China’s Deteriorating Public Finabces

Ichiro Suzuki

An economy growing at 5% is supposed not be considered being in a slump. Such growth rate is an envy of the world, except in India. The Chinese economy grows at 5%, according to the Communist Party. Despite the growth rate, the economy is struggling immensely, as it is widely reported. At best, it is a two-speed economy. The external sector registered exorbitant trade surpluses of $1.2 trillion in 2025, which was over 6% of GDP. Factories are cranking out products to be sold to customers outside of the country. On the other hand, its domestic economy remains very soft. Young Chinese are finding it hard to land a job. In December, 2025, 16.5% of men and women between 16 and 24 years old were without a job. The number was down from 18.9% in August. While Chinese universities are moving up on the global rankings, their graduates are not able to paint a bright picture for their future. 

While President Xi Jinping worships selling goods to overseas customers, an export boom doesn’t have to translate into huge profits for exporters, manufacturers to be specific. The manufacturing sectors are troubled by the same problems as the real estate sector, which is overcapacity. Stimulated by subsidies from local governments as much as Beijing, Corporate China has built production capacity far in excess of what would generate reasonable profits. The economy can still earn foreign exchange as long as export value exceeds that of imports. On the other hand, corporations may make little or no money through export drives if their goods are sold at modest or little profits. This is how the economy can expand without thriving corporations. 

At about 4,000 the Shanghai Composite Index is still trading one-third less than it did at the end of October 2007. Ten months before the Olympics in Beijing, it was a time of frenzies when the future of China looked limitless. Since then, in almost twenty years, the Chinese economy quintupled to a $20 trillion behemoth but the stock market has been totally divorced from such strong growth. Chinese equities are valued at around 70% of the country’s GDP whereas the market is giving the U.S. equities valuation twice as large as the size of the economy. American tech titans are boasting strong ability to generate profits and cash. Chinese tech counterparts on the other hand are not known for extraordinary profits even if they are competing against Americans on a variety of fronts. While Chinese car makers are building a dominant position in EVs, excessive competition, and hence too much production capacity, is allowing only a handful out of over hundred EV makers to report profits. Most of Chinese tech titans have build their positions inside the firewall that shuts Americans out. While American tech companies are generating exorbitant amount of profits outside the U.S., that doesn’t appear to be the case for Chinese counterparts, probably with the exception of TikTok. They may be gaining significant presence in parts of the Global South, but they still don’t dominate in such places, competing with Americans.

Weak corporate earnings have consequences, and they show up in a variety of fashion. To begin with, share prices are held down by weak earnings, presenting corporations a stumbling block in raising capital. This effect has already been abundantly felt in China. Foreign investors’ interest in the country has dwindled over the last fifteen years. Capital inflows in the form of portfolio investments have almost vanished as China was relegated to one of the worst long-time performers in the world. On top of overcapacity, already feeble returns were made even worse by Xi Jinping’s wrath that crushed tech corporations several years ago. The CCP’s intrusion into the market in general are adversely affecting returns, too. This is taking place a time when foreign direct investments have also dwindled on multi-national corporations’ realignment of their supply chain. 

Then, weak earnings adversely affect tax revenue for the government in two ways. Lower earnings growth generate fewer tax revenue for the government, in the form of comporate income tax and tax on dividends. It is as simple as this. In addition, absense of robust earnings growth suppresses trading volume, translating into lower tax collection on transactions. More indirectly, sluggish stock and real estate market reflects subdued broader economic activities, which in turn bring in lower tax revenue, most notably in the form of VAT revenue. At a time when the Japanese economy was mired in persisting mild deflation, the Ministry of Finance was routinely troubled by revenue short falls that constrained public finances. Despite their determination not to repeat Japan’s post-bubble fiasco, China today is closely following Japan’s footsteps, by not fully committing itself to write off non-performing loans aggressively. Deflation is a drag on economic activities and the country is paying the price for it. Huge local government debt raises the hurdle for Beijing even if the CCP might want to step in more aggressively.  

Not surprisingly, China’s public finances are deteriorating steadily. The country’s debt to GDP ratio is approaching 100%. Still considerably lower than Japan, Italy, the United States, etc, a middle-income country to reach this level is unprecedented. Unlike ordinary developing country, China runs massive current account surpluses with vast amount of foreign exchange reserves.  This is a still concern, nonetheless, especially at a time when its population is already falling. The government keeps pouring financial resources into technology and manufacturing industries in order to stay competitive against the US. Focusing on these sectors leave the household sector neglected amid financial constraints. China’s pockets are no longer deep enough to pursue both technological lead and resilience in the domestic economy. Then, the latter is dropped unsurprisingly, leaving buoyant consumption as a forever goal.

Softness in the domestic economy continues to persist. The CCP might have lost interest in tackling the problem that might have grown too big to beat. For the real estate sector to be truly lifted from the problem of supply-demand imbalances, it requires wholesale write-downs of non-performing loans in real estate lending, which Xi Jinping would loathe to see. Such a move would expose a policy failure to the public, but no one can hold the dictator accountable. So the problem keeps going on, until it is hopefully solved by time’s passing, and it could be well into the next decade before the imbalances are fully worked out.

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.