Beijing's recent economic interventions offer short-term relief for key sectors but fail to address underlying economic issues. Without tackling structural imbalances, Beijing risks locking China into a cycle of temporary fixes that leave its long-term economic health in jeopardy.

Adjusting to New Economic Realities

After months of weak economic performance, Beijing has introduced a series of measures aimed at stabilising the economy. These measures include a 10 trillion yuan (US$1.4 trillion) local government debt restructuring package, initiatives to support the property market, the establishment of a 500 billion yuan (US$71 billion) stock market fund, and incremental interest rate cuts to ease borrowing costs.

Marking a departure from the growth-driven strategies of the 2008 and 2015 stimulus programmes, these policies prioritise economic stability over fostering rapid expansion. This shift underscores two key realities: the decelerating pace of China’s economy and Beijing’s dual challenge of managing short-term pressures while addressing long-term structural issues.

While these interventions are intended to stabilise the economy in the short term, they leave unaddressed the deeper structural problems of China’s overreliance on investment-led growth and persistently weak household consumption.

Local Government Debt Restructuring

China’s local governments face a mounting debt crisis caused by shrinking land sale revenues—traditionally a major source of fiscal income—and rising spending demands.

To address this, Beijing has raised the local government debt ceiling by 6 trillion yuan and authorised them to issue an additional 4 trillion yuan in special bonds over five years to replace hidden debts from financing vehicles with transparent obligations.

These measures aim to reduce systemic risks, alleviate fiscal pressures on local governments, and establish a more manageable framework for public debt. In practice, debt restructuring allows local governments to convert some high-interest debts into lower-interest debts and bring a portion of their hidden liabilities onto the books.

However, these measures fail to tackle the root causes of mounting debt, including fiscal imbalances, dependence on land sales for revenue, excessive infrastructure borrowing, and promotion systems for local officials that prioritise short-term economic growth over fiscal responsibility.

To address the root causes rather than just the symptoms, fiscal reforms are needed to better align local government funding with their spending responsibilities. Most critically, promotion systems for local officials need to prioritise financial responsibility rather than short-term economic growth metrics.

Property Sector Interventions

China's property sector has been under severe distress in recent months, with falling sales and increasing developer defaults causing broader economic ripples. To stabilise the situation, Beijing has introduced measures to support property prices and restore market confidence, including easing purchasing restrictions and providing additional liquidity to developers.

Although these measures may stabilise the property market in the short term, they risk deepening China’s dependence on the sector as a main economic driver, perpetuating vulnerabilities like debt accumulation, distorted local government finances, and inefficient resource allocation.

For sustainable and balanced growth, China must focus on diversifying its economy through high-tech innovation and increased household consumption.

The Domestic Demand Problem

At the heart of China's economic challenges lies an overreliance on investment-led growth and persistently weak household consumption.

China’s household consumption has remained consistently low relative to GDP—hovering around 38–40 per cent in recent years, a figure significantly below that of other major economies. This reflects limited social welfare coverage, an underdeveloped pension system, and comparatively low household incomes, which together drive high precautionary savings and constrain discretionary spending.

Addressing the domestic demand problem requires significant reforms, including expanding social welfare, strengthening the pension system, and implementing income redistribution policies to raise household incomes.

However, reallocating resources toward households would divert economic benefits from entrenched interest groups, including local governments, property investors, and state-owned enterprises, making these reforms politically sensitive and slow to materialise.

Ultimately, without tackling structural imbalances, Beijing risks locking China into a cycle of temporary fixes that leave its long-term economic health in jeopardy.