Xi Jinping Pledges to Rewire China’s Finances and Support Indebted Regions

Photo: REUTERS

President Xi Jinping has unveiled a comprehensive plan aimed at strengthening the finances of China’s local governments, addressing their debt crisis as part of a broader blueprint for the country’s economic future. Announced through a detailed 22,200-character resolution by Xinhua News Agency, Xi’s strategy involves redistributing revenue from the central to local governments. This includes allowing regional authorities to receive a larger share of consumption taxes to alleviate their financial burdens.

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Xi’s proposed reforms represent the “third major taxation and fiscal reform” in recent Chinese history. Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, highlighted previous significant reforms, such as the 1994 shift to increase central government revenue and the 2013 allowance for localities to issue their own bonds. According to Ding, the adjustments will help balance the spending responsibilities and income between central and local governments.

The resolution follows a key conclave in Beijing, where about 400 senior officials endorsed Xi’s vision for advancing China’s $17 trillion economy through enhanced manufacturing. The document signals continuity in Xi’s policies, focusing on managing economic risks without major deviations from his overarching plans.

China faces pressure to resolve its staggering 66 trillion yuan ($9.1 trillion) local debt crisis and rebalance its economy. Critics argue that China’s reliance on exports to counteract weak domestic demand is unsustainable. By increasing regional shares of consumption tax, the new plan aims to boost consumer spending and provide a fresh revenue stream for local governments.

In addition to fiscal reforms, Xi’s plan includes granting city governments more control over local property markets and expanding subsidized housing projects. It also addresses issues in the housing sector, such as the pre-sale model that has left many homes unfinished despite payments from residents.

The conclave also placed national security in a prominent position, possibly indicating a shift in focus. Xi’s administration is exploring a unified national population management system, a new concept in official discourse.

While investors had high expectations for the Third Plenary Session, some experts, like Alfred Wu from the National University of Singapore, view the resolution as lacking concrete measures and primarily providing broad guidelines.