China's fiscal spending "will only increase" in future...
The overseas expansion of Chinese companies is driving renminbi internationalisation; asset quality of China's commercial banks remains under pressure due to property.
Our digest on everything you need to know about China’s economic policy discussion as of Friday, 24 April, 2026.
In this edition:
Domestic deflation has cushioned China’s economy from the shock in oil prices caused by the War in Iran, according to Guan Tao (管涛), chief economist at Bank of China’s investment banking wing. This enabled Q1 GDP growth to post a slight increase compared to the preceding quarter.
Chinese fiscal spending will only increase in future, as the rationale of its economic growth shifts in response to demographic change, argues Ren Zeping (任泽平) , formerly a researcher with the State Council and currently chief economist at Zhongyuan Bank. Ren sees ample room for China to raise its levels of government debt, which remain considerably lower than those of other major economies.
The real driver of internationalisation of the renminbi is the global spread of Chinese enterprise and investment, says Sheng Songcheng (盛松成), formerly a director with the Chinese central bank and currently a professor at the Shanghai University of Finance and Economics. Sheng believes that now is the “best time” to drive further adoption of the renminbi internationally, calling for Beijing to increase the issuance of government bonds and central bank notes abroad.
The asset quality of Chinese banks has come under continuous pressure since 2014, argues Wang Jian (王剑), chief financial sector analyst at Guosen Securities. He highlights a shift in the source of non-performing loans from the manufacturing sector to the real estate market - especially in the wake of the Covid pandemic.
Domestic deflation cushions China’s economy against Iranian oil shock
Guan Tao (管涛), chief economist at Bank of China’s investment banking vehicle, writes that long-standing deflationary pressure has actually helped the Chinese economy since the start of 2026, enabling it to withstand the adverse impacts of the oil shock caused by the War in Iran.
“Unlike developed economies such as Europe and the United States, which face upward inflationary pressures, China has mainly faced the challenges of insufficient effective demand and persistently low prices in recent years,” Guan writes in an opinion piece entitled “The conflict between the US, Israel and Iran has not prevented the Chinese economy from vigorously stepping forward” (“管涛：美以伊冲突无碍中国经济起步有力、金融平稳运行”).
“This means that the direct impact of war in the Middle East on China’s economy is relatively limited, as embodied by the strong resilience of renminbi asset prices.”
Despite the sharp rise in global oil prices, China’s producer price index (PPI) still fell 0.6% (year-on-year)YoY in the first quarter of 2026.
This was nonetheless 1.5 percentage points less than the decline for the previous quarter, after PPI posted a YoY 0.5% uptick in March that broke a 41-month streak of declines. China’s GDP deflator also continued to decline in the first quarter, edging down 0.06% YoY.
China’s GDP growth came in at 5% for the quarter - ahead of market expectations and accelerating 0.5 percentage points compared to the preceding period. The print was also in line with Beijing’s official growth rate target for the past several years.
Chinese exports posted an especially strong performance, rising 14.7% YoY in US dollar terms, as compared to average compound growth rate of 7.2% for the two years ending March.
In spite of this, the trade in goods surplus still fell in YoY terms, eroding the contribution made by exports to China’s economic growth.
Foreign demand accounted for 0.8 percentage points of China’s economic growth in the first quarter, for a decline of 0.6 percentage points compared to last year’s final quarter.
Consumption drove 2.4 percentage points of growth - on par with the preceding period, while investment drove 1.9 percentage points of growth - 1.2 percentage points above the print for the final quarter of 2025, as China’s “Two Keys” (两重) projects began to dial up spending.
China’s fiscal spending “will only increase” in future, government debt still low by global levels
Ren Zeping (任泽平) writes that China’s fiscal policy underwent a pivotal shift at the start of 2025, with top policymakers anticipating heavy economic headwinds from Trump’s second term in office.
Beijing shifted its official setting for fiscal policy to “even more active” last year while also raising the official deficit ratio to 4% for the first time on record. This was a major departure from the long-standing precedent of keeping China’s deficit ratio at the Maastricht Treaty level of 3%.
Ren, formerly a researcher with the State Council and currently chief economist at Zhongyuan Bank, argues that China will still have ample room to support deficit-driven fiscal spending moving forward, given that its government debt ratio remains far lower than those of other major economies.
“”While the deficit and government debt have increased significantly, China’s government debt remains at a low-to-medium level compared to international standards, leaving much room for future policy manoeuvring,” Ren writes in the opinion piece “Hearing thunder in silence - looking at China future via 2025 statistical data” (“任泽平：于无声处听惊雷——从2025年统计数据看中国未来”).
“As of the end of 2024, the total national government debt was 92.6 trillion yuan, including 82.1 trillion yuan in statutory government debt and 10.5 trillion yuan in local government implicit debt, corresponding to a government debt ratio of 68.7%.
“This is far lower than the average levels of 118.2% for G20 countries and 123.2% for G7 countries.”
On top of the challenges brought by a second Trump presidency, Ren argues that the shift towards more expansive fiscal policy arrives just as the “deep-seated logic of China’s economic performance undergoes systemic and far-reaching change.”
Chief amongst these changes are demographic shifts - in particular the sharp decline in birth rates that has coincided with the rising affluence of Chinese society. They also include a renewed imperative to expand domestic demand - with an especial focus on consumption, in order to reduce dependence on export-led growth that has led to mounting trade tensions.
Consequently, in addition to greater tolerance for deficit spending, Ren sees China changing fiscal policy by placing far greater emphasis on “investing in people,” as opposed to the traditional of emphasis of “investing in things” in the form of copious infrastructure spending.
Fiscal spending that “invests in people” will involve:
Spending on improvements to human capital in order to drive future productivity gains, and
Putting money directly in the hands of more Chinese households via transfer payments, in order to boost domestic demand in the form of consumption.
Ren enumerates a slew of official statements made by China’s top authorities as consistently reiterating these policy themes.
“At a State Council Information Office press conference held this year, the Ministry of Finance further stated that fiscal expenditure will ‘only increase, not decrease,’” Ren writes.
“[It will] employ more funds to boost consumption, invest in people and protect people’s livelihoods, as well as increase household incomes via multiple channels.
“The Central Economic Work Conference explicitly proposed formulating and implementing a plan to raise the income of urban and rural residents, to promote simultaneous improvements to human capital accumulation and household consumption capacity.
“The National Development and Reform Commission’s interpretation stressed that the foundation of domestic demand will be strengthened by increasing household incomes and improving social security.”
With demographic changes potentially hampering future growth, Ren highlights the need for China shift from the “population dividend” that drove its rapid development during the first several decades of the reform era towards a “talent dividend” that can achieve enhanced productivity and innovation.
“The scale of science and technology talent continues to expand, with innovation-driven development providing support for high-quality economic and social development during the 15th Five-Year Plan period,” Ren writes.
“A series of talent support policies were introduced in 2025, accelerating the development of national strategic talent and supporting the development of cutting-edge technologies.
“China’s total number of R&D personnel nationwide has reached 10.797 million, and its number of high-level international journal papers and invention patents both rank first in the world.”
The future for Chinese monetary policy
When it comes to future trends in monetary policy, it’s important to note that the Chinese central bank’s main policy rate - the seven-day reverse repo - sits at just 1.4%, leaving limited room for further cuts.
Ren points out, however, that China can still make use of cuts to the required reserved ratio to augment the money supply and complement more expansive fiscal policy. The reductions will release liquidity for government borrowing, by giving Chinese commercial banks more room on their balance sheets to buy bonds.
“The government debt ratio remains low, while on the monetary policy front front, the weighted average required reserve ratio for Chinese financial institutions is approximately 6.3%, significantly higher than the level of 0%-1% in major developed economies,” he writes.
China’s central bank will also place greater emphasis on the use of structured monetary policy tools that channel funds towards priority areas of the economy.
This is evidenced by the recent swath of adjustments to the Chinese central bank’s re-loans- a key monetary policy initiative for applying credit guidance to commercial lenders.
In May last year, the central bank increased the re-loan quota for technological innovation and technological upgrading to 800 billion yuan, as well as established a new 500 billion yuan re-loan quota for services consumption and aged care.
It also increased re-loans for agriculture and small businesses by 300 billion yuan, while merging and optimising the quotas for the two capital market support tools to 800 billion yuan, in order to “provide targeted support for technological innovation, green transformation, inclusive finance for micro and small enterprises, and capital market development.”
At the start of 2026, the central bank further lowered the interest rates on various re-loan and re-discounting facilities by 25 basis points, as well as announced a further increase in the re-loan quota for technological innovation to 1.2 trillion yuan and the establishment of a new 1 trillion yuan re-loan quota for private enterprises.
The overseas expansion of Chinese enterprises is driving renminbi internationalisation
In a recent opinion piece, Sheng Songcheng (盛松成), formerly a director with the Chinese central bank and currently a professor at the Shanghai University of Finance and Economics, refrains from remarking upon the role of the War in Iran in raising the internationalisation prospects of the renminbi.
He instead focuses upon the role played by the expansion of Chinese companies into overseas markets when it comes to boosting the use of the renminbi for settlement and financing abroad.
“The demand for cross-border renminbi financing from enterprises going abroad is continually increasing,” Sheng writes in the opinion piece entitled “Now is the best time for the renminbi to expand globally” (“盛松成：现在，是人民币走向全球的最佳时机”)
Sheng points to recent data on cross-border renminbi usage as substantiating this assertion.
“The structure of renminbi cross-border settlement typically includes two main categories - current account transactions and direct investment” he writes.
“Currently, current account transactions account for 67.9% of the total, amounting to 17.86 trillion yuan.
“Direct investment includes two vectors: foreign direct investment (FDI) and outward direct investment (ODI).
“Currently, FDI accounts for 20.3% of renminbi cross-border settlement, while the share of outward direct investment has increased to 11.8%
“The continued growth of China’s outward direct investment indicates that our global industrial and supply chain layout is becoming increasingly deep and comprehensive.
“This data powerfully demonstrates that trade and investment are jointly driving the vigorous development of demand for renminbi cross-border investment and financing.”
Sheng also highlights the ongoing rapid growth in Chinese foreign trade as a core driver of renminbi internationalisation.
In the first quarter of this year, China’s total yuan-denominated import and export volume, reached 11.84 trillion yuan for a year-on-year increase of 15.0% -11.26 percentage points higher than the full-year growth rate for 2025.
Exports grew by 11.9%, while imports surged by 19.6%, for growth rates 5.17 and 25.43 percentage points higher respectively than the same period last year.
“These newly released figures fully demonstrate that we are forming a virtuous cycle of ‘large-scale imports and exports,’ Sheng writes.
“[They] demonstrate China’s unwavering commitment to expanding high-level opening-up, a stark contrast to the ‘closed-door’ strategy adopted by some nations.”
Policy recommendations for renminbi internationalisation
In order to best capitalise upon the impetus for renminbi internationalisation created by the expansion of Chinese trade and investment abroad, Sheng has three key policy proposals.
Expand the offshore supply of secure renminbi assets. “China must normalise the issuance of renminbi Treasuries and central bank notes overseas, and by these means improve the offshore renminbi yield curve,” he writes.
Strengthen the coordination and linkages between Shanghai and Hong Kong as financial centres. Sheng points out that cementing the two cities as “great international financial centres” has already risen to the status of a “national strategy” for Beijing. This is part of broader efforts to drive further opening of China’s financial sector and raise Shanghai’s role in “global resource allocation.”
Uphold the market’s “decisive” role in the formation of exchange rates, while also strengthening the guidance of expectations. “There are two phrases that are most important here,” Sheng writes. “Upholding the direction of marketisation, and making market supply and demand the foundation.”
The asset quality of Chinese banks has come under continual pressure since 2014
Wang Jian (王剑), chief financial sector analyst at state-owned Guosen Securities, provides readers with a brief history of the bad debts of Chinese banks ever since the Global Financial Crisis in his recent opinion piece, “A comprehensive review of asset quality in the banking sector” (“银行业资产质量大盘点”).
At the start of the 21st century, the Chinese banking system was on the brink of collapse, due to the huge volumes of non-performing loans accumulated by efforts to keep ailing state-owned enterprises afloat during the fraught process of market liberalisation.
According to Wang, Premier Zhu Rongji’s reform of the Chinese financial system managed to effectively deal with the issue during the noughts. By 2010, Chinese banks “almost had no asset problems,” despite the ongoing impacts of the Global Financial Crisis.
Starting from 2011, however, changes in China’s economic environment contributed to a deterioration in the quality of banking system assets. Key factors included adjustments to the Chinese property market, tighter monetary policy, easing GDP growth, as well as the dilemma of industrial over-capacity.
While bank asset quality saw marginal improvements in 2016 courtesy of Xi Jinping’s supply-side structural reforms, pressure on asset quality spiked during the initial phase of the Covid pandemic.
“We can say that from 2014 until now, the asset quality of listed banks has been under continuous pressure,” Wang writes.
“At present, the overall non–performing loan (NPL) ratio of listed banks is still close to 2014.”
This ongoing pressure has been accompanied by a pivotal shift in the source of non-performing loans for Chinese banks.
While the NPL ratio of loans to the manufacturing sector and wholesalers hovered at around or above 5% from 2016 to 2018, by the end of last year this figure had dropped to under 2%.
In sharp contrast, the NPL ratio of loans to real-estate developers leaped starting from the end of 2020, rising to a high of over 4% by the end of 2023.
“Since 2021, credit defaults in the real estate industry have occurred frequently, and the NPL ratio for real estate development loans has risen rapidly,” Wang writes.
“The NPL ratio for personal housing loans has also been rising continuously since 2022.
“Of the two, the NPLs of real estate developers have risen at a faster pace, but their NPL ratio has now slightly declined. The NPL ratio for personal home loans is still on the rise, however.”
In spite of Wang’s concerns over pressure on the asset quality of China’s commercial banks, official data indicates that the sector-wide NPL ratio remains at modest levels.
Figures from the National Financial Regulatory Administration (NFRA) show that the NPL ratio for Chinese listed banks stood at around 1.5% as of the end of 2025, down from 1.52% for the previous quarter.