The U.S. presidential election has cast a long shadow over China’s economic policymaking. The Ministry of Finance in Beijing scheduled an important press conference just two days after the election, stoking speculation about a major economic stimulus package. According to pre-conference leaks reported by Reuters, the scale of this stimulus would hinge on the election’s outcome. If Kamala Harris were to win, a modest package ranging between RMB 4 trillion and RMB 6 trillion was expected. But if Donald Trump secured a second term, prompting fears of further trade war escalation, Beijing would resort to a much larger stimulus, potentially reaching RMB 10 trillion.
When Trump, buoyed by a mix of lies and chaos, clinched his second term, the Chinese Ministry of Finance delivered on expectations. A stimulus plan worth RMB 10 trillion (approximately $1.3 trillion) was announced, matching the upper bounds of market predictions. Yet, in a surprising twist, the market responded with a nosedive. The FTSE China A50 index dropped sharply on the announcement, followed by successive declines in the Hang Seng Index and the Shanghai Composite over the ensuing trading week.
Why such a paradoxical reaction? This apparent contradiction reveals the deeper dilemmas in China’s economic landscape and sheds light on Xi Jinping’s oscillation between unrealistic ambitions and hesitancy in managing the economy.
The term “N trillion” (N wanyi yuan, N万亿元) has become a peculiar hallmark of China’s economic policy. It originated in the aftermath of the 2008 global financial crisis, when China’s exports faced a severe blow, and the central government launched the now-legendary RMB 4 trillion stimulus package. That initiative unleashed an infrastructure construction frenzy that reshaped China’s economic trajectory. Today, any multi-trillion-yuan stimulus evokes memories of that post-2008 investment boom, reigniting public fervor.
So why did the stock market react so negatively to this new RMB 10 trillion plan?
1. What Kind of RMB 10 Trillion Stimulus Is This?
First, let us examine the structure of this RMB 10 trillion plan. Is it a single-year expenditure for 2025? Not quite. The package consists of two main components, spread across multiple years.
The first tranche involves RMB 4 trillion allocated over five years, with RMB 800 billion annually coming from new local government special bonds. The second tranche, worth RMB 6 trillion, raises the general debt ceiling for local governments, with RMB 2 trillion per year from 2024 to 2026.
This means that over the next three years, local governments will have RMB 2 trillion (approximately $270 billion) in new general debt capacity annually, alongside RMB 800 billion ($110 billion) in annual special bond quotas. On paper, this sounds like a substantial sum. For context, the general debt limit for 2023 was RMB 16.5 trillion, so this new tranche alone marks an 12.1% increase in the debt ceiling. Why, then, is the market unimpressed?
The answer lies in the fundamental difference between this RMB 10 trillion stimulus and previous large-scale plans. The famous RMB 4 trillion package of 2008 was primarily used to fund infrastructure projects, with nearly all of the funds entering the real economy. That stimulus directly created RMB 4 trillion in incremental liquidity, fueling economic activity. In contrast, the RMB 10 trillion plan announced today is primarily aimed at debt restructuring rather than new investment.
Think of it this way: imagine an individual with RMB 200,000 in credit card debt that he cannot repay. After negotiating with the bank, the debt is converted into a long-term loan with interest-only payments for the initial period. The bank extends an additional RMB 200,000 in credit to refinance the debt, but the individual does not receive any immediately usable funds. Similarly, the bank does not gain any new capital—it is merely a bookkeeping exercise.
To understand the implications, one must grasp the complexity of China’s local government debt system, which operates on two parallel ledgers: general debt (yiban zhaiquan, 一般债券) and special bond (zhuanxiang zhaiquan, 专项债券) .
Historically, local governments operated solely within the general debt framework, with borrowing tightly controlled by central government-imposed limits. However, as local officials faced pressure to meet economic growth targets tied to their career prospects, they turned to aggressive infrastructure development, far exceeding official borrowing quotas. To bypass these restrictions, local governments established numerous state-owned enterprises (SOEs) to issue corporate debt backed by implicit government guarantees. These funds were funneled into highways, railways, airports, and industrial parks—many of which became mired in overcapacity, generating little to no economic return.
This left local governments saddled with unsustainable debt burdens. In many cities, annual interest payments alone now exceed total fiscal revenues. As a result, local governments effectively operate with two sets of accounts: general debt (around RMB 40 trillion) and hidden off-balance-sheet debt (estimated at RMB 70 trillion, though precise figures are elusive).
To curb this unsustainable borrowing and reassert control, Beijing introduced the special bond system in recent years. This framework represents a shift back toward centralized planning, with local governments required to obtain explicit approval from the central government for each project. Applications must include detailed documentation, such as implementation proposal, financial report, and legal report, collectively known as the “one proposal, two reports” (yi an liang shu, 一案两书). Since 2018, special bonds have grown rapidly, overtaking general debt as the primary channel for local government borrowing.
Here are the trends in debt ceilings:
- 2018: General debt RMB 12.3 trillion / Special bonds RMB 8.6 trillion
- 2019: General debt RMB 11.8 trillion / Special bonds RMB 9.4 trillion
- 2020: General debt RMB 13.6 trillion / Special bonds RMB 16.4 trillion
- 2021: General debt RMB 15.1 trillion / Special bonds RMB 18.1 trillion
- 2022: General debt RMB 15.8 trillion / Special bonds RMB 21.8 trillion
- 2023: General debt RMB 16.5 trillion / Special bonds RMB 25.6 trillion
Given this trend, why does the new RMB 10 trillion plan prioritize general debt (RMB 2 trillion annually) over special bonds (RMB 800 billion annually)? Does this signal a decentralization of fiscal and economic control back to local governments? The answer is no.
The emphasis on general debt reflects Beijing’s cautious strategy to manage risks rather than to stimulate growth. The RMB 10 trillion package is not a liquidity-boosting policy but a risk-control measure designed to refinance existing obligations. The net liquidity injection into the economy is not RMB 10 trillion, nor even RMB 2.8 trillion per year—it is far smaller.
2. Incremental Impact and Market Disappointment
While the debt restructuring plan has some potential to increase liquidity in the market, this incremental effect arises from two mechanisms: expanding the scope of debt resolution and debt swaps to lower interest costs.
Broadening the Scope of Debt Resolution
In its narrowest sense, debt restructuring (huazhai, 化债) involves reducing government obligations to banks and non-bank financial institutions, thereby lowering debt ratios. This would entail simply repaying outstanding loans, which does not directly inject liquidity into the market. However, in a broader sense, “huazhai” could also include unpaid wages for government employees or overdue payments to corporate suppliers. If the restructuring is expanded to cover these liabilities, the funds would flow into the market, stimulating economic activity.
This broader approach is not without precedent, albeit it deviates from conventional debt management principles. For instance, 2023 saw the issuance of “special special bond”, which was not tied to the usual procedural requirements of the “one proposal, two reports” system. These bonds, totaling RMB 923.3 billion by September, were used to unpaid wages and clear overdue payments to companies. It is likely that the RMB 800 billion annual allocation in special bonds under the new plan will serve a similar purpose, creating some degree of liquidity infusion into the market.
Debt Swaps to Reduce Interest Costs
The second mechanism involves debt swaps. Consider, for example, a local government-owned transportation investment group owing RMB 1,000 billion to banks at a 7% annual interest rate, requiring RMB 70 billion in yearly interest payments. By converting this debt into general government debt with a 15-year maturity and a reduced interest rate of 2%, annual interest payments would drop to RMB 20 billion. This frees up RMB 50 billion annually, which could then be redirected to other purposes.
Based on this approach, the annual RMB 2 trillion increase in general debt limits could support large-scale debt swaps. With the average coupon rate of 3-year urban investment bonds currently at 5.5%, compared to the 2.3% average rate for local government bonds, the interest differential of approximately 2.2% could free up around RMB 440 billion in annual savings.
Combining these mechanisms, the actual annual liquidity increase from the RMB 10 trillion stimulus plan might amount to around RMB 840 billion. This figure pales in comparison to the nominal scale of RMB 10 trillion or even the annual allocation of RMB 2.8 trillion. Such a modest incremental impact hardly qualifies as a significant stimulus, which explains the lukewarm reaction from capital markets.
However, if the RMB 923.3 billion in “special special bond” issued in 2023 is maintained or increased, broader debt resolution funds at the local level could reach RMB 2 trillion next year. This would represent a meaningful sum, accounting for 6% of local government spending, given that local government general budget expenditures totaled RMB 23.6 trillion and fund expenditures RMB 9.6 trillion in 2023.
Despite these calculations, the “RMB 10 trillion” plan has left the market underwhelmed, for three key reasons:
- Nominal vs. Actual Scale
The headline figure of RMB 10 trillion belies the reality of an annual incremental impact of less than RMB 1 trillion. This discrepancy between expectations and actual liquidity infusion has dampened market enthusiasm. - Reliance on Local Governments
The responsibility for fiscal expansion remains disproportionately on local governments. At an October 12 press conference, the Ministry of Finance hinted at the central government’s ample borrowing capacity and room to expand the deficit, raising hopes that Beijing would take a more active role in fiscal stimulus. Yet, the final plan left this role to local governments, disappointing those who believed the economic challenges warranted direct central government intervention. This reliance on local-level debt restructuring signals a lack of urgency in Beijing’s fiscal policy response and raises doubts about its awareness of the economy’s precarious state. - Insufficient Scale to Solve Structural Problems
The plan does little to address the fundamental fiscal challenges facing local governments. In 2022, annual interest payments on local government debt already exceeded RMB 1 trillion and have continued to grow rapidly. The RMB 440 billion in annual interest savings represents a negligible relief. Furthermore, restructuring RMB 6 trillion in off-balance-sheet debt only scratches the surface, covering merely a tenth of the total. The plan appears to focus on addressing the most critical and immediate risks, serving more as a symbolic gesture than a comprehensive solution to the fiscal woes of local governments.
3. Xi Jinping’s Economic Mindset
Does China’s economy need a stimulus? Undoubtedly. Market expectations alone reveal this urgency. By April 2024, economic indicators began to signal an impending collapse: a sharp contraction in social financing, a post-Spring Festival decline in M1 (for the first time), and a continuous drop in the Producer Price Index (PPI). The data painted a clear picture—China was sliding into the most challenging form of economic malaise: deflation.
In any normal economy, such alarming statistics would prompt swift government action. By May, one would have expected decisive measures, yet Beijing’s response was limited to tentative easing of property restrictions, which failed to deliver results. Month by month, the economic data worsened, but the government’s policies remained half-hearted. It wasn’t until September that the Politburo, for the first time, publicly discussed economic issues during its September monthly meeting—a move widely seen as an acknowledgment of the country’s deepening economic crisis.
Yet, to the market’s dismay, the policies unveiled in November were still exploratory at best. This indecisiveness is reminiscent of a term Xi Jinping frequently emphasizes: “strategic composure” (zhanlüe dingli, 战略定力). This concept evokes the image of a wise, calculated leader who remains unshaken by adversity, patiently awaiting the optimal moment to act. Xi portrays himself as a grand strategist, unflustered by temporary setbacks and supremely confident in his ability to manage complex challenges.
This is not simply the personification of state policy—it is a reflection of Xi Jinping’s direct control over China’s economic decision-making. Xi positions himself as an expert in every field, from law to diplomacy, rural development to environmental protection. Naturally, he is also the supreme economic authority. While China boasts a cadre of technocratic economic officials, their policies are ultimately shaped, and often constrained, by Xi’s vision.
This mindset brings to mind the events of 2022. When the Omicron variant of COVID-19 emerged, most countries adapted their public health strategies within weeks, abandoning strict lockdowns. China, in contrast, took a full year to pivot away from its “dynamic zero-COVID” policy, and even then, it was societal pressure from the White Paper Protests—not calculated leadership—that forced the change. When restrictions were finally lifted in late 2022, China’s health and municipal systems were woefully unprepared for the ensuing wave of infections; citizens struggled to find even basic fever medication.
What Xi called “strategic composure” during the pandemic was, in truth, a stubborn refusal to acknowledge the severity of the crisis and an unwillingness to admit policy missteps. Similarly, his reluctance to deploy central fiscal resources in the current economic situation reflects a mix of distrust in local governments’ financial management and a desire to preserve ammunition for potential external shocks, such as a renewed tariff war under a second Trump administration.
The hope is that the “RMB 10 trillion debt resolution plan” can be magnified through state propaganda, creating an outsized psychological impact that revitalizes the economy.
This is governance as a gamble—viewing the economy as something that can be reshaped by controlling public perception, or pinning hopes on external factors like a sudden collapse of the U.S. economy to improve China’s external environment. Thus, all measures are experimental; if an attempt happens to succeed, the nation can achieve economic recovery at minimal cost, further showcasing China’s systemic advantages and the wisdom of its leadership.
The results thus far betray no such wisdom or advantage. Instead, what we see is an empty promise. Local government debt remains chaotic, and even the tightly controlled special bond system now requires exceptions to fund basic operational expenses. Far from solving problems, the special bond mechanism—a product of central planning introduced just seven years ago—has exacerbated inefficiencies in the fiscal system.
Economic systems thrive on clear signals and predictable outcomes, yet China’s government has undermined both. Since May, Beijing has issued a stream of tentative policies while its propaganda apparatus—guided by the “economic optimism doctrine” introduced in March 2024— has suppressed negative narratives. Media outlets, securities firms, and economists are directed to amplify successes and obscure failures, all in the name of shaping market expectations.
At first glance, this strategy seems to amplify the impact of rescue measures, creating the illusion of recovery. However, it risks plunging China into a Tacitus Trap (Taxituo xianjing, 塔西佗陷阱)1—a scenario where official statements are automatically disbelieved, regardless of their content. By 2025, as economic ailments deepen, Beijing may find itself incapable of issuing credible signals to the market.
This is not a genuine recovery effort but a theatrical performance. Each exaggerated policy announcement and propaganda campaign further depletes future trust and credibility.
The term was first coined by Chinese aesthetician Pan Zhichang and later popularized by Xi Jinping, who brought it into prominence in media and academic discourse. To avoid falling into this trap, the Chinese state and Party focus on maintaining credibility through measures such as narrative control and the reinforcement of ideological education.↩︎