China's government debt set to grow by a trillion dollars in 2026
What the Communist Party has in store for China’s monetary and fiscal policy in 2026.
Xi Jinping convened the all-important end-of-year economic work meeting of the Communist Party’s Politburo on 8 December.
The event serves to send critical signals on the direction of China’s fiscal and monetary policy in 2026.
Domestic economists now expect a dramatic increase in Chinese government debt to drive growth in fiscal spending next year.
This will be complemented on the monetary policy front by multiple cuts to both interest rates and the required reserve ratio.
“[We] will continue to implement even more active fiscal policy and moderately loose monetary policy,” the Politburo said in an official statement.
“[We] will expand the intensity of counter-cyclical and cross-cyclical adjustments, and pragmatically increase the effectiveness of macro-economic regulation.”
Fiscal policy in 2026
This year’s economic work meeting continued to stress the need for “even more active fiscal policy” to safeguard China’s economic growth, amidst the choppy waters created by ongoing Cold War tensions between Beijing and Washington.
Beijing remains highly concerned about two economic challenges in particular.
The first is the long-standing problem of inadequate domestic demand in the wake of China’s property slump - an issue viewed by policymakers as arguably the greatest dilemma facing the national economy.
The second is the impact of external growth threats resulting from the trade dispute with the US, and potentially other nations that have run up mounting current account deficits with China, by purchasing more goods than they sell to the Chinese market.
Beijing consider expansionary fiscal spending to be the best short-term solution for both of these economic challenges.
Chinese economists see it pickup up the slack of any fall in exports resulting from the protectionist measures of other countries, while Beijing also hopes that the right policy design will drive growth in household consumption.
As a consequence, domestic analysts anticipate a sharp increase in Chinese government debt next year, with an expansion in the issuance of ultra-long-term special government bonds by the central government, as well as special purpose bonds by local governments.
Zhang Aoping (张奥平) - a special economic advisor to Tsinghua University and state-owned media, expects total bond issues by the Chinese government to hit at least seven trillion yuan (approx. US$1 trillion) next year.
He firstly expects the issuance of ultra-long-term special bonds by the Chinese central government to increase from 1.3 trillion yuan this year to around 2 trillion yuan in 2026.
This represents a doubling compared to the issuance of 1 trillion yuan in ultra-long-term special government bonds by Beijing in 2024.
In a recent opinion piece on the economic work meeting (“张奥平：128政治局会议，释放2026年八大关键信号”), Zhang writes that fiscal spending by the central government will hone in particular on two main policy areas.
These policy areas are:
The “Two Keys” (“两重”) - a reference to “implementation of key state strategies” and “security capability in key areas,” and
The “Two New’s (两新)” - a reference to “cash-for-clunkers” consumption subsidies and and subsidies for upgrades to capital equipment.
The focus of the “Two Keys” will lie in urban renewal schemes, alongside programs to accommodate the ongoing urbanisation of China’s rural migrant workers.
Beijing has already indicated that the 15th Five Year Plan (2026 - 2030) will “deeply drive people-focused forms of new urbanisation,” as well as “drive the urbanisation of rural migrant populations in a scientific and orderly manner.”
According to figures released by the National Development and Reform Commission (NDRC) at the end of December, Beijing used 700 billion yuan and 800 billion yuan in funds raised from ultra-long-term special bonds in 2024 and 2025 respectively for urban renewal and upgrade programs around China.
With regard to the “Two New’s”, Beijing is set to expand its consumer subsidy program to include services consumption by Chinese citizens, while simultaneously broadening the scope of subsidies for capital equipment upgrades.
Zhang also foresees an increase in local government debt in 2026, particularly given it’s the inaugural year of the 15th Five Year Plan, as well as the vital role that China’s regional authorities play in fiscal spending.
He expects the issuance of special purpose bonds by local governments to increase from 4.4 trillion yuan this year to around 5 trillion yuan in 2026.
Key areas of spending are set to include rolling over the debts for state investment projects and making payments in arrears to small businesses, which is expected to help to pour liquidity into China’s regional economies.
Special-purpose bonds will also be used to support the growth of investment in China’s more economically important provinces.
Monetary Policy in 2026
The latest Politburo meeting called for the continued implementation of “moderately loose monetary policy” (适度宽松的货币政策) in 2026.
This specific phrase was resurrected by Beijing at the end of 2024 - a move which was viewed as a sign of significant monetary easing, given it was last employed by China’s top policymakers in the aftermath of the Global Financial Crisis.
Beijing has been restrained when it comes to interest rate cuts in 2025, however, as quarterly GDP prints successively pointed to China handily reaching its full-year growth target of 5%, and calls mounted abroad for appreciation of the renminbi to deal with trade imbalance.
The Chinese central bank has only reduced its key policy rate - the seven-day reverse repo rate - on one occasion, trimming it from 1.5% to 1.4% in May. This in turn supported a reduction in China’s benchmark loan prime rate (LPR) from 3.1% to 3%.
China’s macroeconomic system is distinguished by the coordination of fiscal and monetary policy, with the central bank and the Ministry of Finance both operating under the unified leadership of the State Council.
This stands in sharp contrast to the world’s other major economies, where central banks possess at least nominal independence from the executive branch, to prevent the misuse of monetary policy by elected officials during campaign season.
For this reason, Zhang also expects the Chinese central bank to “focus on coordination with fiscal expansion,” as well as work to dissolve the hidden or risk-fraught debt burden of local governments.
In 2026, he sees the Chinese central bank implementing one to two cuts to interest rates, as well as one to two cuts to the required reserve ratio.
“The goal is to stabilise growth and fight deflation,” Zhang writes.
Zhang also sees the central bank continuing to implement the other distinguishing feature of China’s monetary policy system - the use of credit guidance to direct funds to priority sectors of the economy.
This is reflected by the Politburo’s call for “the implementation of even more active macroeconomic policy” in tandem with “strengthening of the foresight, targeting and coordination of policy.”
“Structured monetary policy could continue to expand, with a focus on supporting the ‘Five Great Chapters’ of finance,” Zhang writes.
The “Five Great Chapters of Finance” that Zhang refers to were first proposed by China’s Central Financial Work Conference in December 2023.
They encompass the economic priority areas of:
Science and technology financing.
Green finance.
Financial inclusion.
Aged care financing, and
Digital finance.