Lately, foreign headlines have split into two camps. One points to slumping industrial profits, a Producer Price Index that has fallen for nine straight quarters, and savage price wars in the electric-vehicle and solar sectors—sure signs of chronic overcapacity. The other notes the heady advance of ventures from DeepSeek to robotics, and recalls how Beijing’s hard line during Trump’s trade war forced the president to blink first. By that telling, China keeps winning the game of chicken.
So which portrait is true? In a country this vast, any single snapshot misleads. China’s eighteen largest cities hold roughly 285 million people—about one-fifth of the nation. Tour Shanghai’s glittering streets and you might conclude the economy is humming; step outside that urban archipelago and the picture darkens.
The darker side now features an unmistakable alarm: unpaid wages inside the state itself. Civil servants went short in 2024, despite a late-year, ten-trillion-yuan debt swap that was supposed to steady the books. By June 2025 the arrears were worse. A leaked TikTok spreadsheet in early July showed dozens of government offices in Shenyang’s Yuhong District owing staff half a year’s pay. Similar posts from Wuhan and Nanjing went viral, spurring more on-the-record complaints. Even relatively affluent Shandong has buckled: officials in Qingdao, Weifang and Jiaozhou have missed at least one month’s salary, while some teachers and police officers have received only their basic wage. In rural Guangdong, frontline bureaucrats now take home about 4,000 yuan a month after performance bonuses were scrapped last June. In landlocked Sichuan, nurses at several public hospitals report monthly pay of 1,300 yuan—barely 180 dollars—and zero bonuses; the same social-media search term links them with Shandong teachers who are six months behind.
This “official wage drought” is not a freak storm but a visible crack in China’s fiscal architecture. A retired mid-level cadre in Shandong put it with grim precision: “When the government can’t even pay its own people, the toolbox is empty.” That, not the headline export figures, is the peril that really matters.
I. The Deficit Riddle
For most countries the deficit ratio is a blunt, transparent figure—the red ink in the state budget. Beijing’s headline number for 2025 is already high: 4 percent of GDP, or roughly ¥5.66 trillion, brushing the line that worries international lenders. The official stance: larger fiscal and monetary outlays, yes, but within the “red line.”
In truth that line was crossed long ago. Rating agencies no longer play along. On 3 April Fitch cut China’s long-term foreign-currency rating from A+ to A, citing a swollen deficit and an ever-rising debt path. HSBC, folding in the off-budget ledgers the government omits, puts the full-scope deficit at 9.9 percent of GDP this year—up from 7.7 percent in 2024. Four percent on paper, nearly ten percent in practice: not a statistical spat but a clash over which bills belong to the state.
The dodge rests on two labels kept off the deficit sheet. “Special-purpose bonds” sit in the government-fund budget, allegedly repaid by project income. “Ultra-long special treasury bonds” are tagged “one-off” and deemed “outside the deficit.” Yet the money goes to industrial parks already plagued by overcapacity, and to straightforward 2025 subsidies for consumer goods and factory retrofits. Together they total about ¥5.7 trillion—more than the declared shortfall.
Global analysts now price China as a single borrower. The PIIE bluntly concludes the official deficit “no longer meaningful measure” as a guide to fiscal stance.
Worse, those eye-watering figures are only the plan. Execution in the first half of 2025 looks unhinged. Total fiscal outlays—general budget plus government-fund spending—hit a record ¥18.8 trillion, up 8.9 percent year on year, far above the economy’s 5.3 percent growth. On the revenue side, land-sale income—lifeblood for local coffers—fell another 6.5 percent from an already weak base, while new special-purpose bonds jumped 45 percent to ¥2.16 trillion. Project cash flow is shrinking; debt is swelling.
Demand for ultra-long bonds is cooling too. In May the yield on fifty-year paper had to rise to lure buyers—the first such move since 2022—as investors rethink duration risk and roll-over odds.
At this pace the real deficit could top 9 percent of GDP by year-end. For a state already lugging a heavy debt load, running a hole that wide is a danger that speaks for itself.
II. The Iron Grip of Public Spending
When red ink spreads, most governments grab the knife and cut. In China, however, the blade never falls. For years Beijing has urged “living within tight belts,” backed by anti-graft drives in healthcare and finance, but those savings scarcely dent the ledger. Four pistons keep the engine racing—interest, social security, the “Sanbao” (Three Guarantees”, 三保) transfers, and the “steady-growth, steady-jobs” programme—and none of them has a brake. Debt keeps climbing, the population keeps aging, and growth targets stay immovable, so the wheels only spin faster.
Interest. With debt rolling over and the policy rate stuck, the explicit interest on central-and-local bonds will hit about ¥2.69 trillion in 2025, roughly 2 percent of GDP. Even the Finance Ministry’s most cautious projection puts the figure at ¥2.87 trillion by 2030. Factor in the true deficit and interest alone will be eating 3 percent of GDP—money that cannot be wished away.
Social security. China is greying at world-record speed. More than 310 million people are over 60; by 2030 that could reach 380 million. To keep today’s pension replacement rate, the Treasury already pours in ¥1.43 trillion a year, plus ¥0.5 trillion for the health-insurance pot. On present trends those two lines will smash through ¥2 trillion within five years. The 2023 pension shortfall was ¥1.75 trillion; by 2030 it will barrel toward ¥3 trillion. These payments are written into law and underwrite social peace—untouchable.
“Sanbao” transfers. Counties must “guarantee wages, operations and basic welfare.” Land-sale revenue has collapsed, workers are moving out, pension gaps are widening; local treasuries survive only because Beijing wires them cash—¥8.3 trillion in 2020, ¥10.2 trillion in 2024, and, based on past performance, at least 5 percent more each year.
Steady growth, steady jobs. The party insists on a roughly 5 percent GDP growth to find work for about 13 million new job-seekers annually. Domestic demand is weak and private firms are wary, so the state picks up the tab. As the return on investment falls, each new job costs more capital. In 2024 the bill reached nearly ¥12 trillion. If the ICOR rises from 6.5 to 8, the line item could rocket to ¥18 trillion within five years.
Add the totals and the trap is clear. Interest plus social-security outlays lock the budget; “Sanbao” transfers and job programmes stop the centre from retreating. The only things left to slash—science, culture, education, health—are insignificant. Deflation drags on nominal GDP, eroding the tax base even as debt balloons. Fitch cited the very mix when it cut China’s rating in April.
Short of a sweeping overhaul of both politics and economics, Beijing cannot solve this riddle—it can only shuffle the furniture on a listing ship.
III. The Tax Squeeze
China’s ledger would look grim enough if spending were the only headache, yet revenue now adds a sharper ache. While the party still claims 5 percent annual GDP growth, tax receipts are sliding. The widening gap between headline output and what the taxman collects has become the economy’s most telling “scissors.”
A decade in view
Over the past ten years tax income has plunged three times, each fall triggered by policy:
- 2016 “business-tax-to-VAT” swap cut service-sector levies by roughly ¥500 billion.
- 2019 structural tax cut trimmed the VAT rates.
- 2022 pandemic relief wrote off an enormous ¥4.6 trillion—27 percent of that year’s haul.
In those three years tax growth lagged GDP by –1.9, –5 and –6.5 percentage points.
Once the “Golden Tax Phase III” e-filing system took hold, the state regained its grip. In 2017, 2021 and 2023 tax growth beat GDP by about four points each time.
Then came the break: with no major new giveaways, the gap swung to –8.4 points in 2024 and to –8.9 in the first quarter of 2025—an abnormal turn demanding an explanation.
Why the core taxes are shrinking
Our focus is on “taxes” proper, not land-sale fees. Two pillars—domestic value-added tax (VAT) and corporate income tax (CIT)—supply more than half of all revenue, so their slide tells the whole story.
VAT: the main leak
After a brief rebound in 2023, VAT shrank 3.8 percent in 2024, for four clear reasons:
- Surging export rebates. With home demand weak, exports take a bigger share. Rebates hit ¥1.8 trillion in 2023—about 22 percent of net VAT—biting deep into the base.
- Property crash. Real estate once fed the VAT till. In 2024 alone the sector paid roughly ¥380 billion less.
- Relentless PPI deflation. VAT is levied on sales; factory-gate prices fell an average 2.7 percent in 2024, trimming about ¥260 billion.
- Local giveaways. Provinces lure investors with tax kickbacks—small-business breaks, EV incentives, and so on—erasing at least ¥450 billion more in 2024.
General Secretary Xi, at a recent “Central Urban Work Conference,” scolded cadres for stampeding into “new-quality productive forces”—AI, data centers, EVs—dangling ever richer rebates and gutting the base. Of the four leaks, only this one is within easy reach; the others are structural.
CIT and IIT: profit and wage pain
Corporate tax peaked in 2021 and has fallen for three straight years, down 17.8 percent in 2023 and still negative in 2024-25. Loss-making developers, squeezed factory margins, and generous R&D write-offs all hollow the base. Personal income tax trails company profits by two to three quarters and turned negative in 2023, sliding a further 1.7 percent in 2024 as youth joblessness, gig-economy fatigue and a frozen housing market cut wage and capital gains.
VAT, CIT and IIT (Individual Income Tax) are all under pressure, hence the stark split between GDP and revenue. To turn the tide China would need:
- PPI to stop falling;
- a genuine bottom in property;
- a rebound in corporate profits;
- and structural reforms such as a real estate tax.
Each is unlikely soon. The revenue crunch is, in truth, an eruption of China’s old growth model under new strain. With weak domestic demand, a property overhaul and harsher external winds, tax income will probably keep trailing GDP in the years ahead, leaving fiscal sustainability on an ever thinner ledge.
IV. The Real Wildcard Ahead
China’s weakest link now lies in finance. Government bonds already make up close to 41 percent of bank assets—well above the 30 percent line most watchdogs call “safe”—and the share keeps climbing. More than half of all new credit in 2024-25 has come from new state paper. If those bonds lose value, over a third of banks would slip below minimum capital rules. The sovereign-bank spiral would shove fiscal risk straight into the financial core.
Should capital injections falter and ratings slide, inter-bank spreads would blow out. Small lenders would be the first to lose funding; runs could follow. Beijing would then have to pour fresh capital not only into the “Big Six” but into city and rural banks as well. Markets would see that bailout for what it is—using the budget to underwrite the banks—and mark sovereign risk higher still. The loop tightens.
Next comes the liquidity after-shock. With trust gone, second-tier banks would woo deposits with high rates. Dearer money would stop loan rates from falling, crush corporate cash flow, raise bad-loan ratios and bite the banks again. Any fresh default by shadow lenders, trusts or LGFVs would shove risk appetite lower and feed the cycle.
Beijing’s answer is already visible: a creeping nationalisation of finance. Some small banks will be fused into big state lenders; high-debt provinces must spin off infrastructure assets before swapping their bonds; and the PBOC is edging toward a soft form of debt monetisation, taking heaps of government bonds as collateral under standing facilities. All three steps are under way, not mere forecasts.
The more capital the centre channels into brittle banks, the less it has for the hard-wired spending we traced above. Local treasuries rely ever more on “Sanbao” transfers and debt swaps; special-purpose bonds and PBOC relending quotas rise year after year. Tighter central audits will pull fiscal power upward, while weak counties may be folded into stronger cities in a quick-fire redraw of the map.
Expect a selective default on public services: wage arrears for officials, delayed payments to contractors, cuts first to schools and buses in high-debt counties, stirring grassroots anger. To cap borrowing costs, Beijing will lean harder on policy banks, insurers and pension funds to “order-buy” its bonds. But wider spreads and lower ratings will tempt capital to flee, setting the stage for fresh fights over the yuan and the reserves. As the old tax base dries up and land prices fail to recover, talk of new levies—property tax, inheritance tax, forced dividend hand-overs—will grow louder. Each measure shifts the balance among social groups and fuels new quarrels.
In short: power centralises, state duties shrink, the tax bite deepens. Legitimacy then rests more on surveillance and message-control, while factions argue whether to “save growth” or “save the debt.” Bureaucrats will line up on either side.
Fiscal fragility is not a mere accounting glitch; it is the master switch that can reset centre-local power, social distribution and even the style of rule. Without a breakthrough—either a surge in revenue or a real cut in hard spending—the deficit-debt-bank snowball will accelerate downhill, gathering weight and speed, along with the political risk that makes “wildcard” feel almost understated for the years ahead.