1 Debt illusion and fiscal red lights in China’s 2025 fiscal data
China’s official 2025 fiscal data
On Jan. 30, the PRC Ministry of Finance released China’s fiscal revenue data for 2025.
National fiscal revenue
- The general public budget revenue decreased 1.7 percent year-on-year to 21.6045 trillion yuan.
- National tax revenue increased 0.8 percent year-on-year to 17.6363 trillion yuan.
- National non-tax revenue decreased 11.3 percent year-on-year to 3.9682 trillion yuan.
- Major tax categories:
- Domestic value-added tax (VAT) increased 3.4 percent year-on-year to 6.8947 trillion yuan.
- Domestic consumption tax increased 2.0 percent year-on-year to 1.6857 trillion yuan.
- Corporate income tax decreased 1.0 percent year-on-year to 4.1304 trillion yuan
- Individual income tax increased 11.5 percent year-on-year to 1.6187 trillion yuan.
- Securities transaction stamp duty increased 57.8 percent year-on-year to 203.5 billion yuan.
National fiscal expenditure
- General public budget expenditure increased 1.0 percent year-on-year to 28.7395 trillion yuan.
- Debt interest payments increased 4.8 percent year-on-year to 1.3491 trillion yuan.
National government fund budget revenue
- Government fund budget revenue decreased 7 percent year-on-year to 5.7704 trillion yuan.
- Revenue from transfers of state-owned land use rights decreased 14.7 percent year-on-year to 4.1518 trillion yuan.
National government fund budget expenditure
- Government fund budget expenditure increased 11.3 percent year-on-year to 11.2874 trillion yuan.
- Expenditure related to transfers of state-owned land use rights decreased 7.6 percent year-on-year to 4.7120 trillion yuan.
Comprehensive revenue and expenditure (general + government funds)
- Total revenue decreased 2.9 percent year-on-year to 27.3749 trillion yuan.
- Total expenditure increased 3.7 percent year-on-year to 40.0269 trillion yuan.
- Comprehensive fiscal deficit increased 21.3 percent year-on-year to 12.6520 trillion yuan.
Our take
1. Beijing’s official fiscal data for 2025 show that revenue is entering structural contraction. The CCP authorities are barely maintaining a balanced ledger through “asset-draining” (掏空式) and extractive tax and fee collection, but the single-month data for December reveals a worsening trend.
i) Fiscal deterioration is evident in December and is consistent with our earlier analysis that China’s economy trended downward in 2025:
- General public budget revenue: Down 25 percent
- Tax revenue: Down 11.5 percent
- Non-tax revenue: Down 47.9 percent
- Domestic consumption tax: Down 3.9 percent
- Corporate income tax: Down 18.3 percent
- Personal income tax: Up 11.4 percent
- Land transfer revenue: Down 22.9 percent
- Full-caliber revenue: Down 18.5 percent
- Full-caliber expenditure: Down 0.7 percent
- Full-caliber deficit: Up 36.2 percent
In Chinese fiscal cycles, December typically shows a “year-end effect”:
- Concentrated tax inflows (corporate income tax and year-end individual tax settlement).
- A year-end surge in fund revenues (especially land transfer fees).
- Accelerated spending as governments rush to “meet annual targets.”
Therefore, a broad-based weakening in December fiscal data, and the failure of the usual “year-end effect,” constitute strong evidence of an economic downturn.
- On the corporate side, annual corporate profits not only failed to rebound but were worse than in 2024. Even though full-year corporate income tax still recorded an increase of 1.0 percent, this was entirely propped up by performance in the first half of the year.
- On the consumption side, the full-year data may appear acceptable. But the December downturn shows that consumption is not improving sustainably and instead reflects a temporary effect of subsidies, promotions, and policy stimulus. At year-end, households’ marginal propensity to consume fell again.
- December should have been the last window for local governments to push land sales and finalize transactions booked within the year. The fact that even this “year-end transaction patch-up” failed indicates that the problem is not price, but a collapse in transaction volume itself. This means local governments’ asset side — monetizable resources — is shrinking rapidly.
- Full-caliber expenditure fell to nearly flat (up 0.7 percent YoY), but rigid spending on social security, healthcare, and interest payments continued to grow. This signifies that the government is losing its ability to use fiscal spending as a tool to support the economy.
ii) Non-tax revenue displays clear “one-off” characteristics, reflecting that the stock of government assets available for monetization is close to exhaustion and cannot serve as a sustainable fiscal pillar. In 2025, nationwide non-tax revenue totaled 3.97 trillion yuan, down 11.3 percent year-on-year, mainly because 2024 revenues were inflated by one-time remittances of special proceeds. This reveals that when regular tax revenues falter, the authorities’ strategy of revitalizing assets — or “drinking poison to quench thirst” by liquidating state-owned assets to cover regular budget gaps — has hit its ceiling.
iii) Tax authorities have adopted exhaustive, predatory enforcement measures (the Phase IV Golden Tax System and tighter overseas asset supervision) to aggressively extract wealth from the private sector, thereby deeply suppressing domestic consumption vitality. As the “Natural Person Tax Management System” (自然人稅收管理系統) achieved real-time linkage with banks and the foreign exchange authority, the government in 2025 carried out forceful back-tax collection on overseas income of high-net-worth individuals. As a result, individual income tax rose 11.5 percent despite overall revenue decline. This “wealth siphoning” from the private sector is accelerating the erosion of social consumption momentum.
iv) Land-based finance has undergone a structural collapse with no sign of stabilization, causing local governments to completely lose their core source of endogenous financing and off-budget revenue. In 2025, revenue from transfers of state-owned land use rights fell to 4.15 trillion yuan, down 14.7 percent year-on-year. This multi-year, cliff-like decline marks the end of the “land-for-financing” model, and with the loss of this “second ledger,” local governments have essentially lost their ability to generate revenue autonomously.
2. China’s fiscal system has fallen into a vicious debt-cycle trap. Its operating logic is shifting from an earlier model of “borrowing to expand investment” toward a singular focus on “borrowing to repay old debt.”
“Borrowing new to repay old” has become the dominant theme of local government debt issuance. The high proportion of refinancing bonds shows that fiscal resources are being hollowed out by debt principal and interest payments. Of the 10.29 trillion yuan in bonds issued by local governments in 2025, nearly 48 percent (4.93 trillion yuan) were refinancing bonds used solely to repay principal. When accounting for more than 1.3 trillion yuan in interest payments for the year, the room for new financing in local budgets has been almost entirely consumed by the burden of legacy debt.
Government investment capacity has also undergone a substantive decline. The rising share of funds allocated to debt resolution has directly crowded out space for infrastructure investment, causing large amounts of capital to circulate idly within the financial system. Because a significant portion of new special-purpose bonds has been prioritized for settling arrears owed to enterprises and swapping out hidden debt — rather than being invested directly in new, revenue-generating projects — infrastructure investment growth in 2025 has remained persistently below expectations, with fiscal funds trapped in an inefficient repayment loop.
3. The central bank’s introduction of “outright reverse repos” is essentially a disguised tool for monetizing fiscal financing, effectively turning the People’s Bank of China into the de facto ultimate buyer of government bonds.
The role of the central bank is shifting from that of a regulator of liquidity to a guardian of fiscal financing, providing underlying credit support for massive government bond issuance through various monetary instruments. As the market’s capacity to absorb government bonds declines, the central bank has increasingly relied on outright reverse repos and government bond purchase-and-sale operations to stabilize issuance yields and smooth liquidity shocks. This marks a point at which monetary policy has effectively become subordinate to fiscal policy.
Since the launch of the outright reverse repo tool in October 2024, its outstanding scale has reached 6.2 trillion yuan as of January 2026. Based on the pace of operations — 1.1 trillion yuan in a single operation in January 2026 — the annual rolling scale is on track to breach 10 trillion yuan. Compared with estimated general budget revenue of only 22.2 trillion yuan, the scale of debt support would approach the critical red line of 50 percent of fiscal revenue. This model of heavy reliance on the central bank’s “money printing and swapping” mechanism is flashing a red light for a deep deficit.
All risk indicators suggest that when fiscal operations become highly dependent on central bank liquidity provision, systemic risk can be exponentially amplified by exchange rate pressures or global interest rate volatility. Under the shadow of debt monetization, the stability of the renminbi exchange rate will be directly challenged by expanding fiscal deficits. Should external conditions tighten, the PBoC will face a fatal dilemma between “protecting debt” and “protecting the currency.”
4. The Chinese fiscal system is facing a resonance of multiple crises in 2026. Four core symptoms indicate that the “fiscal red light” is flashing, and the risk of localized collapse is acute.
i) The external export environment continues to cool due to geopolitics and trade frictions. Forced adjustments to export tax rebate policies will further widen fiscal revenue–expenditure gaps. Faced with weakening external demand and rising trade tensions, the authorities have little choice but to scale back export tax rebates for certain industries to free up funds. While this may ease short-term spending pressure, it risks triggering sharper declines in foreign exchange earnings and cascading industrial bankruptcies.
ii) The side effects of the tax authorities’ long-term, “killing the goose that lays the golden eggs”-style collection practices are beginning to surface. Also, the twin deterioration of capital outflows and household expectations is accelerating the erosion of the tax base. Although the high-intensity enforcement in 2025 produced a brief rebound in revenues, it has deeply undermined entrepreneurial confidence and middle-class consumption expectations. As a result, tax revenue growth in 2026 is likely to stagnate or even turn negative.
iii) Debt-servicing pressure is erupting in pulses, with explicit debt interest payments reaching record highs and continuously crowding out space for essential public services. As outstanding local government debt surpasses 54 trillion yuan, the proportion of debt interest payments relative to fiscal expenditure has risen to a historic high of 4.9 percent. This means that for every yuan the government earns, an ever-larger share must be paid directly to banks rather than used for public welfare or infrastructure.
iv) The risk of explicit debt defaults has shifted from theory to reality, particularly as land-sale revenues dry up and refinancing becomes more difficult. Under the dual blow of exhausted land revenue and refinancing difficulties, the credit systems of certain regions are facing potential disintegration. Notably, local government bond maturities in the first quarter of 2026 have surged by 214 percent even as the CCP authorities are extending lifelines through refinancing bonds. Should market liquidity experience even a brief disruption due to external shocks, statutory local government debt defaults in specific regions could become the trigger for a systemic crisis.
