China’s Local Debt Hits 126.6% of GDP, Fiscal Spending Declines 3.5%

China’s augmented government debt, including local government off-balance-sheet borrowing, reached about 126.6% of GDP last year, according to the International Monetary Fund (IMF). This figure is comparable to levels seen in developed markets such as the U.S. and Europe. General government debt alone stands at roughly 68.4% of GDP, giving Beijing room to borrow, but concerns grow over local authorities' heavy debt burdens.

Local governments have historically funded infrastructure through land sale income, which has more than halved since 2021, dropping to 4.2 trillion yuan ($590 billion) from 8.7 trillion yuan. As a result, combined fiscal spending declined 3.5% in the first eight months of this year, after increasing 3.6% last year. Urban fixed-asset investment also fell 7.2% in the first three quarters, continuing a multi-year downward trend.

Beijing is aiming to control hidden debt by restricting off-the-books borrowing and converting state-backed entities into market-oriented companies by mid-2027. Despite setting an official fiscal deficit target of about 4% of GDP, the Institute of International Finance estimates the actual deficit could reach as much as 9%, which may still be insufficient to stimulate growth. The IMF projects China’s growth to slow from 5% last year to 4.5% in 2026 and further to 4% in 2027.

This matters for investors because declining local government spending and investment could restrain China's economic momentum, impacting related sectors and overall market growth. The fiscal challenges underscore risks associated with local government debts and the pace of economic stimulus via government spending.