China’s infrastructure growth model losing effectiveness; Xi’s strategic intent behind visiting North Korea

  1   China’s failing infrastructure growth model sees Xi bear burden for Jiang-era policies

Recent data from the PRC’s National Bureau of Statistics (NBS) and the People’s Bank of China (PBoC) indirectly suggest that the infrastructure growth model that drove China’s rapid economic growth over the past several decades — particularly during the era of Jiang Zemin — is losing effectiveness. This growth model was centered on local-government-led infrastructure investment, financed through local government financing vehicles (LGFVs), supported by private-sector advance funding, and sustained by credit from financial institutions.

  NBS and PBoC data

1. On May 27, the NBS released industrial enterprise data for January-April 2026:

• As of the end of April 2026, accounts receivable held by industrial enterprises above the designated size reached 27.44 trillion yuan, up 7.2 percent year-on-year.
• Compared with the same period in 2025 (25.86 trillion yuan) and 2024 (23.61 trillion yuan), accounts receivable increased by 1.58 trillion yuan and 3.83 trillion yuan, respectively.

According to fixed-asset investment data for January-April 2026 released on May 18:

• National fixed-asset investment (excluding rural households) totaled 14.1293 trillion yuan, down 1.6 percent year-on-year.
• Infrastructure investment increased 4.3 percent year-on-year.
• Private-sector fixed-asset investment declined 5.2 percent year-on-year.
• State-controlled fixed-asset investment increased 2.5 percent year-on-year.

2. The PBoC released financial data in early June indicating that liquidity within China’s banking system remains very abundant, and arguably to the point of excess. The market itself is not short of funds, leading primary dealers (mainly commercial banks) to reduce or even stop borrowing from the central bank.

• On June 4, the PBoC conducted zero seven-day reverse repurchase operations. Since 101.3 billion yuan in seven-day reverse repos matured that day, the central bank effectively withdrew 101.3 billion yuan of liquidity from the market on a net basis. Since the beginning of June, the scale of the PBOC’s seven-day reverse repo operations has followed a highly unusual pattern of rapid decline:
  • June 1: 11 billion yuan
  • June 2: 200 million yuan, an exceptionally low level
  • June 3: 0 yuan
  • June 4: 0 yuan
• Interbank market rates also reflected abundant liquidity. On June 3, the DR007 (the seven-day pledged repo rate for deposit-taking institutions), a key market benchmark, fell to 1.3428 percent, below the PBOC’s seven-day reverse repo policy rate of 1.40 percent.
• On June 1, the yield on one-year AAA-rated negotiable certificates of deposit (NCDs) issued by commercial banks fell to a record low of 1.4275 percent, before edging slightly higher to 1.43 percent on June 3, remaining at a historically low level. These figures indicate that liquidity conditions in the banking system remain exceptionally loose, with market interest rates falling below official policy rates and financial institutions showing little demand for additional central bank funding.

  Beijing’s campaign to address overdue payments to enterprises

Since the 20th Party Congress in October 2022, Beijing has steadily elevated the political importance of addressing overdue payments owed to businesses in response to structural challenges such as weak domestic demand, mounting local government debt pressures, and cash-flow strains facing private enterprises. Policy efforts have evolved from earlier “special rectification campaigns” to a strategy combining legislative solutions and direct fiscal intervention through debt-resolution programs.

2023: Launch of special campaigns and credit-based penalties

July 14, 2023: The CCP Central Committee and the State Council issued the “Opinion on Promoting the Development and Growth of the Private Economy” (commonly known as the “31 Measures for the Private Economy”). Key provisions include:

• For the first time, improving government credibility and contract fulfillment mechanisms was incorporated into a top-level central policy document.
• A system for recording and penalizing government credit violations was established. Information regarding breaches of contract, payment arrears, and refusal by government agencies and public institutions to comply with court rulings would be incorporated into the national credit information-sharing platform.
• Mechanisms were introduced for the regular disclosure of overdue payments, guidance and warnings, and proactive enforcement actions.

Sept. 20, 2023: The State Council executive meeting approved the “Special Action Plan for Clearing Overdue Payments to Enterprises.” Key provisions include:

• A nationwide campaign to settle payment arrears was formally launched. Provincial governments were made ultimately responsible for debt-clearance efforts within their jurisdictions.
• Local authorities were instructed to resolve government arrears owed to enterprises and break the chain of inter-enterprise payment delays. Central state-owned enterprises (SOEs) and other state-owned firms were required to take the lead in making repayments.
• Emphasis was placed on “substantive repayment,” supported by enhanced policy measures, supervision, and performance assessments.

2024: Institutional reform and judicial involvement

October 2024: The CCP General Office and the State Council General Office issued the “Opinion on Resolving Overdue Payments Owed to Enterprises.” Key provisions include:

• This marked the first comprehensive central-level policy framework dedicated to addressing payment arrears.
• The central authorities called for improvements to the legal and judicial systems governing debt repayment and for increasing the costs of non-compliance.
• Oversight of government-investment projects and project financing was strengthened. Regular inspections of funding availability were mandated to prevent politically motivated projects from commencing without sufficient financing.
• A nationwide unified registration and complaint platform for overdue payments owed to small and medium-sized enterprises (SMEs) was established.

2025: Stronger legal measures, debt-resolution funding, and high-level directives

Feb. 17, 2025: At a central symposium on private enterprises, senior CCP leaders explicitly highlighted the need to “focus on resolving overdue payments owed to private enterprises.” Key points brought up include:

• Additional pressure was placed on the bureaucracy.
• The central authorities emphasized that breaking the cycle of debt accumulation must begin with governments and state-owned enterprises, especially central SOEs.
• Improving private-sector cash flow was identified as a priority.

March 24, 2025: The State Council issued revised “Regulations on Ensuring Timely Payments to Small and Medium-Sized Enterprises,” which took effect on June 1, 2025. Key provisions include:

• A legally binding payment deadline was established. Government agencies, public institutions, and large enterprises — including SOEs — must make payment to SMEs within 60 days after the delivery of goods, completion of projects, or provision of services.
• “Passing-the-buck” contractual clauses were explicitly prohibited. Payments to SMEs could no longer be conditioned upon receipt of funds from third parties, such as government agencies, nor may they be paid in proportion to the third party’s payment schedule. This directly targeted the long-standing practice whereby governments delayed payments to general contractors, who in turn delayed payments to private subcontractors.

March 28, 2025: The State Council executive meeting approved the “Action Plan for Accelerating and Intensifying the Clearance of Overdue Enterprise Payments.” Key provisions include:

• The campaign was renamed from a “special action” (in September 2023) to an “accelerated and intensified action,” signaling a transition from a temporary cleanup effort to a long-term institutional solution.
• Greater emphasis was placed on addressing problems at their source and preventing situations in which debts were repaid only to be re-created shortly afterward.

April 25 and Dec.8, 2025: Two Politburo meetings listed debt clearance among their core priorities. Key points brought up include:

• The April meeting explicitly called for faster resolution of overdue payments owed by local governments.
• The December meeting further elevated the issue by requiring authorities to resolve both enterprise payment arrears and unpaid migrant-worker wages. Debt clearance was formally designated as a top-level political task linked to maintaining social and economic stability.

Mid-2025: The Ministry of Finance and the State Council adjusted the permitted uses of newly issued local government special bonds. Key provisions include:

• Recognizing that many local governments lacked the resources to repay debts, the central government relaxed restrictions on how the funding from newly issued local government special bonds can be used.
• Local authorities were allowed to use portions of newly issued special bond quotas to repay overdue enterprise debts directly. In effect, governments could issue explicit public debt to inject funds and settle obligations owed by local governments and LGFVs to businesses.

2026: Mandatory targets and bond allocations

Jan. 16, 2026: A State Council executive meeting deployed further measures to clear overdue enterprise payments and ensure wage payments to migrant workers. Key measures include:

• Mandatory repayment targets were established. For outstanding debts below 500,000 yuan per contract or project, local governments were required to clear all arrears within specified deadlines.
• Fiscal support mechanisms were put into operation. The meeting instructed authorities to focus on key regions, strengthen local accountability, and quickly allocate special-bond quotas designated for debt repayment. Newly issued special bonds in 2026 would continue to reserve a certain proportion specifically for clearing overdue payments. Greater coordination between fiscal and financial policies was emphasized to maximize the effectiveness of debt-resolution efforts.

  Beijing’s aggressive local government debt-resolution campaign

Faced with depleted local government finances, mounting repayment pressures from LGFV bonds, and a corporate accounts receivable burden that has reached 27.43 trillion yuan, Beijing’s approach to local debt resolution has undergone a fundamental shift since 2025. What was once a policy of “local governments solving their own problems” has evolved into a centrally directed campaign that mobilizes top-level fiscal resources to conduct large-scale replacement of hidden debt with explicit government debt. The central government’s strategy is essentially an attempt to “exchange time for space” by using low-interest, long-term government bonds to replace high-interest, short-term off-balance-sheet liabilities, including LGFV debt, non-standard financing arrangements, and unpaid construction and engineering bills owed to enterprises.

Policies finalized by the PRC Ministry of Finance at the end of 2024 and fully implemented throughout 2025 and 2026 mobilized a total of 12 trillion yuan in debt-resolution resources. As 2026 progresses, the central government’s debt-resolution campaign has exhibited two defining characteristics, namely, accelerating implementation and increasingly stringent accountability. While providing substantial financial support, Beijing has simultaneously imposed unprecedented levels of discipline and oversight on local governments regarding hidden debt accumulation.

• In March 2026, the finance ministry published its 2025 Annual Report on the Development of a Law-Based Government, publicly disclosing twelve representative cases involving accountability for hidden-debt violations.
• The central authorities formally proposed establishing a dedicated Debt Management Department, institutionalizing oversight of LGFVs and strictly prohibiting local governments from simultaneously repaying old debts while continuing to accumulate new hidden liabilities (邊清邊欠、頂風違規舉債).

Beijing issued 3.68 trillion yuan in debt-resolution bonds in 2025. Once those funds reached local governments, repayment priorities were tightly constrained by financial discipline. To protect their political careers, local officials generally prioritized using the replacement funds to repay banks and holders of LGFV bonds in the public market (that is, financial institutions) in order to prevent defaults and the risk of broader financial contagion. By contrast, unpaid bills owed to private-sector contractors and suppliers were often pushed to the back of the repayment queue. As a result, the amount of funding actually available for clearing arrears owed to private enterprises and small and medium-sized businesses remains extremely limited relative to the overall 27.43 trillion yuan in outstanding corporate receivables.

In essence, Beijing’s debt-resolution campaign has primarily transformed off-balance-sheet LGFV liabilities into on-balance-sheet local government bonds. It has succeeded in preventing an acute financial crisis among banks and local financing platforms, but it has not injected local governments with the new cash flow needed to undertake another large-scale wave of infrastructure investment.

Banks have received repayment funds from the debt-swap program and now face abundant liquidity. However, because they recognize that the traditional local-government infrastructure investment model has largely exhausted its effectiveness, they have become increasingly reluctant to channel this liquidity back into new infrastructure projects.

  Our take

Beijing’s official fiscal, financial, and fixed-asset investment data as of early June 2026 suggest that the CCP’s long-standing growth model of relying on infrastructure investment to drive the economy is encountering what may be described as a “Pac-Man effect.” This giant credit-fueled creature, built upon hidden debt and massive infrastructure expansion, consumed future fiscal and economic dividends for years. Now, lacking enough productive projects capable of generating genuine growth, it has begun to devour itself. Delayed payments to private enterprises, the use of judicial tools to suppress creditors (“criminalizing debt disputes”), and the depletion of local fiscal and financial credibility are all signs that the system is entering a phase of self-exhaustion.

1. The widespread practice of local governments and SOEs delaying payments to private contractors — undermining the foundations of commercial contracts — represents the first stage of infrastructure investment’s debt-driven self-consumption process.

During China’s infrastructure boom in the Jiang-Hu era, local governments frequently relied on non-market financing arrangements such as requiring private firms to undertake projects with their own capital or provide substantial advance funding. In effect, financing pressure was pushed down the industrial supply chain. However, when infrastructure spending in many inland or low-efficiency regions grew to several times — or even dozens of times — their annual tax revenues, the model, which depended on future fiscal growth to service debt, became unsustainable.

As local fiscal revenues dried up, debt-chain failures began cascading downward through the economy. Data from the PRC National Bureau of Statistics (NBS) show a marked deterioration in both the scale of accounts receivable and collection periods among industrial enterprises in recent years. Between April 2024 and April 2026, outstanding accounts receivable at above-scale industrial enterprises surged from 23.61 trillion yuan to 27.44 trillion yuan, an increase of 3.83 trillion yuan in just two years. Particularly noteworthy is that accounts receivable rose by 7.2 percent year-on-year as of April 2026, while national fixed asset investment during January–April 2026 declined by 1.6 percent.

This divergence paints a troubling picture: the volume of actual physical economic activity — investment and construction — is shrinking, while unpaid receivables accumulating on corporate balance sheets continue to grow rapidly. It suggests that, under mounting fiscal pressure, local governments and SOEs are increasingly using delayed payments and extended settlement periods to transfer their own financial distress onto industrial firms, especially private small and medium-sized enterprises further down the supply chain.

When private businesses attempt to recover debts through courts, petitioning authorities, or public opinion channels, some local governments have allegedly responded not by honoring repayment obligations, but by utilizing administrative and judicial resources to transform commercial debt disputes into criminal cases. This phenomenon has become known in public discourse and academic discussions as “criminalizing debt collection” (以刑化债).

One of the most prominent examples is the debt collection case involving ethnic minority entrepreneur Ma Yijiayi. Since 2016, companies founded by Ma have undertaken ten government construction projects commissioned by two local government financing platforms in Shuicheng District and Liupanshui City in Guizhou Province. After project completion, payment was allegedly withheld for an extended period. In 2020, her companies were forced to withdraw from the projects and seek audit-based settlement procedures.

During subsequent collection efforts, Ma Yijiayi, her attorneys, and legal assistants (more than ten individuals in total) were criminally detained and formally arrested by the Shuicheng District public security bureau in late 2023 on suspicion of “picking quarrels and provoking trouble” after publishing information about the debt dispute and related litigation on social media platforms and sending complaint letters to relevant authorities. Prior to these arrests, local authorities had reportedly proposed a settlement of 12 million yuan to resolve claims approaching 100 million yuan in total outstanding payments, an offer that Ma rejected. Following intense public scrutiny and criticism over its handling of the Ma Yijiayi case, the Guizhou provincial government established a joint investigation team in February 2024 to look into the district government’s actions. The provincial investigation later confirmed that substantial arrears did exist and that the district government’s proposed 12 million yuan settlement lacked sufficient legal basis.

Taken together, the statistical evidence and representative legal cases suggest that local governments — entities traditionally expected to uphold contracts and protect property rights — are increasingly affected by debt pressures. The emergence of phenomena such as “criminalizing debt disputes” indicates that portions of local administrative and judicial authority may be becoming entangled with local debt management imperatives. Under extreme pressure from fiscal distress and potential defaults by local government financing vehicles, some local authorities appear inclined to adopt defensive measures that effectively prioritize containing creditors rather than resolving underlying debt obligations.

The secondary consequence is a significant erosion of governmental credibility. If private entrepreneurs begin to believe that pursuing legitimate debt claims could expose them to criminal prosecution or restrictions on personal freedom, their willingness to engage in commercial cooperation with government entities may sharply decline. Such a collapse in trust would not only eliminate the private sector financing leverage that historically supported the CCP’s infrastructure expansion, but could also accelerate the withdrawal of private capital from government-linked projects. This would lead to a further weakening of the real economy and intensifying economic contraction.

2. A comparison of the NBS’s breakdown of fixed asset investment data illustrates why Beijing’s continued debt restructuring efforts and monetary easing have failed to revive growth through infrastructure spending.

According to historical and latest data released by the NBS, fixed asset investment and its composition between 2024 and April 2026 exhibit three highly visible characteristics: state-owned investment propping up the system, private investment collapsing, and overall investment continuing to contract.

The above data illuminates why China’s infrastructure-driven growth model is losing effectiveness:

• China’s investment-led growth model, which supported economic expansion for decades, has effectively entered a period of overall decline. The cumulative growth rate of nationwide fixed-asset investment (excluding rural households) fell from 4.2 percent during the same period in 2024 to negative growth (-3.8 percent) for the whole of 2025, and continued to contract by 1.6 percent during January-April 2026.
• Infrastructure investment is now being sustained almost entirely by the “national team.” During the first four months of 2026, despite a series of aggressive stimulus measures (including large-scale debt restructuring programs and the issuance of ultra-long-term special government bonds), infrastructure investment increased by 4.3 percent year-on-year, while state-controlled fixed-asset investment rose by 2.5 percent. However, these increases were driven almost entirely by SOEs and central government firms carrying out politically mandated projects supported by fiscal subsidies. The additional investment has not generated the broader multiplier effects typically associated with market driven economic activity.
• Private enterprises, meanwhile, appear to have largely disengaged from the government-led investment system, opting instead for a strategy of preservation and retrenchment. The most striking figures are those for private fixed-asset investment. Growth in private investment barely remained positive in 2024 (0.3 percent during January-April and -0.1 percent for the full year). In 2025, however, private investment plunged by 6.4 percent, and during January-April 2026 it remained deeply negative at -5.2 percent.

These figures challenge the traditional Keynesian assumption that increased government investment can stimulate private-sector investment through multiplier effects. Under normal economic conditions, an increase in infrastructure spending — such as the 4.3 percent growth recorded during January-April 2026 — would be expected to generate downstream orders, encouraging private firms to expand capacity, upgrade equipment, and increase capital expenditures. Instead, the opposite phenomenon has emerged: while the government continues investing aggressively, private firms are withdrawing.

One explanation for this disconnect is that many private enterprises have become discouraged by persistent payment arrears and concerns about debt-collection risks. When businesses expect that accepting government or state-owned enterprise contracts may result not in predictable cash flow but in large volumes of difficult-to-collect receivables, they may rationally choose to reduce borrowing, postpone investment, scale back operations, or even exit certain sectors altogether. Without private capital serving as the economy’s largest multiplier mechanism, infrastructure spending circulating largely within the state sector is unlikely to generate substantial new productive capacity or employment. As a result, the effectiveness of investment spending diminishes sharply, and the economic return on additional infrastructure investment continues to decline.

3. The evolution of the PRC’s infrastructure debt-driven “Pac-Man” dynamic into today’s fiscal monstrosity can trace its political and institutional origins back to the tax-sharing reform of the 1990s and the cadre evaluation system that followed.

i) The fiscal system established in 1994 significantly increased the central government’s share of revenues by assigning major taxes such as the value-added tax (VAT) and corporate income tax either wholly or partially to the central government. This substantially enhanced Beijing’s fiscal concentration. However, the division of administrative responsibilities and expenditure obligations between central and local governments remained largely unchanged. Local governments continued to bear responsibility for a wide range of public services and spending commitments, including basic education, public health, and infrastructure development.

The severe mismatch between fiscal authority and spending obligations forced local governments to seek off-budget revenue sources to support their expenditures. One particularly important institutional arrangement was the decision to allocate all revenues from paid state-land-use rights to local governments. This directly fostered the combination of “land finance” and the property boom. Local governments acquired land at relatively low compensation costs and then sold land-use rights to real-estate developers at much higher prices, generating enormous off-budget revenues.

ii) The official evaluation system established during the Jiang Zemin era further reinforced debt-fueled investment incentives. Under a cadre assessment framework that placed overwhelming emphasis on GDP growth and fixed-asset investment, the political performance and promotion prospects of local officials became closely tied to the economic expansion of their jurisdictions. Since officials typically remained in a given position for only three to five years, the system encouraged a highly short-term approach to governance.

Following the 2008 global financial crisis, Beijing launched the 4 trillion yuan stimulus program to stabilize growth. The central government, however, contributed only 1.18 trillion yuan directly, while the remaining 2.82 trillion yuan was expected to be financed primarily by local governments and local fundraising efforts. At the time, the PRC’s Budget Law largely prohibited local governments from issuing bonds directly. As a result, local authorities widely established financing vehicles (most notably LGFVs) that used land assets as collateral to borrow heavily from commercial banks, trust companies, and other financial institutions.

Within this framework, local government debt expanded rapidly and often without effective restraint, accompanied by widespread practices designed to conceal risks or maintain formal compliance. Recent reports from the Ministry of Finance and the National Audit Office have documented numerous cases in which local officials engaged in irregular financing practices to evade debt restrictions. China’s local debt problem is therefore not simply a technical issue of fiscal imbalance. Rather, it reflects a classic “tragedy of the commons” created by the interaction between bureaucratic promotion incentives and soft budget constraints.

Under a system where officials were judged primarily by GDP growth, held office for limited terms, and where the entities that borrowed money (local governments and LGFVs) were not necessarily the same entities that ultimately bore repayment responsibility (future administrations and future fiscal revenues), the rational strategy for many officials became clear. These officials would maximize borrowing during their tenure, convert debt into visible economic achievements, conceal risks through refinancing or accounting adjustments, and leave repayment obligations to successors. This bureaucratic passing of the buck created little incentive for local governments to exercise fiscal discipline. Over time, hidden debt accumulated beyond the genuine repayment capacity of local public finances, ultimately producing the large-scale debt overhang that China faces today.

4. Entering 2025 and 2026, changes in China’s fiscal data and debt structure further indicate that Beijing’s debt-driven infrastructure “snake” is facing structural fiscal anemia and hemorrhaging.

As both explicit and hidden debt burdens have reached historic highs, the composition of fiscal expenditures has deteriorated. Debt-servicing costs are increasingly crowding out spending on real economic activity and public investment:

• According to budget execution reports released by the PRC finance ministry, debt interest payments under the national general public budget reached 819.36 billion yuan in 2025, equivalent to 98.2 percent of the annual budget allocation. This means that nearly one trillion yuan of central and local government resources did not translate into tangible economic output, but were instead consumed simply to prevent the collapse of debt credit structures.
• In the first quarter of 2026, local government debt interest payments reached 361.8 billion yuan, representing a year-on-year increase of around 12 percent. Against the backdrop of declining tax revenues and shrinking land-sale income caused by the property downturn, the rigid growth of interest obligations has forced local governments to further cut public services, infrastructure support expenditures, and payments owed to private contractors.

To alleviate the acute debt pressures facing local governments, the central government has adopted a debt restructuring strategy centered on increasing the share of debt borne by the central government while reducing the burden on local authorities. Despite involving debt-relief programs worth trillions of yuan, however, these measures continue to face significant transmission bottlenecks when measured at the microeconomic level.

Under stricter central oversight of new borrowing by LGFVs, local governments have launched a wave of LGFV “transformation and exit” initiatives, attempting to distance themselves from the credit liabilities of these entities through nominal market-oriented restructuring.

• As of March 2026, the latest debt-resolution data showed that more than 82 percent of financing platforms nationwide had officially exited the LGFV registry, while their operating financial liabilities had declined by more than 74 percent. However, mainland media have noted a deeper contradiction behind these figures, namely, that the platforms may have exited on paper, but the risks have not disappeared. LGFVs are products of the close intertwining of public investment and market-based financing. As a result, rebuilding their creditworthiness and transforming them into genuinely commercial entities is far more difficult than merely restructuring fiscal liabilities.
• According to mainland media reports, entities that have exited the financing platform system still retain enormous amounts of non-platform operational debt, with outstanding risk exposure estimated at about 17.8 trillion yuan. Lower-tier financing platforms facing consolidation and liquidation pressures could easily transmit credit risks to smaller financial institutions holding their bonds and loans, creating secondary systemic risks.

At its core, the central government’s strategy of replacing high-interest hidden local debt with low-interest swap bonds and special treasury bonds represents a defensive effort to buy time in exchange for fiscal breathing room. Yet the deployment of these debt-resolution funds at the local level is heavily shaped by a priority placed on maintaining rigid repayment obligations. To prevent defaults on publicly traded LGFV bonds, and thereby preserve access to financial markets, local governments tend to direct limited restructuring funds first toward repaying principal and interest owed to financial institutions, rather than settling overdue payments to private sector contractors. Therefore, much of the debt relief funding released by Beijing effectively circulates within local governments and the banking system itself, without meaningfully reaching the real economy or private enterprises. This dynamic helps explain why, despite repeated announcements of large-scale debt-resolution initiatives, the collection periods for corporate accounts receivable continue to lengthen, and why private firms continue to face severe cash-flow pressures.

5. As fragmented micro-level credit conditions, widespread retrenchment among private enterprises, and the structural fiscal weakening of local governments converged within the financial system, market data from early June 2026 revealed an unusual phenomenon: extremely abundant liquidity in the banking sector coexisting with severely depressed demand for real economy financing.

On June 3 and June 4, 2026, the PBoC conducted its regular seven-day reverse repo operations but set the operation size at zero for two consecutive days. Such a move is highly unusual at the beginning of a month, when central bank liquidity support is typically more active. This rare “zero-operation” policy was not a signal of monetary tightening. Rather, it represented the central bank’s deliberate effort to absorb excess liquidity after market interest rates had fallen significantly below policy rates. Indirectly, this suggests that commercial banks were already saturated with liquidity and had little interest in obtaining additional short-term funding.

At the beginning of June, interbank lending rates and government bond yields declined across the board, illustrating the growing phenomenon of funds circulating within the financial system itself rather than flowing into productive economic activity.

When viewed alongside the PBOC’s open market operations, interest rate movements, and the latest investment data, these developments suggest that China’s financial system has entered an atypical form of liquidity trap characterized by a severe breakdown in monetary transmission.

Under a normal monetary transmission mechanism, liquidity injected by the central bank should flow through the following chain: Central bank → commercial banks (Credit Expansion) → real economy enterprises (Investment and Innovation) → employment and consumption growth. However, the damage inflicted on micro-level credit conditions by the debt-driven infrastructure model has effectively severed the critical link between commercial banks and real economy borrowers:

• Commercial banks now face a shortage of quality assets despite abundant liquidity. On the one hand, private enterprises, which account for a substantial share of China’s economy, are contracting rapidly, with private fixed asset investment declining by 5.2 percent, reflecting a widespread reluctance to borrow for expansion. On the other hand, many industrial enterprises that remain operational have their working capital trapped by the country’s 27.44 trillion yuan in accounts receivable, severely limiting their ability to undertake new investments. From the perspective of commercial banks, many local government projects are tied to heavily indebted financing platforms burdened by chronic payment arrears. As a result, the real economy suffers from a shortage of creditworthy borrowers capable of repaying loans.
• Excess funds within the financial system are increasingly being diverted into the bond market, creating a form of internal circulation. Holding trillions of yuan in surplus liquidity, commercial banks are unable to lend aggressively to shrinking private sector borrowers, yet remain reluctant to increase exposure to high-risk LGFVs. To preserve capital and avoid the cost of idle funds, they channel growing amounts of liquidity into central government bonds and policy-bank debt. This flood of demand has pushed medium- and long-term bond yields toward historically low levels.

The broader implication is that real economy credit has effectively frozen. Regardless of how aggressively the PRC monetary authorities cut interest rates, lower reserve requirements, or inject additional liquidity, capital will continue to circulate defensively within the financial system, as long as confidence in government-business contractual relationships remains weak. Under such conditions, funds remain trapped within banks, non-bank financial institutions, and bond markets, producing an increasingly pronounced imbalance, namely, massive liquidity expansion within the financial sector alongside severe financial stress in the real economy. 

The result is a highly unusual situation in which the financial system is awash with money, the real economy continues to suffer from a shortage of effective financing, and commercial banks become so flush with liquidity that they effectively decline the central bank’s reverse repo funding altogether. This represents an extreme form of financial bottleneck in which monetary stimulus struggles to reach productive economic activity.

6. In sum, the CCP’s economic growth engine — built around the formula of “local government leadership, advance financing by private enterprises, credit support from banks, and infrastructure-driven GDP growth” — has evolved into a debt-fueled “snake” that is ultimately consuming itself. The institutional roots of this problem can be traced back to the era of Jiang Zemin, when a bureaucratic evaluation system centered overwhelmingly on GDP growth, combined with fiscal imbalances created by the tax-sharing system, encouraged local governments to pursue debt-financed expansion with few effective constraints.

As China’s property market weakened and land-sale revenues (the foundation of local-government finance) began to dry up, some local authorities adopted increasingly extreme measures to protect themselves. These included the use of criminal proceedings to manage debt disputes and the prolonged withholding of payments owed to private firms. Such practices severely undermined confidence in contractual enforcement, contributed to the erosion of private-sector creditworthiness, and helped drive private fixed asset investment down to negative 5.2 percent.

At the same time, although the central government launched debt restructuring programs worth trillions of yuan through special purpose bonds and special treasury bonds, much of the funding remained stuck within the financial system. Resources were largely directed toward supporting financial institutions and maintaining repayment obligations in local-government financing vehicles, rather than reaching businesses and the broader real economy. The outcome has been the emergence of what some analysts describe as a “financial reservoir” characterized by excess liquidity trapped within the banking system, alongside signs of credit stagnation in the real economy. These conditions are reflected in developments such as zero-volume reverse repo operations and historically low government bond yields.

It is becoming evident that reliance on monetary easing alone — through interest rate cuts, reserve requirement reductions, or administrative restructuring measures such as removing entities from financing-platform registries — is no longer sufficient to restore the infrastructure sector’s erstwhile role as a primary driver of economic growth. If Beijing wishes to prevent mounting debt pressures from evolving into broader fiscal and financial risks, it would need to rebuild confidence among market participants, strengthen protections for contractual rights, and address practices that undermine the business environment. Beijing would also require deeper fiscal reforms to better align local governments’ expenditure responsibilities with their revenue sources, thereby reducing the structural pressures that encourage excessive borrowing. However, such reforms may be difficult to achieve under a governance model that places increasing emphasis on centralized political control and party leadership across all areas of administration.

  2   What is Xi’s strategic intent behind visiting North Korea?

On June 5, the CCP authorities announced that PRC leader Xi Jinping will make a two-day state visit to North Korea from June 8 to June 9.

The trip is Xi’s first to Pyongyang in seven years and his seventh in-person meeting with North Korean leader Kim Jong Un. Kim has traveled to Beijing just once for the Sept. 3, 2025 military parade, while Xi has not been to North Korea since the outbreak of the COVID-19 pandemic.

  Backdrop

In the two to three weeks preceding Beijing’s announcement of Xi Jinping’s visit to North Korea, Xi received both United States President Donald Trump and Russian leader Vladimir Putin in China.

The official readouts released by Washington and Beijing following the summit between Trump and Xi differed markedly regarding the issue of North Korea’s nuclear weapons program. The White House fact sheet said that Trump and Xi had “confirmed their shared goal to denuclearize North Korea.” By contrast, the official PRC summary of the summit made no mention whatsoever of North Korea or the issue of denuclearization.

  Our take

Per the narrative promoted by official mainland media, Xi Jinping’s visit to North Korea is an effort to “carry forward the traditional friendship between China and North Korea” and “promote regional peace and stability.” However, the timing of the trip, as well as the potential strategic calculations and political objectives behind it, suggest that Beijing is seeking to maximize its interests and counter U.S. pressure at a moment when multiple international crises are converging for the CCP regime.

1. Xi Jinping is visiting Pyongyang at a critical juncture characterized by major shifts in the international balance of power, protracted regional conflicts, and emerging uncertainties in Northeast Asia.

i) Just over two weeks before Xi’s trip to Pyongyang, he hosted two major world leaders in China in rapid succession: Donald Trump (May 13 to 15) and Vladimir Putin (May 19 to 20). Beijing depicted these back-to-back summits as evidence of the emergence of a China-centered “strategic triangle with Chinese characteristics.”

During his meeting with Trump, Xi reportedly adopted a firm position on the Taiwan issue, drawing clear red lines for Washington. He also raised the question of whether the two countries could avoid the so-called Thucydides Trap, implicitly warning that continued U.S. efforts to contain China and supply arms to Taiwan could trigger an irreversible crisis.

Shortly afterward, Xi welcomed Putin in Beijing as an “old friend” and oversaw the signing of twenty agreements covering trade and technology. The Xi leadership, however, reportedly refrained from finalizing the long-discussed Power of Siberia 2 pipeline project, a move interpreted by some observers as demonstrating China’s dominant economic position in the bilateral relationship.

Having met both the U.S. and Russian leaders, Xi could be finding an opportunity to brief North Korean leader Kim Jong Un on the outcomes of those discussions when he travels to Pyongyang. It may also serve as a signal to Washington that Beijing remains a central player in Northeast Asia’s most sensitive security issues.

ii) The PRC could be seeking to exploit strategic pressures generated by both the U.S.-Iran conflict and the prolonged Russia-Ukraine war. In particular, the conflict involving Iran has placed significant military, fiscal, and political burdens on the Trump administration. Critics within the U.S. have argued that deep involvement in Middle Eastern conflicts risks weakening America’s security commitments in the Indo-Pacific region.

Meanwhile, Russia’s continued military efforts in Ukraine, supported in part by North Korean ammunition and manpower, have increased Moscow’s dependence on China for trade, technology, and critical imports. From this perspective, Beijing may calculate that Washington’s commitments elsewhere create strategic vulnerabilities. Raising the prospect of increased tensions on the Korean Peninsula could therefore become a tool for exerting pressure in broader disputes involving trade, semiconductor restrictions, or Taiwan.

iii) Another possible reason for Xi’s trip is the changing political landscape in South Korea. South Korea has seen significant political upheaval in recent times. In late 2024, conservative president Yoon Suk Yeol was impeached following a constitutional crisis linked to the declaration of martial law. After the impeachment was upheld, progressive politician Lee Jae-myung won the subsequent presidential election.

Since taking office, Lee has sought to revive South Korea’s traditional balancing strategy, which is often described as “security with the U.S., economic cooperation with China.” This approach aims to strengthen ties with Beijing while avoiding direct involvement in contentious issues such as the Taiwan Strait and the South China Sea. However, South Korea’s balancing strategy has faced challenges from U.S. trade policies. Changes in American tariff measures and restrictions affecting key sectors such as semiconductors have created uncertainty for South Korean exports and investment planning.

Concurrently, South Korea remains significantly dependent on China for certain critical minerals and industrial inputs. Previous Chinese export restrictions on products such as urea highlighted the vulnerabilities associated with that dependence. Against this backdrop, Xi’s highly publicized visit to North Korea may be interpreted as a reminder to Seoul of Beijing’s potential influence over security dynamics on the Korean Peninsula. According to this line of analysis, the visit conveys an implicit warning that regional stability could be affected if South Korea is perceived as aligning too closely with one side in the broader U.S.-China rivalry.

2. Although Beijing portrays China–North Korea relations as a fraternal alliance rooted in internationalist ideals, geopolitical realities suggest that Xi’s visit is driven by highly pragmatic strategic calculations. The Xi leadership could be looking to maximize Beijing’s strategic interests and offset what it views as growing U.S. military pressure in the Asia-Pacific region.

i) Since the outbreak of the Russo–Ukrainian war, North Korea has reportedly strengthened its relationship with Russia by supplying ammunition and other forms of support in exchange for military technology, air-defense systems, and economic assistance from Moscow. The development of direct security and economic ties between Moscow and Pyongyang has afforded Kim Jong Un with additional diplomatic options and reduced North Korea’s traditional dependence on China as its sole economic lifeline. From Beijing’s perspective, the growing closeness between Russia and North Korea has altered regional power dynamics and may create concerns about the PRC’s relative influence on the Korean Peninsula.

Against this backdrop, Xi Jinping’s visit to Pyongyang may serve as a reminder that, despite Russia’s growing role, the PRC remains North Korea’s most important economic partner and retains substantial leverage over the country’s long-term economic prospects.

ii) One issue that has attracted attention is the question of China’s access to the sea through the lower reaches of the Tumen River.

In a joint statement issued following the Beijing summit between Xi Jinping and Vladimir Putin on May 20, 2026, the PRC and Russia indicated that they would continue discussions with North Korea regarding trilateral cooperation related to the river’s maritime access. Since the late nineteenth century, China has lacked direct navigation rights from the Tumen River into the Sea of Japan. The river’s lower section forms part of the border between Russia and North Korea and contains infrastructure, including the historic Friendship Bridge and the newly completed Khasan-Tumangang Road Bridge, that limits the passage of larger vessels.

It is possible that Beijing could be seeking North Korean cooperation on infrastructure modifications and dredging projects that would improve navigation in the lower Tumen River. If such projects were realized, they could potentially provide China’s northeastern provinces with more direct access to the Sea of Japan. This would have both economic and strategic implications, potentially altering the maritime geography of Northeast Asia over time.

iii) In recent years, Japan has expanded defense spending and strengthened military capabilities in response to concerns about both the PRC’s military activities and North Korea’s missile programs. At the same time, security cooperation among the United States, Japan, and South Korea deepened during the administration of Yoon Suk Yeol, particularly in the areas of intelligence sharing and missile defense.

In breaking out of U.S.-led “containment” of the PRC, North Korea’s nuclear arsenal provides Beijing with indirect strategic benefits. Continued security concerns regarding North Korea compel the U.S., Japan, and South Korea to devote substantial military resources, intelligence assets, and missile-defense capabilities to the Korean Peninsula. Shortly before Xi announced his visit, North Korea reportedly revealed another uranium-enrichment facility and reiterated its intention to significantly expand its nuclear arsenal. As long as North Korea maintains a credible deterrent capability, it will continue to absorb a considerable portion of U.S. and allied strategic attention. From this perspective, that dynamic could reduce the military pressure the PRC faces in other regional theaters, including the Taiwan Strait and the South China Sea.

3. History suggests that whenever Beijing faces major external geopolitical pressure or reaches an impasse in negotiations with the United States, Pyongyang becomes a tool for diverting attention and extracting concessions from the West. Xi Jinping’s upcoming visit fits squarely within Beijing’s long-standing practice of playing the “North Korea card.”

i) The 2019 precedent demonstrates how Beijing has used North Korea as leverage in negotiations with Washington. In February 2019, the second U.S.–North Korea summit between President Trump and Kim Jong Un in Hanoi collapsed without an agreement, plunging the Korean Peninsula back into uncertainty. At the same time, the Sino-U.S. trade war was at its most intense stage, with bilateral tensions reaching a peak.

Against this backdrop, Xi Jinping made a sudden state visit to North Korea in June 2019, his first visit to the country since taking power in 2012. Xi deliberately scheduled the trip immediately before the G20 summit in Osaka, only days before his crucial meeting with Trump on trade issues. Beijing’s strategic intent was clear: by publicly showcasing the inseparable alliance between China and North Korea, Xi signaled to Trump that no meaningful progress on North Korean denuclearization would be possible without China’s endorsement and mediation. In effect, Beijing transformed North Korea’s nuclear ambitions into a bargaining chip in its broader negotiations with Washington, increasing its leverage during trade talks.

The situation in June 2026 bears notable similarities to that of 2019. Trump resumed an aggressive tariff strategy following his return to the White House, while the U.S.–Iran war has further stretched American political and military resources. Xi’s renewed trip to Pyongyang at this moment appears to reflect political calculations strikingly similar to those of seven years ago.

ii) Another historical example lies in the PRC’s long-standing dual-track approach within the United Nations Security Council. Although Beijing has formally supported resolutions opposing North Korea’s nuclear proliferation and has publicly endorsed denuclearization, it has repeatedly taken a different stance when the U.S. sought to impose tougher sanctions on Pyongyang. Whenever Washington pushed for more stringent economic measures or restrictions on North Korea’s oil imports, China frequently coordinated with Russia to block or dilute such initiatives, including through the use of veto power or diplomatic resistance.

Through this approach — publicly condemning North Korea’s nuclear activities while simultaneously shielding Pyongyang from the harshest forms of international pressure — Beijing has sought to preserve the regime’s stability while maintaining North Korea’s strategic utility. This policy has ensured that Pyongyang retains sufficient room to continue developing its missile and nuclear capabilities, while also serving as a persistent security challenge for the U.S., Japan, and South Korea. Therefore, North Korea functions not merely as a neighboring ally but as a strategic asset that can complicate the security environment confronting the U.S.-led alliance network in Northeast Asia.

4. With the U.S.–Iran war currently deadlocked and American global credibility facing mounting challenges, strategic coordination among the authoritarian bloc of the PRC, Russia, Iran, and North Korea has arguably reached an unprecedented level. Against this backdrop, it is worth assessing — based on established facts and geopolitical reasoning — whether Xi Jinping’s visit to North Korea could facilitate covert support from the PRC, Russia, and North Korea for Iran to cross the nuclear threshold and conduct its first-ever nuclear weapons test, and what benefits and risks such a development might present for Beijing.

This assessment begins with several established facts:

• According to reports from multiple security agencies and military think tanks, the PRC, Russia, Iran, and North Korea have developed extensive mechanisms for sanctions evasion, shadow-tanker transactions, and the transfer of dual-use technologies.
• The PRC and Iran signed a 25-year comprehensive cooperation agreement in 2021. Through intermediary companies and regional financial channels, China has continued purchasing large quantities of discounted Iranian oil while exporting critical dual-use technologies to Iran.
• North Korea and Iran have maintained missile cooperation for decades. Iran’s Shahab-3 missile, for example, was developed largely from the design of North Korea’s Nodong missile.

Given these realities, it is not inconceivable that the PRC, Russia, and North Korea could provide indirect assistance to Iran’s nuclear program through air-defense support, logistics networks, material transfers, or technical data sharing. In such a scenario, there are several potential geopolitical advantages and disadvantages for the PRC if Iran were to conduct a nuclear test.

Potential strategic benefits for the PRC include:

• An Iranian nuclear test could reduce U.S. strategic pressure on China in the Indo-Pacific. A successful Iranian nuclear test would likely trigger a major security crisis in the Persian Gulf. Faced with a newly nuclear-capable Iran, the United States would be compelled to redeploy substantial military resources — including carrier strike groups, strategic bombers, and missile-defense systems — to the Middle East for an extended period. Such a shift could reduce Washington’s ability to prioritize its Indo-Pacific strategy and broader efforts to counter the PRC’s rise. From Beijing’s perspective, this could create a temporary but valuable strategic window during which China would face less external military pressure in areas such as the Taiwan Strait or the South China Sea.
• If Iran were able to conduct a nuclear test despite direct American military pressure, it could send a powerful signal that U.S. deterrence and security guarantees are no longer fully effective at preventing nuclear proliferation among authoritarian states. Such a perception could weaken confidence among U.S. allies in East Asia, including South Korea, Japan, and Taiwan, as well as among certain European partners. Beijing could potentially benefit if doubts emerged regarding the credibility of America’s extended deterrence commitments.
• Following a nuclear test, Iran would almost certainly face additional Western sanctions and financial isolation. Under such conditions, Iran, Russia, and North Korea might become increasingly dependent on alternative settlement mechanisms outside the dollar-based financial system. This could create opportunities for the PRC to expand the use of renminbi-based payment networks and cross-border financial platforms. From Beijing’s perspective, a more fragmented global financial system could provide a testing ground for alternative settlement arrangements and potentially advance long-term efforts to internationalize the renminbi, as well as advance de-dollarization.

Potential strategic risks for the PRC include:

• A nuclear Iran could trigger uncontrollable nuclear proliferation in East Asia. This is arguably Beijing’s most serious risk. If an Iranian nuclear breakthrough were widely interpreted as evidence that U.S. security guarantees had lost credibility, political pressure could grow significantly within South Korea and Japan for the development of independent nuclear deterrents. Both countries possess advanced technological, industrial, and nuclear-energy capabilities. Their potential acquisition of nuclear weapons would fundamentally alter the regional balance of power. Rather than improving the PRC’s security environment, the emergence of nuclear-armed Japan and South Korea could create a far more challenging strategic landscape for Beijing.
• The PRC’s energy security could come under threat. China remains heavily dependent on imported energy, with a significant share of its oil imports transiting through the Strait of Hormuz. An Iranian nuclear test could trigger further escalation in the Middle East, including military responses from regional actors and an intensified regional arms race. Any prolonged disruption of Gulf energy exports or maritime traffic through Hormuz would pose serious economic challenges for China. Even increased energy imports from Russia would likely be insufficient to offset a major disruption in Middle Eastern supply. Given China’s ongoing economic restructuring and existing debt-related pressures, a severe energy shock would represent a significant strategic vulnerability.
• The PRC could face extensive secondary sanctions and economic decoupling if compelling evidence emerged that Beijing had actively assisted Iran’s nuclear weapons program. The U.S. and its allies could impose broad secondary sanctions targeting Chinese financial institutions, corporations, and overseas assets. Such measures could significantly affect China’s trade, investment flows, and access to international financial markets. Given China’s continued reliance on external markets for growth and exports, a large-scale economic confrontation with advanced Western economies would carry substantial economic and social costs.

Based on the balance of potential benefits and risks, the most advantageous outcome for Beijing would likely not be an actual Iranian nuclear test. Rather, from a strategic standpoint, the PRC would have greater incentives to see Iran remain a nuclear-threshold state, or a country capable of developing nuclear weapons relatively quickly, but which stops short of conducting an overt test or openly deploying a nuclear arsenal. Such a scenario could continue to consume American strategic attention and resources without crossing the red lines that might trigger severe secondary consequences, such as widespread nuclear proliferation in East Asia or a major disruption of global energy flows.

Beijing’s preference would likely be for a manageable and controlled crisis rather than either complete stability or uncontrolled escalation. A persistent but contained geopolitical confrontation can create strategic opportunities, whereas a fully destabilized international environment could generate risks that ultimately outweigh any short-term gains.

5. All in all, Xi Jinping’s trip to Pyongyang is likely to be far more than a routine diplomatic visit. Rather, it could represent an attempt by Beijing to maximize geopolitical leverage within an increasingly multipolar strategic environment. By carefully timing the visit while the Trump administration is heavily engaged in the Middle East, South Korea is navigating a period of political transition, and U.S. tariff policies are placing additional pressure on regional economies, Beijing appears to be playing the “North Korean card” at a particularly sensitive moment.

Potential PRC objectives such as advancing discussions over access through the Tumen River corridor and recalibrating the balance within China–North Korea–Russia relations could serve broader efforts to expand Beijing’s strategic influence in Northeast Asia. Such initiatives may also be viewed as attempts to gradually erode aspects of the U.S.-led regional security architecture and create new avenues for China’s maritime and economic reach.

However, a strategy that relies heavily on managing complex geopolitical rivalries also exposes Beijing to risks that may be difficult to control. The evolution of Russia–North Korea cooperation, as well as the possibility of more aggressive policies by regional actors, could generate unintended consequences that extend beyond the PRC’s ability to manage them. In particular, any significant escalation involving nuclear programs or regional military confrontations could increase the risk of wider proliferation pressures and security instability across Northeast Asia. Such developments would complicate the CCP’s long-term strategic objectives and could undermine regional stability in ways that are ultimately detrimental to all parties involved.

As Northeast Asia continues to undergo significant geopolitical change, investors and policymakers have to focus not only on official diplomatic narratives but also on the broader strategic calculations underlying regional power competition. Understanding these dynamics requires examining both the publicly stated goals of regional actors and the wider geopolitical interests that shape their actions.