Economists Urge Central Government to Leverage Up: China Has Room for More Debt to Replace Local Liabilities

Since late August, the National Development and Reform Commission (NDRC) has significantly accelerated its deployment of investment expansion measures. Over the past two months, private enterprise symposiums have focused on "expanding effective investment" and "broadening investment space." Since August 20, at least three working meetings have been convened to advance the implementation of major projects under the "Six Networks" framework and the "15th Five-Year Plan" outline.

As a key component of expanding domestic demand, boosting effective investment has once again become a recommended prescription from economists for achieving short-term stable growth. Consensus has been reached on investment directions—including the modern infrastructure system represented by the "Six Networks" and the 109 major projects under the "15th Five-Year Plan." Optimizing government debt structures and fully leveraging the remaining fiscal expansion capacity of the central government have been repeatedly cited by economists as actionable measures.

Expanding Demand to Achieve Economic Rebalancing

Justin Yifu Lin, Boya Chair Professor at Peking University and Dean of the Institute of New Structural Economics, noted that whether countries choose to invest more or consume more during development is a result of global division of labor.

"Developing countries have many opportunities to improve productivity, and seizing these opportunities requires investment," Lin said. He pointed out that investment includes two aspects: industrial investment, which directly raises productivity levels, and infrastructure investment, which makes industrial investment feasible and unlocks its productive potential.

Huang Yiping, Boya Distinguished Professor at Peking University and Dean of the National School of Development, noted that China's economy has undergone significant rebalancing over the past two decades: the investment rate has declined, the consumption rate has risen, and the current account surplus as a share of GDP has fallen significantly from historical highs. However, domestic supply-demand imbalances persist, and the consumption rate still lags far behind the global average.

"Notably, external imbalances have widened again since 2018. From a marginal perspective, the main reason is not a decline in the consumption rate, but a faster decline in the investment rate—driven by local government debt and real estate issues," Huang added.

AI Capital Expenditure Dominates the Current Investment Cycle

Yu Yongding, a member of the Chinese Academy of Social Sciences, noted that the "consumption-driven growth" argument is mostly advocated by American economists such as Paul Krugman and Lawrence Summers—yet the United States itself is now emphasizing infrastructure investment.

"China has developed characteristics that position it to lead the global industrial revolution. For the first time, it has transitioned from a follower to a frontrunner," said Xing Ziqiang, Chief China Economist at Morgan Stanley. He pointed out that embodied intelligence and physical intelligence will increasingly enhance China's productivity. As industrial transformation and upgrading investment accelerates, China's manufacturing sector will evolve from simple assembly to exporting entire ecosystems—including production chains, high-end machine tools, precision instruments, supply chain sensing systems, and industrial design software. This will also be the core source of further growth in manufacturing value-added.

To achieve this, Xing provided quantitative data: over the next decade, China's Industry 5.0 will generate an additional $12 trillion (approximately RMB 80 trillion) in capital expenditure.

Central Government Still Has Room for Fiscal Expansion

If investment remains important, where will the funding come from?

In September, the first batch of funds under the new policy-based financial instruments began to be disbursed. As a key policy tool for expanding effective investment this year, the total scale of these new instruments is RMB 800 billion, providing crucial initial capital for major projects. Based on projects already launched in Zhejiang, Yunnan, Sichuan, Hubei, Xinjiang, and Fujian, a key feature of this round of new policy-based financial instruments is the tilt toward projects involving private capital participation, as well as those under the "Six Networks" and industrial manufacturing categories.

Easing the cash flow pressure on local governments is a specific direction that economists are focusing on to advance effective investment expansion.

Li Xunlei, Chief Economist at Zhongtai International, stated: "China can continue to increase government debt. Why? Because increasing debt has not triggered inflation—China has been in a long-term low-inflation environment. Although the efficiency of debt growth is relatively low, our borrowing space remains relatively large." Li emphasized that only the government—and primarily the central government—can increase leverage to maintain economic balance.

Justin Lin suggested that past local government debts should be addressed: some localities undertook vanity projects or image-building initiatives by borrowing through investment and financing platforms—these localities must take responsibility themselves. However, if local governments incurred debt building infrastructure required by national policies, the best approach is for the central government to issue bonds to replace those debts. As for future projects, major projects should still be planned by the central government, while local governments can conduct feasibility studies and propose supporting plans.

(Source: Securities Times)