Chinese Economist Warns of Debt Crisis Amid Stimulus Reliance

Liu Xiaoshu, the chief economist at the Bank of Qingdao, has raised alarms regarding China's increasing reliance on fiscal and monetary stimulus to drive short-term economic growth. In a recent op-ed, Liu cautioned that such reliance could lead to unsustainable debt levels, ultimately threatening the stability of the Chinese economy. His warning comes in the wake of a sluggish economic recovery post-COVID-19, characterized by declining consumer demand and a significant real estate crisis.

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The Chinese government has been criticized for its slow response in implementing a major stimulus package, opting instead for a strategy focused on "high-quality development" and selective investments. This approach, championed by President Xi Jinping, contrasts with the more aggressive fiscal measures advocated by some economists who argue for increased government spending to stimulate domestic consumption.

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Liu's perspective highlights the potential dangers of accumulating debt through short-term stimulus measures. He noted that increased government borrowing could lead to a "vicious cycle," where rising debt levels result in higher interest payments, thereby constraining public spending on essential services. Liu referenced historical examples, such as Japan's prolonged economic stagnation and the debt crises faced by southern European nations like Greece, to illustrate the risks associated with excessive reliance on deficit spending.

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Conversely, Lian Ping, an economist at East China Normal University, supports higher levels of government spending, arguing that the current fiscal situation in China remains stable. Lian pointed out that the government's official deficit ratio target for 2025 is set at 4 percent of GDP, a record high, but he believes this increase will not pose significant risks due to the relatively low ratio of central government debt to GDP.

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In response to the economic outlook, Fitch Ratings has projected an increase in China's overall government deficit to 8 percent of GDP this year, up from 6.5 percent in 2024. Despite these fiscal concerns, Fitch has upgraded China's growth forecast for 2025 to 4.7 percent, attributing this optimism to anticipated stimulus measures and strong export performance. The Chinese government has set its growth target for approximately 5 percent for the current year.

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Critics of the current fiscal strategy argue that the modest stimulus measures implemented thus far are insufficient to address the underlying structural weaknesses in the economy. Liu Xiaoshu's warnings serve as a counterpoint to the more optimistic views held by proponents of increased government spending, highlighting a significant divide among economists regarding the best path forward for China's economic recovery.

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While Liu Xiaoshu emphasizes the risks of accumulating debt, Lian Ping maintains that the government's fiscal health is stable. This divergence in viewpoints underscores the complexity of China's economic situation and the challenges policymakers face in balancing short-term growth with long-term sustainability.

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“Short-term stimulus often relies on increased government borrowing,” — Liu Xiaoshu, Chief Economist, Bank of Qingdao

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“Although this figure is significantly higher than in the past, considering that the Chinese government's fiscal situation and debt level are generally stable and healthy, especially the low ratio of central government debt to GDP, this increase will not bring too much risk.” — Lian Ping, Economist, East China Normal University

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