook for Fiscal Policy During the 15th Five-Year Plan Period

The transition of China's macro fiscal policy during the 14th FYP period represented a conceptual breakthrough beyond many long-standing "red lines". This was particularly evident in 2025. In the absence of extraordinary shocks, the deficit-to-GDP ratio was set at around 4%, a deliberate move above the conventional 3% benchmark. Furthermore, the concept of "investing in human capital" was proposed, which requires the optimization and adjustment of the fiscal expenditure structure and a sustained increase in social welfare outlays. The 15th FYP should witness the continued advancement of this transition, coupled with a dedicated focus on enhancing policy efficacy.

Sustaining the Proactive Stance of Fiscal Policy and Coordinating the Three Major Debt Financing Instruments

During the 15th FYP period, China's fiscal policy should maintain an overall proactive stance. The scale of fiscal revenue and expenditure, and consequently the scale of government debt financing, should be determined annually based on prevailing economic conditions and development objectives. On the whole, downward economic pressure is expected to remain significant during the 15th FYP period. However, it remains essential to sustain an annual growth rate of roughly 5% to achieve per capita GDP comparable to that of a "medium-developed country" by 2035. This imperative, in turn, will require the full utilization of the three major debt financing instruments,