PRC’s 2025 audit report exposes various risks in the CCP regime; the 20-trillion-yuan energy bubble in the CCP’s 15th Five-Year Plan

  1   PRC’s 2025 audit report exposes various risks in the CCP regime

On June 23, the PRC State Council submitted to the Standing Committee of the National People’s Congress its audit report on the “execution of the 2025 central budget and other fiscal revenues and expenditures” (國務院關於2025年度中央預算執行和其他財政收支的審計工作報告). The 25-page report provided a comprehensive review of the state of central fiscal management in 2025, the implementation of major policy initiatives, the operation of financial institutions and state-owned assets, and the safeguarding of public welfare funds. It also identified structural issues within fiscal operations and the financial system.

The report presented findings across five areas: Central fiscal revenue and expenditure management, fiscal administration and special-purpose bond audits, audits of major policy implementation and project funding, audits of financial institutions and central state-owned enterprises, and compliance audits covering public welfare funds and government agencies.

1. According to the report, execution of the 2025 central budget remained generally stable, with major headline indicators meeting expectations:

• Total central general public budget revenue reached 9.737 trillion yuan, total expenditure reached 14.597 trillion yuan, and the central fiscal deficit stood at 4.86 trillion yuan, exactly matching the annual budget target.
• The National Development and Reform Commission managed 735 billion yuan in central budget investment, including 142.017 billion yuan in direct central expenditures, 592.983 billion yuan in transfers to local governments, and a 7.1 percent increase in central government spending on science and technology from the previous year.
• On local debt restructuring, the full 2 trillion yuan quota of local government bonds designated for replacing existing hidden debt was issued in 2025. More than 82 percent of local government financing platforms reportedly completed exit procedures.

2. While affirming overall budget execution, the audit highlighted a number of governance and compliance issues:

• Some regions and departments engaged in irregular fiscal collection practices. Tax and customs authorities collected or accelerated collection of corporate income tax and VAT from 1,954 companies, totaling 40.427 billion yuan. Local authorities in 21 provinces and municipalities inflated fiscal revenue by 59.651 billion yuan through accounting practices such as temporarily recording treasury funds as expenditures before reversing entries.
• Budget discipline issues included 10.52 billion yuan in excess allocations for strategic material reserves and 6.746 billion yuan in central investment allocated ahead of schedule. Also, several ministries piloting zero-based budgeting allocated 1.073 billion yuan in baseline operating expenditures using prior-year assumptions rather than evaluation results.
• Special-purpose bond supervision also revealed weaknesses. Seventeen counties packaged 69 projects with mismatched revenue and financing structures into ostensibly balanced projects by overstating expected returns. These projects obtained 12.174 billion yuan in special bond funding, with repayment later relying mainly on refinancing bonds. Another 25 counties failed to register 485 bond-financed project assets, involving 66.375 billion yuan.

3. The audit report tracked implementation of major national priorities, including the “two major projects” (major national strategies and security capacity building) and “two new initiatives” (large-scale equipment upgrading and consumer trade-in programs):

• For infrastructure funding such as urban underground utility networks, audits covering 13 provinces and 100.8 billion yuan in funding found 2.833 billion yuan diverted or misappropriated, including 58 counties redirecting 2.731 billion yuan to repay loans or inflate fiscal revenue and 4.772 billion yuan obtained through fraudulent claims.
• Trade-in subsidy programs also experienced abuse. Across 14 provinces and municipalities, 8,367 merchants or individuals allegedly manipulated qualification rules, altered product identification numbers, or falsified delivery records to fraudulently obtain 106 million yuan in subsidies. Separately, 1.292 billion yuan of strategic project and equipment-upgrade funding was diverted by local governments to cover fiscal shortfalls.

4. The financial sector audit identified cases of exploiting preferential policies and excessive expansion:

• Bank of China was found to have used two affiliated financial entities between April 2023 and August 2025 to structure 11 private funds as public funds by recruiting employees to make symbolic investments ranging from 1 yuan to 100 yuan. The arrangement allegedly enabled the institution to improperly benefit from public-fund tax exemptions and avoid 2.367 billion yuan in income tax.
• The report also found that some financial institutions had blindly pursued scale expansion, artificially inflating their deposit and loan volumes. Notably, three financial institutions inflated deposits and loan balances by 615.67 billion yuan through practices such as “deposit first, loan later” and immediate loan recycling. They expanded lending by 472.304 billion yuan using unusually low interest rates. Relaxed underwriting standards contributed to 324.127 billion yuan in non-performing or high-risk loans.

5. The audit report explicitly singled out administrative and public institutions for violating the “tighten our belts” mandate and for the loss of funds earmarked for public livelihood and social security. Examples included:

• Certain administrative agencies improperly distributed employee benefits. Two affiliated entities under the Ministry of Natural Resources extracted 9.788 million yuan from commercialization proceeds to fund employee bonuses. One unit under SASAC used 1.075 million yuan in public funds to purchase customized cashmere coats and down jackets for staff.
• Social insurance audits found additional issues. Audits of workplace injury insurance funds across 26 provinces (covering 115.11 billion yuan) identified problematic amounts totaling 4.869 billion yuan. Across 24 provinces, 34,100 construction projects failed to provide injury insurance coverage for 2.26 million migrant workers. Certain medical institutions increased costs by favoring higher-priced procurement choices, adding more than 150 million yuan in burdens to patients and medical insurance funds.

6. Since May 2025, the National Audit Office has reportedly identified and transferred for investigation more than 260 major disciplinary and legal cases, involving over 1,100 individuals and with funds totaling more than 91 billion yuan. Relevant case leads have been transferred to disciplinary inspection, supervisory, and judicial authorities. Local governments, agencies, and entities involved are carrying out corrective measures, and the National Audit Office plans to submit a comprehensive remediation report to the NPC Standing Committee before the end of the year.

  Our take

The State Council’s 2025 audit report appears on the surface to be a routine review of government fiscal compliance. But viewed through the lens of the political economy, it functions more as a diagnostic document revealing the underlying tensions between the PRC’s central and local governments, the breakdown of fiscal transmission mechanisms, and the quiet accumulation of financial risks. The systemic irregularities highlighted in the report, rather than just being technical accounting lapses, suggest structural bottlenecks in the implementation of the central government’s top-down model of highly centralized governance.

At the aggregate level, central fiscal revenue and expenditure appear fully aligned with the annual budget plan. Yet beneath this appearance of balance, the allocation of funds, management of public assets, and handling of local debt display significant disorder and defensive behavior at the local level. As fiscal resources move toward the real economy, they appear increasingly vulnerable to institutional rent-seeking and incremental capture by vested interests.

1. Under the CCP’s highly centralized political structure, decision-making authority is concentrated upward while implementation responsibilities and fiscal pressures are continuously pushed downward. This asymmetric structure incentivizes local bureaucracies and departmental interest groups to develop increasingly sophisticated adaptation and avoidance strategies to preserve and advance their interests.

i) According to the findings in the State Council audit report, some local governments effectively transformed central compliance requirements into a form of technical performance. Meanwhile, under conditions of weak local oversight, market participants turned broad stimulus and welfare programs into opportunities for low-risk arbitrage, causing central fiscal expansion to evolve into de facto redistribution toward specific interest groups. Examples include:

• Under tight local debt controls, 15 counties reportedly circumvented restrictions on local financing vehicles by rerouting borrowing through state-owned enterprises outside official financing platforms, creating 4.197 billion yuan in hidden debt.
• Under the consumer trade-in subsidy program designed to stimulate domestic demand, 8,367 merchants and individuals across 14 provinces fraudulently obtained 106 million yuan in subsidies.

This suggests that once central policy objectives are transmitted to local governments and market participants, information asymmetry and high monitoring costs can create conditions for adverse selection and moral hazard. Local officials could prioritize visible compliance and political signaling — for example, formally declaring financing platforms to have exited — while continuing to secure financing through indirect channels.

ii) The audit report also suggests that tighter political discipline improved compliance indicators at the central ministry level, but underlying incentive structures remained intact and increasingly migrated into subordinate institutions. Examples include:

• Under the Ministry of Finance’s pilot zero-based budgeting reforms, reviews were conducted across 36 public institutions under nine pilot departments, yet evaluation outcomes were largely not implemented. Instead, around 1.073 billion yuan continued to be allocated based on historical budget baselines.
• Across broader audits of central departments, 39 major departments and 225 affiliated entities were found to have problematic expenditures totaling 13.924 billion yuan.
  • Only 23.19 percent of those issues occurred at ministry headquarters, while 76.81 percent originated from subordinate institutions. Examples of rent-seeking included:
    • Sixteen affiliated units under seven ministries charged 92 million yuan in bundled service fees.
    • Thirteen affiliated institutions under six ministries collected 79 million yuan in naming and participation fees during national standard-setting processes.

This pattern suggests that ministries increasingly shift sensitive activities — including fee collection, financial operations, and employee benefit arrangements — into affiliated institutions, associations, and subsidiary entities that sit further from direct regulatory scrutiny. At the same time, the Ministry of Finance’s limited implementation of its own budgeting reforms reflects resistance from entrenched interests when existing budget allocations are threatened. The principle of zero-based budgeting, or allocating resources according to current needs rather than historical baselines, appears to encounter strong bureaucratic inertia in practice.

iii) The audit report further noted that some local governments, under simultaneous fiscal strain and performance pressure, engaged in aggressive tax collection and revenue enhancement practices:

• Tax and customs authorities collected or accelerated tax payments from 1,954 firms, totaling 40.427 billion yuan.
• Twenty-one provinces and municipalities inflated fiscal revenue by 59.651 billion yuan through circular treasury transfers and accounting adjustments.

Systematic statistical distortion and enforcement distortions can emerge naturally from bureaucratic systems centered on numerical targets. As economic growth slows and land-related revenues weaken, local governments in China continue facing rigid fiscal obligations, including maintaining basic public services, payroll, and administrative operations.

When traditional revenue sources become constrained, local administrations may resort to aggressive tax collection that effectively pulls forward future revenue at the expense of firms’ productive capacity. Likewise, treasury circulation techniques may serve to preserve the appearance of fiscal stability on paper and demonstrate policy success to higher authorities. A broader implication of this dynamic is that if reporting incentives increasingly diverge from underlying economic conditions, the macroeconomic feedback reaching central decision-makers may become progressively less reliable, raising the risk of policy miscalibration by Beijing.

2. The State Council’s audit report used stark financial data to sketch out the “liquid damping” (液體阻尼) effect facing China’s macroeconomic stimulus as it transmits to the micro level, as well as the increasingly Ponzi-like characteristics emerging in local government debt and financial-sector operations.

i) The report suggests that the transmission of central macro-level funding has encountered a new variant of the “liquidity trap,” while local governments’ fiscal gaps in maintaining the “three guarantees” (guaranteed basic livelihood, government wages, and administrative operations) have become a massive liquidity sinkhole.

For instance, to counter economic slowdown, the central government issued 1.3 trillion yuan in ultra-long-term special treasury bonds in 2025, of which 800 billion yuan was allocated to major national strategic and security-capacity projects (“Two Major Initiatives”), and 500 billion yuan to large-scale equipment upgrades and consumer trade-in subsidies. However, the audit found that 1.292 billion yuan of those construction and equipment-upgrade funds had been directly diverted by local governments to fill fiscal shortfalls and pay civil servant salaries.

In infrastructure investment, idle funds and project delays were also prominent. For example, the Tianjin–Weifang High-Speed Railway project experienced a delay in releasing 1.944 billion yuan in dedicated investment funds. The funds were disbursed 275 days after approval by the National People’s Congress, exceeding the schedule by 185 days, resulting in the money remaining unused and rolled over at year-end rather than converting into actual construction activity. This phenomenon reveals that when local governments struggle even to pay civil servants and maintain basic operations, any special-purpose development funding becomes highly vulnerable to passive diversion. Delays and stagnation of funds between central and local governments, projects, and fiscal accounts suggest that administrative efficiency at the grassroots level has deteriorated sharply under fiscal tightening, causing macro-level monetary and fiscal expansion to encounter severe transmission blockages.

ii) The audit report also suggests that the credit foundations of local government special-purpose bonds are undergoing structural erosion, and that local debt-related financial risks may be far greater than the central government anticipates.

According to audit findings, 17 counties fraudulently inflated projected returns and packaged 69 financially unviable projects as revenue-balanced projects to obtain 12.174 billion yuan in special bond funding. The report stated that after completion, many projects generated returns that were insufficient to cover costs, with bond principal repayments relying primarily on refinancing bonds. To conceal the true debt situation, 25 counties failed to register 485 special bond project assets, involving 66.375 billion yuan. Also between 2023 and 2025, four provinces used tactics such as arranging state-owned enterprise loans for repayment or even directly deleting debt records from reporting systems, artificially reducing reported hidden government debt by 6.682 billion yuan.

The audit’s conclusion effectively acknowledges through official language the increasingly Ponzi-like dynamics of local government special bonds. Legally, special bonds are intended to be serviced entirely through project-generated revenue. In practice, however, local governments have reportedly engaged in systematic financial packaging and credit manipulation to secure construction financing. When bond principal depends entirely on issuing new refinancing bonds to repay old obligations, local debt loses substantive asset backing and begins to resemble a pure maturity-extension cycle. Especially concerning are practices such as deleting liabilities from debt systems or replacing government liabilities with SOE borrowing, suggesting that under strict central accountability mechanisms, some local authorities have adopted increasingly opaque and digitized methods of evading oversight. This makes the PRC’s true debt exposure more difficult to measure and increases the risk of sudden systemic credit stress.

iii) The audit report indicates that competition over financial metrics inside Chinese financial institutions has intensified, while financial policy tools have become increasingly formalistic.

The audit of seven major financial institutions — including Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications, China CITIC Bank, Agricultural Bank of China, China Everbright Group, and Bank of China — revealed widespread circulation of funds and inflated financial statistics. Examples include:

• To improve loan-volume rankings and meet structural lending targets, three financial institutions used techniques such as “deposit first, lend later” and “instant lending with immediate recovery” to inflate loan and deposit figures by 1.41 trillion yuan.
• Two institutions, seeking higher bond-underwriting rankings, accepted 242 million yuan in losses to artificially increase underwriting volumes by 363.111 billion yuan.

The report also found that implementation of technology finance policies had become largely symbolic:

• 126 provincial branches across four banks issued 64.222 billion yuan in loans without substantively evaluating innovation capability. Technology labels were simply attached afterward on the loans for reporting purposes.
• Of 47.85 billion yuan in sampled loans, 10.109 billion yuan still required intellectual property pledges even when traditional collateral was already sufficient or unnecessary, creating redundant compliance burdens.
• Between December 2021 and August 2025, the Agricultural Bank of China conducted superficial pre-loan reviews and improperly issued 11.066 billion yuan in loans to projects unrelated to high-standard farmland. Some of the funds were diverted into wealth management products or debt repayment.
• A trust company affiliated with a central SOE illegally sold 149.178 billion yuan in trust products through unauthorized non-financial subsidiaries and continued providing implicit guarantees on 2.042 billion yuan of products even after regulators ordered the practice to stop.

The practices above illustrate the increasingly non-market nature of financial resource allocation under heavy administrative intervention. As the central authorities elevate objectives such as technology finance, green finance, and rural revitalization into political mandates, banks facing high real risk premiums and limited high-quality innovation assets could rationally respond through metric inflation and technical relabeling. The 1.41 trillion yuan in inflated loans and losses accepted merely to expand underwriting rankings suggest a financial system expending enormous state capital to preserve the appearance of supporting the real economy. Meanwhile, the trust company’s continued implicit guarantees despite regulatory prohibition reflects deep anxiety within the shadow banking sector that defaults could trigger broader runs and instability, leading institutions to absorb risks themselves and making the financial system’s risk-transmission channels increasingly fragile and opaque.

3. The State Council audit report suggests that while local government finances are tightening, rigid expenditures within the state system have seen almost no meaningful reduction. To sustain operations, local governments are increasingly shifting fiscal pressure downward onto social welfare and environmental protection, resulting in a tangible erosion of the social contract at the grassroots level.

For instance, the National Audit Office conducted a special audit of work injury insurance funds across 26 provinces (covering 115.11 billion yuan) and identified problematic funds totaling 4.869 billion yuan. Key findings included:

• 3.966 million workers in high-risk industries either were not enrolled in mandatory insurance or were improperly downgraded into lower-coverage categories.
• By the end of September 2025, 34,100 construction projects across 24 provinces had failed to provide legally required work injury insurance for 2.26 million migrant workers, involving unpaid premiums totaling 2.53 billion yuan.
• In the field of medical insurance and pharmaceutical procurement, some medical institutions reportedly exploited an older pricing mechanism under which traditional Chinese medicine products still permitted a 25 percent markup over procurement cost. As a result, certain hospitals engaged in reverse selection procurement and deliberately choosing higher-priced products over cheaper alternatives. This generated 121 million yuan in excess procurement spending, more than 30 million yuan in markup-related revenue extraction, and an additional burden exceeding 150 million yuan on patients and medical insurance funds.

Work injury insurance and related social security funds represent essential financial protection for lower-income groups, particularly migrant workers. The exclusion of millions of workers from social protection suggests that during periods of fiscal tightening, local regulators and employers (often local state-linked investment entities or connected firms) may have found incentives to reduce operating costs by weakening labor protections.

Meanwhile, the phenomenon of “choosing expensive over economical” procurement in healthcare reflects broader institutional incentive distortions. Policies originally intended to support hospital finances could, in practice, become mechanisms for compliant rent-seeking, converting public healthcare and insurance resources into institutional revenue while reducing the carrying capacity of the public welfare system.

4. The State Council’s 2025 audit report can be viewed as a diagnostic document on the PRC’s political-economic operating conditions expressed through official audit language. Using detailed and verifiable data, the report argues that the central government’s policy approach — attempting to prevent and resolve systemic risks through political pressure, centralized control, and strict compliance enforcement — is encountering structural constraints in implementation. Concurrently, the report implies that current pressures may already extend beyond the scope of traditional monetary or fiscal fine-tuning.

The issues identified in the report are not only questions of budget execution or administrative discipline, but also concerns about how central directives are transmitted to local governments, whether fiscal resources reach their intended destinations, how incentives shape institutional behavior, and how financial and social obligations are managed under increasing resource constraints. The data and findings in the report raise broader questions about the PRC’s governance capacity, policy transmission efficiency, and the long-term sustainability of existing adjustment mechanisms.

  2   Unpacking the 20-trillion-yuan bubble in the CCP’s 15th Five-Year Plan energy strategy

June 25
1. The PRC National Energy Administration released national electricity statistics for the January-May 2026 period. The data show that by the end of May, China’s cumulative installed power generation capacity had increased 11.0 percent year-on-year to reach 4.01 billion kilowatts. This marks the first time in history that China’s installed generation capacity has exceeded the 4-billion-kilowatt threshold, further consolidating its position as the world’s largest power system.

Official data indicate that electricity indicators in the first five months of the year exhibited two simultaneous characteristics, namely, rapid expansion of installed capacity and a decline in average utilization hours of power generation equipment.

• Within the total installed capacity of 4.01 billion kW:
  • Solar power capacity reached approximately 1.26 billion kW, representing a substantial 16.3 percent year-on-year increase;
  • Wind power capacity reached around 660 million kW, up 17.0 percent year over year. Non-fossil energy sources have now become the dominant contributor to incremental growth in installed power capacity in China.
• From January to May, the national average utilization hours of power generation equipment totaled 1,155 hours, a decline of 95 hours compared with the same period last year.

***
In response to the milestone of “installed power generation capacity surpassing 4 billion kilowatts,” major mainland media outlets including Xinhua News Agency, The Paper, and China National Radio launched special coverage and issued official reports. Their reporting largely centered on three core narratives:

i) Official and semi-official mainland media highlighted the historical trajectory of China’s power sector. According to Xinhua and other state media reports, China’s installed generation capacity grew from just over 57 million kilowatts in 1978 to 1 billion kilowatts in 2011, while the jump from 3 billion to 4 billion kilowatts took only two years.

Media outlets also cited power industry experts stating that China’s installed capacity now exceeds the combined total of the United States, the European Union, India, Japan, and Russia. They argued that both the speed of expansion and the scale advantage are unmatched globally and represent a major step forward in China’s ambition to become an energy superpower.

ii) Mainland media coverage focused heavily on structural changes in electricity generation. Reports noted that non-fossil energy sources now account for more than 60 percent of total installed capacity (reaching 62 percent), while coal-fired power capacity has declined to 32 percent of the total. Those media outlets generally framed this as evidence of China’s success in simultaneously managing the transition of traditional energy systems while accelerating the development of renewable energy.

iii) In anticipation of seasonal electricity demand peaks during summer, semi-official outlets such as The Paper emphasized the role of China’s massive installed capacity as a strategic safety buffer for economic and social development. Reports noted that China’s total electricity consumption has exceeded 10 trillion kilowatt-hours, and argued that this extensive generation base — combined with the world’s leading ultra-high-voltage transmission network — enables renewable electricity generated in western China to be rapidly delivered to eastern load centers.

Media coverage further emphasized that strong electricity supply capability would support the rigid demand for high-quality power from emerging industries including artificial intelligence, advanced manufacturing, and industrial upgrading.

2. The PRC’s National Development and Reform Commission and National Energy Administration jointly released the “15th Five-Year Plan for Building a New Energy System.”

The key points of the 17-page plan include:

i) Establish binding targets for both energy supply and demand by 2030, with non-fossil energy becoming dominant:

• China’s total energy production capacity is targeted to reach 5.8 billion tons of standard coal equivalent by 2030.
• The share of non-fossil energy consumption must rise to 25 percent, while coal and oil consumption are expected to enter their peaking phase.
• Total installed electricity capacity is projected to reach 5.4 billion kilowatts by 2030, including:
  • Wind and solar power exceeding 50 percent of total installed capacity, becoming the dominant source of capacity;
  • Non-fossil electricity generation exceeding 50 percent of total generation output, becoming the primary source of electricity supply.
• The plan also introduces two strengthened targets for the first time, including reducing carbon emissions per unit of electricity generation by more than 10 percent during the plan period and achieving energy savings equivalent to more than 150 million tons of standard coal in key industries.

ii) Optimize the national energy layout to address geographic mismatches between production and consumption. The plan proposes a nationwide coordinated strategy:

• Expand the “West-to-East Energy Transmission” program and continue developing large desert-based wind and solar bases in northern regions and integrated hydro-wind-solar bases in southwest China. Add more than 80 million kilowatts of west-to-east transmission capacity, raising total transmission capability above 420 million kilowatts. Further strengthen oil, gas, and coal transportation corridors.
• The plan also seeks to promote “West Energy for West Use,” encouraging energy-intensive but lower-emission industries (including advanced manufacturing, computing infrastructure, and hydrogen) to relocate closer to western energy hubs. The stated objective is to move from exporting raw energy toward exporting products and computing power (tokens).
• Eastern regions are instructed to strengthen local energy resilience, with a target that 70 percent of incremental energy demand growth in eastern China during the 15th Five-Year Plan period be supplied locally.

iii) Upgrade infrastructure and build smart grids, storage systems, and new energy ecosystems. Key targets include:

• Transform distribution grids into integrated platforms coordinating generation, networks, loads, and storage. Ensure the grid can accommodate 900 million kilowatts of distributed renewable energy capacity by 2030.
• Additional capacity targets by 2030:
  • Conventional hydropower: 410 million kilowatts.
  • Operating nuclear power: 110 million kilowatts.
  • New energy storage: 300 million kilowatts (including 160 million kilowatts of pumped hydro storage).
  • Overall system flexibility and balancing capability are targeted to increase by more than 40 percent.
• The plan also promotes the large-scale deployment of virtual power plants (VPPs) and expansion of vehicle-to-grid (V2G) integration. By 2030, both VPP and V2G flexible response capacity should exceed 50 million kilowatts. National charging infrastructure is targeted to reach 40 million charging points, roughly doubling current levels.

iv) Build an independent energy innovation ecosystem. The plan calls for:

• Launching an “AI + Energy” initiative. Advancing smart grids, smart coal mines, and intelligent power plants.
• Coordinating national computing hubs with large renewable energy bases. Promoting the model of “power supporting computing, computing strengthening power” to meet growing electricity demand from AI and big data industries.
• Hydrogen initiatives include expanding direct renewable-powered hydrogen production and reaching 2 million tons of renewable hydrogen production annually by 2030.
• Developing green hydrogen, ammonia, and methanol production bases. Scaling applications across transportation, chemicals, metallurgy, and large-scale energy storage.

v) Advance market reform and modernization of governance. The plan proposes:

• Establishing a unified electricity market integrating spot markets, medium- and long-term markets, ancillary services, and capacity markets. Fully implementing provincial spot electricity markets and expanding real-time cross-grid trading.
• Pricing reforms include optimizing capacity pricing mechanisms for generators, improving renewable energy settlement systems, and establishing reliable capacity compensation mechanisms.
• Climate governance measures include full implementation of dual carbon-emission control systems, expanding renewable energy certificate and green electricity markets, and increasing international recognition to better respond to green trade barriers.
• The plan also aims to improve the business environment by issuing guidance that encourages private-sector participation in large and medium hydropower, nuclear energy, and oil and gas storage and transport infrastructure, thereby expanding private investment opportunities.

June 26
The State Council Information Office of China held a thematic press conference as part of its “Launching the 15th Five-Year Plan” series. Wang Hongzhi, member of the Party Leadership Group of the NDRC and a person-in-charge of several portfolios at the NEA, attended the press event alongside other officials to introduce the “15th Five-Year Plan for Building a New Energy System” and respond to questions on major issues including current international geopolitical tensions, electricity supply under surging AI computing demand, the role of coal power, and private investment.

Wang stated that by 2030, China aims to establish the basic framework of a clean, low-carbon, secure, and highly efficient new energy system. During the 15th Five-Year Plan period, total investment in major energy projects and emerging energy business models is expected to exceed 20 trillion yuan, with the goal of driving growth across upstream and downstream industrial chains.

The officials stated a position regarding international geopolitical tensions (particularly the sharp volatility in global energy markets since late February 2026) and China’s continued expansion of coal-fired power in response to questions from reporters representing Ta Kung Wen Wei Media Group and Bloomberg. Wang Hongzhi said, “Coal is our greatest source of confidence in maintaining stable energy supply. We must proceed from this national reality and continue strengthening coal base development.”

Other officials emphasized that before renewable energy can fully provide reliable substitution capacity, coal-fired power’s role as the cornerstone of power system security and stability will not weaken. If anything, coal power will be further strengthened.

The 15th Five-Year Plan’s energy strategy targets the establishment by 2030 of more than 100 million tons per year of reserve coal production capacity, while output from the five major coal supply security bases is expected to account for over 80 percent of national coal production.

For fossil energy, the policy approach is described as “limited but stable”—deploying capacity according to the minimum level required for overall system reliability. Under this framework:

• Coal-fired power plants are expected to operate at lower utilization rates under normal conditions to provide flexible balancing support for renewable electricity;
• During periods of system stress or peak demand, they must be capable of maximizing output to guarantee supply security.

Addressing concerns that rapid growth in AI and big data industries could create a future “electricity black hole,” Du Zhongming, director of the NEA’s power department, estimated that during the 15th Five-Year Plan period, rising demand from computing infrastructure, charging networks, and household consumption will increase China’s annual electricity consumption by approximately 600 billion kilowatt-hours per year. This would be equivalent to adding the annual electricity demand of a medium-sized country every year.

  Our take

The PRC’s “celebration” of China’s power generation capacity in official and semi-official media obscures deeper structural issues within the system, including declining efficiency, rising marginal costs, and deteriorating returns on power-sector capital investment.

1. The CCP authorities have set highly ambitious energy transition targets through 2030 under the “15th Five-Year” energy plan. This expansion strategy — driven primarily by large-scale deployment of wind and solar — emphasizes installed-capacity growth while raising questions about utilization efficiency and asset productivity.

i) Wind and solar power are inherently intermittent, variable, and seasonal. Their capacity factors (actual electricity generation relative to installed nameplate capacity) remain comparatively low. In China, solar photovoltaic systems typically achieve average capacity factors of only around 12-15 percent, while wind power generally operates at approximately 20-25 percent. This means that to secure one unit of stable, dispatchable electricity available to the grid, the system may need several multiples of nominal installed renewable capacity to offset variability.

Therefore, Beijing’s planned target of reaching 5.4 billion kilowatts of installed capacity by 2030 does not necessarily imply a proportional increase in firm generation capability. Instead, part of the expansion reflects large additions of lower-utilization assets whose output is concentrated in limited operating windows. This means concerns remain around capital intensity, overlapping infrastructure investment, and potential resource misallocation.

ii) Power systems must obey the physical requirement of real-time balancing between generation and consumption, that is, electricity must be produced and consumed simultaneously. Because economically viable long-duration storage technologies (such as hydrogen storage, gravity storage, or advanced chemical storage) have not yet achieved broad commercial competitiveness at scale, storing electricity remains expensive. As a result, power systems are typically planned around extreme peak-demand conditions rather than average demand conditions.

In China, annual peak electricity demand is generally driven by periods of extreme summer heat and severe winter cold. Yet these peak-load events often occur for only a limited number of hours out of the 8,760 hours in a year. To maintain reliability during those brief periods, China’s system must sustain substantial reserve generation and backup transmission infrastructure.

The CCP’s “15th Five-Year” energy plan proposes enabling distribution networks to accommodate 900 million kilowatts of distributed renewable energy capacity by 2030. Distributed generation (primarily rooftop solar and small-scale wind) is typically connected directly to local distribution grids near end users. Rapid deployment creates several engineering and operational challenges for distribution systems originally designed for one-way electricity flows:

• Reverse power flows and voltage instability: During midday solar peaks, distributed solar installations may export electricity back into local distribution networks, creating localized over-voltage risks and operational stress.
• Reactive power imbalance and harmonic distortion: Grid-connected renewable inverters can introduce harmonics that reduce power quality, requiring utilities to invest in costly compensation and voltage-control equipment.
• Lower asset utilization and rising depreciation pressure: To absorb this additional distributed capacity, local grid operators may need large-scale upgrades to transformers and transmission lines. Yet during periods without generation — such as nighttime or low-wind conditions — much of that infrastructure remains underutilized, increasing fixed costs, depreciation burdens, and long-term maintenance obligations across the network.

2. Comparing the power asset structure and utilization efficiency of China and the United States highlights two fundamentally different development models. The U.S. power system has maintained an overall asset utilization rate of around 41.6 percent over the long term. The foundation of that efficiency lies in a power mix built around a dual base of high-capacity-factor, highly stable baseload generation and flexible peak-load balancing.

Within the U.S. generation structure:

• Nuclear power: Functions as the core baseload source, with capacity factors reportedly remaining above 90-92 percent over extended periods, providing highly stable continuous generation.
• Natural gas generation: Benefiting from low-cost gas supplies enabled by the shale revolution, combined-cycle natural gas plants reportedly maintain capacity factors around 55-60 percent. These plants are not only efficient but also highly flexible operationally, allowing them to respond to fluctuations in demand within minutes and provide peak-balancing services.

Under this structure, the U.S. grid does not need to build renewable capacity at multiples of actual electricity demand in the way the text characterizes China’s approach. Instead, a comparatively leaner installed capacity base can achieve efficient matching between supply and demand, reducing the sunk costs associated with redundant capacity and system instability.

However, China cannot easily replicate the U.S. power model because of underlying constraints in energy technology and strategic resource extraction.

First, in the shale gas sector, although China is often described as possessing substantial shale gas reserves, its geological conditions differ fundamentally from those of the United States. Chinese shale formations are generally deeper, subject to more complex geological stress conditions, and concentrated in mountainous regions of the northwest and southwest where water resources are limited. Ultra-deep horizontal drilling and completion are therefore characterized as costly and subject to rapid production decline, preventing the emergence of low-cost, large-scale commercial extraction comparable to the U.S. model.

Second, in heavy-duty gas turbine technology (the core equipment for natural-gas power generation), China has long faced dependence on foreign suppliers for critical technologies. This, in turn, constrains the country’s ability to expand gas-fired peaking plants at scale.

To manage the system risks associated with a rising share of renewable generation, the CCP’s “15th Five-Year” energy planning framework places significant emphasis on expanding supporting infrastructure, with targets for approximately 110 GW of operating nuclear capacity and 160 GW of pumped-storage hydropower capacity by 2030. These solutions, however, come with trade-offs. Nuclear power requires large upfront capital expenditure, long construction cycles of around five to seven years, and is not well suited to frequent deep-load following. Meanwhile, pumped-storage hydropower is constrained by geography and substantial initial civil engineering costs. These investments amount to a costly effort to compensate for the intermittency of upstream renewable generation, potentially increasing the capital burden on the broader electricity system.

3. Geopolitical conflicts have triggered acute energy security concerns among PRC policymakers. In particular, amid escalating tensions in the Middle East and concerns over potential disruptions to global oil and gas supply chains, the CCP authorities appear to have shifted emphasis from the rhetoric of “carbon peaking” toward ensuring physical energy security. At the National Energy Administration press briefing, officials explicitly stated that “coal is our greatest source of confidence in maintaining stable energy supply,” essentially redefining the use of coal power from one of gradual restriction and cleaner transition into an indispensable “strategic national security asset.”

The 15th Five-Year Plan’s energy strategy explicitly requires maintaining a foundation of coal production capacity. The CCP plans to establish over 100 million tons per year of reserve coal production capacity, and concentrate national coal output into five major coal production bases, increasing their share to more than 80 percent of total output nationwide. While this defensive retreat toward coal may strengthen confidence in supply security under extreme scenarios, economically and financially it risks imposing heavy costs on both the power sector and local public finances.

Under policy mandates requiring the continued expansion of renewable electricity generation, coal-fired plants in China are increasingly being repositioned as flexible balancing resources rather than primary generators. In practice, this means operating at lower utilization rates, frequently ramping output up and down, and performing deep load-following to accommodate intermittent wind and solar generation. From both thermodynamic and economic perspectives, however, coal plants are fundamentally designed for continuous, steady-load operation. Their thermal efficiency, fuel consumption profile, and asset lifespan are optimized around stable utilization. Forcing coal units into frequent cycling and deep load adjustment introduces significant costs, including:

• Substantially higher coal consumption, causing marginal generation costs to rise sharply.
• Frequent fluctuations in boiler temperature and pressure, accelerating equipment wear and increasing maintenance and overhaul expenses.
• Policy-driven suppression of operating hours and output, preventing coal plants from recovering fixed costs through normal electricity sales and pushing many operators into losses.

To support coal plants under financial pressure, the CCP authorities introduced a capacity pricing compensation mechanism beginning in 2024. Under this framework, the fixed cost benchmark for coal-fired generating units is set at 330 yuan per kilowatt per year. Between 2024 and 2025, most regions were permitted to recover 30 percent of fixed costs through capacity payments. Under updated rules, beginning in 2026 all regions are required to raise that recovery ratio to at least 50 percent. This policy effectively functions as a government-directed financial support mechanism for coal assets under stress, providing coal plants with a guaranteed baseline revenue stream independent of actual electricity generation.

At the local level, local governments and local government financing vehicles, responding to central policy priorities around carbon reduction and investment-led growth, accumulated substantial debt over recent years to attract renewable generation projects and related industrial supply chains. As average utilization hours across the grid decline, however, actual returns from renewable power projects have in many cases fallen short of feasibility-study projections, and operating cash flows have struggled to cover debt servicing costs. Because many of these projects lack sufficient self-repayment capacity, the associated financial risks are increasingly shifting toward local state-owned financial institutions and policy banks. Energy infrastructure investment in China is evolving into a new form of balance-sheet stress accumulation, with the potential to become another source of distressed liabilities within local financing systems.

4. With the global surge of generative AI, PRC public discourse and official messaging have strongly promoted the idea that a “computing-power boom” will become the ideal outlet for absorbing surplus green electricity. Through concepts such as “power-computing coordination” and “using electricity to strengthen computing,” PRC policymakers aim to address severe wind and solar curtailment. However, hard data presents a more restrained picture.

In 2025, China completed construction of 42 AI computing clusters each exceeding 10,000 accelerators. However, the combined electricity consumption of all national computing centers amounted to only 170 billion kWh (170 TWh), representing merely 1.6 percent of China’s total annual electricity demand of 10 trillion kWh. The NEA projects that during the 15th Five-Year period, electricity demand from computing infrastructure will increase by more than 100 billion kWh annually, reaching around 800 billion kWh by 2030 and accounting for roughly 6 percent of total electricity consumption.

But even if computing-related electricity use reaches the CCP’s projected level, it would remain relatively modest compared with the estimated annual increase of 600 billion kWh in nationwide electricity demand during the same period, and against a theoretical installed generation base already exceeding 4 billion kW and projected to expand to 5.4 billion kW. Therefore, relying on AI computing demand to absorb idle capacity created by large-scale renewable expansion would not materially resolve the imbalance in physical terms.

In China, major large-model developers are also operating in an intensely competitive low-price environment, with limited differentiation in core algorithms and ecosystems. This has reportedly driven down the commercial value of API calls and token generation to extremely low levels. At the same time, U.S. export restrictions on advanced AI chips (such as Nvidia H100 and B200-class products) have pushed Chinese data centers toward large-scale adoption of domestic alternatives. Because of differences in semiconductor manufacturing processes and architecture design, domestically produced AI chips may deliver lower performance-per-watt compared with leading international products, resulting in relatively higher energy consumption per unit of computing output. Computing centers consume subsidized electricity while incurring substantial grid and infrastructure costs to generate low-value digital output for domestic use or external markets. This creates an asymmetric exchange where China consumes physical energy, infrastructure capacity, and environmental resources in return for digital services with limited pricing power and relatively low value-added.

The 15th Five-Year energy strategy and related narratives emphasize concepts such as “Eastern Data, Western Computing” and “Western Energy for Western Use.” These concepts are actually about relocating non-real-time AI model training to western China so that computing demand can adapt to fluctuations in renewable generation and create temporal coordination between electricity and computation. Yet this vision faces significant engineering constraints. AI training (especially for clusters containing hundreds of thousands to millions of accelerators) is an extremely complex systems-engineering task with stringent infrastructure requirements. AI hardware requires highly stable voltage, frequency control, and millisecond-level reactive power compensation. Even small voltage sags or frequency deviations may interrupt synchronization across large clusters, causing checkpoint failures and resulting in substantial losses of both computing time and electricity.

Meanwhile, renewable-heavy grids in western China (dominated by wind and solar) naturally exhibit greater intermittency and lower inertia. This creates tension between variable green power and the high-quality power requirements of large AI computing clusters, which demand stable, uninterrupted electricity supply. Maintaining reliable operation of western data centers and AI clusters ultimately still requires significant dispatchable backup generation (especially coal-fired power) to provide peak support and operational stability. The broader conclusion advanced here is that, in the AI era, expectations that renewable electricity alone can support advanced digital industries face substantial practical and engineering constraints, and conventional energy sources may continue to play a stabilizing role.

5. As average utilization hours for power generation equipment continue to decline across the Chinese economy, local “consumption (grid absorption) crises” in western provinces rich in renewable resources (such as Gansu, Qinghai, Ningxia, and Xinjiang) are expected, to intensify during the 15th Five-Year Plan period.

Actual wind and solar curtailment rates in some regions may exceed the official 5 percent safety threshold as the physical capacity of the grid to absorb additional electricity approaches its limits. In an environment lacking direct fiscal subsidies and where spot-market prices for green electricity periodically fall into negative pricing, many renewable generation assets built during periods of rapid expansion could face severe cash-flow pressure. This could potentially trigger widespread project distress and bankruptcies among private renewable developers in western China.

Meanwhile, nationwide implementation of coal power capacity pricing (with the fixed-cost recovery ratio scheduled to rise above 50 percent beginning in 2026), together with depreciation burdens from the planned expansion of new energy storage to 300 GW by 2030 (with storage capacity pricing estimated at around 34 yuan per kWh), and grid upgrade investments exceeding 5 trillion yuan, would create substantial financial pressure. Neither Chinese power grid operators nor the PRC’s public finances alone would be able to absorb such costs.

The references in the 15th Five-Year framework to “optimizing the generation-side capacity pricing mechanism” and “basically establishing a unified national electricity market” are mechanisms intended to transmit these system costs through market pricing. In practice, this would mean that the cost of maintaining system redundancy, integrating renewable energy, depreciating energy storage assets, and compensating thermal power capacity would ultimately be embedded into retail electricity prices. These costs (amounting to several trillion yuan) would eventually be passed downstream to manufacturing firms and households. This amounts to a hidden industrial tax, which could weaken the international cost competitiveness of China’s export-oriented manufacturing sector.

During the 15th Five-Year period, local governments are also expected to compete for investment and digital-economy growth metrics by aggressively attracting large-scale AI computing centers. Such hyperscale data centers are characterized by extremely high load density, uninterrupted operation requirements, and exceptionally strict standards for power quality. If variable wind and solar generation simultaneously declines sharply (or temporarily drops to near zero because of weather conditions) under peak summer or winter demand conditions, the Chinese power system could face acute short-term balancing gaps. In circumstances where natural-gas peaking resources remain limited, coal generation cannot ramp quickly enough, and long-duration storage capabilities remain insufficient, some local grids could encounter a situation described as “transmission infrastructure without stable power flow.” Such conditions would increase the probability of localized electricity rationing or outages during critical periods, potentially affecting the stability and reliability of advanced industrial supply chains.