China's government is spending less despite mounting pressure from the International Monetary Fund to increase fiscal stimulus, creating what Nomura describes as a "fiscal cliff" that is dragging on economic growth [1]. At IMF and World Bank meetings in Bangkok in October 2026, Managing Director Kristalina Georgieva called for China to "spend more" as the economy teeters on deflation, with the IMF expecting China's economic growth to slow to 4.5% in 2026 from 5% in 2025, and further decline to 4% in 2027 [1].
The root cause of China's spending squeeze stems from a dramatic collapse in land-sale revenues, which have been a primary funding source for local governments for decades [1]. Land-sale income has more than halved since 2021, falling to 4.2 trillion yuan (approximately $590 billion) from 8.7 trillion yuan, according to CF40, a Beijing think tank [1]. This revenue collapse has forced Beijing to restrict local government off-the-books borrowing to prevent a debt crisis, effectively removing a key engine of growth [1].
The fiscal contraction is evident in multiple economic indicators. Combined fiscal spending declined 3.5% in the first eight months of 2026 after growing 3.6% in 2025, according to Nomura's chief China economist Ting Lu [1]. Urban fixed-asset investment, a critical growth driver, declined for the first time in decades, falling 3.8% in 2025 and steepening to a 7.2% decline in the first three quarters of 2026 [1]. While Beijing maintains an official deficit target of about 4% of GDP, the Institute of International Finance estimates the actual deficit could reach as much as 9%, suggesting even current spending levels may be insufficient to support growth [1].
The underlying debt challenge is substantial. While general government debt stands at 68.4% of GDP, augmented government debt—including local government financing vehicles and off-balance sheet borrowing—has ballooned to around 126.6% of GDP, comparable to developed markets including the U.S. and Europe [1]. This structural constraint on spending, combined with Beijing's efforts to control hidden debt accumulation, has created a policy dilemma where the government cannot easily increase stimulus without risking financial stability.
CONCLUSION
China faces a critical policy tension between the need for fiscal stimulus to prevent economic slowdown and the imperative to control hidden debt levels comparable to developed economies. The collapse in land-sale revenues has eliminated a traditional funding mechanism for local governments, forcing Beijing to choose between loosening debt controls or accepting slower growth—a choice that will have significant implications for global markets given China's economic importance.