Key developments in October:
8 October — The PBOC published a position paper rejecting analyses that the export surplus is linked to renminbi undervaluation and therefore necessitates appreciation.
14 October — September trade data showed exports up 36.3% year on year in US-dollar terms and a $133.5 billion trade surplus, up 50.5%. Producer prices rose 5%, against consumer inflation of 0.9%. New bank lending totalled RMB1.08 trillion, beating expectations but RMB210 billion below the previous year, and with government bonds accounting for 43% of new aggregate financing.
16 October — The commerce and science ministries proposed the addition of 23 AI technologies, alongside biomedical and solar technologies, to the catalogue of technologies within the scope of export restrictions.
19 October — GDP growth reported at 4.5% year on year in the third quarter, while January–September fixed-asset investment fell 7.2%.
19 October — The PBOC announced plans for liquidity support for non-bank institutions facing mass redemptions, with the aim of preventing destabilising bond sell-offs.
23 October — The State Council urged local governments to exercise caution and increase time buffers for AI deployment in labour-intensive industries.
29 October — The Fifth Plenum called for assessing officials on public welfare management and their handling of inherited problems, alongside action against unauthorised new hidden borrowing and repeated reversals of policies and plans (or “flipping shaobing”, 翻烧饼).
2 November — Amid a tumble in the A-share market, authorities announced swap operations with financial institutions and upgrades to a lending facility for listed companies to carry out share buybacks. New listings have also been temporarily halted.
October’s economic debate focused on the limits and lessons of the industrial policy tools on which China’s local governments have relied in recent decades, as fiscal conditions and credit availability have become more strained.
One strand focuses on the economic legacy of the land finance model, which once allowed local governments to undertake unprecedented fiscal expansion and support local champions. Capital is now scarcer, and many urban areas are shrinking. Xia Chun associates this model with Huang Qifan, the former mayor of Chongqing under Bo Xilai, who came under investigation for corruption last month, and whom Zhao Jian calls the “LGFV debt king” (城投债王). While acknowledging this growth model’s effectiveness at the time, Zhao refers to continued reliance on debt-fuelled investment as “an opiate draining economic vitality” and argues in favour of a shift towards greater central support for households.
Faced with population decline, the former urban planning official Zhao Yanjing counsels that shrinking cities “shed their tails to survive” (断尾求生), withdrawing support from peripheral areas and concentrating residents, municipal services and investment in a smaller zone. This, he argues, would ease the fiscal burden of maintaining surplus infrastructure and boost the value of assets in core urban zones.
The other strand examines what this model’s apparent obsolescence means for the future of official performance assessments and industrial guidance mechanisms. In a Qiushi article, National Defence University’s Qiu Xinsong firmly dismissed the idea that corruption can be excused in the name of economic growth, warning that treating corruption as a “lubricant” for economic development is akin to “drinking poison to quench one’s thirst”.
This mood shift against cowboy cadres is clear in an essay from the management professor Zhou Li’an, who is best known for the “promotion tournament” (晋升锦标赛) model, which describes how lower- and middle-ranking officials would compete for promotion through economic performance in an era when GDP growth dominated cadre evaluations. Zhou now points to the widening cracks in this arrangement. While it incentivises officials to support local champions’ entry into the market, it does not reward cleaning up debt and can lead to local officials permanently propping up zombie firms.
Likewise pondering the obsolescence of what he terms the “GDP tournament” mechanism, Bob Chen suggests that, as local leadership reshuffles unfold ahead of the 21st Party Congress, a new mechanism for evaluating official performance could be emerging, with greater weight placed on fiscal discipline and breakthroughs in tech.
Stimulating discussions
In this atmosphere of retrenchment, the difficulty will be stimulating broad-based economic activity. As Li Xunlei points out, the government’s stimulus strategy during the current Five-Year Plan is leaning on support for AI diffusion and the “six networks” infrastructure upgrades. He suggests that a large support package is likely to come in mid-2027 rather than this year, possibly prompted by a drop in external demand due to EU trade controls and a slowdown in global AI investment growth.
China’s National Development and Reform Commission (NDRC) projects total investment of RMB23–25 trillion in the “six networks” and related sectors between 2026 and 2030. However, as former official Wang Yiming suggests, this depends on state investment unlocking enough “social capital” to reach these expectations. Mobilising enough SOE and private investment to do so, he argues, will be challenging given the uncertain financial returns of many infrastructure projects.
These financing challenges are reflected in the capital market story for October. The PBoC announced liquidity backstops for bond funds in the case of mass redemptions, with the aim of stabilising investor confidence and credit support. This is especially important as local governments increasingly rely on bond financing. As Sheng Songcheng points out, government bonds accounted for 38.9% of new aggregate financing in 2025, showing that rising direct financing does not necessarily mean more “patient capital” for firms.
Meanwhile, following a tumble in the A-share market over the course of last month, the state securities regulator announced a round of state support for share buybacks on 2 November. Senior finance professor Wu Xiaoqiu writes that share buybacks should become a more established way of returning capital to investors, arguing that “ordinary investors have no inherent obligation to put up money to support the development of companies like DeepSeek” and need stronger incentives and guarantees to do so.
Although on a far smaller scale than in the US, AI is seen as a major locus of investment in China, and potentially to the detriment of the rest of the economy. As a paper from CICC argues, AI is “drawing capital from society as a whole”, diverting funds away from household support and other sectors, squeezing overall consumption.
Employment and AI
New guidelines from the State Council that urged local governments to exercise caution over the risks of AI-driven job displacement echo mounting concern among Chinese economists, which we analysed in our report last month. As a counterpoint to the conclusions we spotlighted in that report, a study by Soochow Securities argues that jobs in China are at a lower risk of automation than in the US, as low wages and a relatively large rural workforce reduce incentives to replace workers.
In the wider debate among Chinese economists, however, this remains a contrarian perspective. Senior CASS economist Cai Fang sees the recent slowdown in hiring, visible in the macroeconomic data, as a likely precursor to broader restructuring, and urges stronger action to protect jobs during the present “brief period of calm” before a storm of jobs displacement.
Of course, AI-driven displacement is only one factor in China’s weak employment conditions. Shen Jianguang points to the failure of the growing trade surplus, boosted by AI demand and price inflation, to generate employment and wage growth within China due to its concentration in capital-intensive industries. Yang Ruilong is one of several to argue for an emphasis on “investing in jobs” (投资于岗) in order to strengthen the “microeconomic foundations” of macroeconomic stability—taking a leaf out of the academic papers of this year’s Nobel Prize in Economics laureates.
In light of the greater emphasis on fiscal discipline and concerns among Chinese economists that AI spending is crowding out investment in other sectors, few see such a shift on the cards anytime soon.
— James Farquharson
In Brief
Cities after the building boom:
Zhou Tianyong on how excessive administrative intervention has led to unsustainable debt and declining household wealth
Xia Chun on the national debt legacy of the cowboy cadre financing model
Zhao Jian counting the costs of unproductive domestic borrowing
Zhao Yanjing on the maintenance costs of shrinking cities
Peng Wensheng on the “passive urbanisation” caused by demographic ageing, and the need to restart urban migration.
The new political economy of local government:
Zhou Li’an on industrial-policy experiments and the problem of protected failures
Bob Chen on fiscal constraints and the evolving competition standards for promotion among officials
Qiu Xinsong on the folly of using economic successes to excuse corruption
Zhao Wei on how entrepreneurs forced institutional changes in Zhejiang
Xu Xiaonian on the institutional leaps needed to progress from catching up to innovation
Li Xunlei on a second “924” stimulus in 2027 and the likely persistence of investment-led growth
Wang Yiming on the challenge of financing infrastructure amid weak returns and government arrears
Liu Gang & Zhang Weihan on how weakness in Hong Kong’s tech index is a symptom of inadequate consumption stimulus
Zhang Jun on deflation giving China more room for monetary and fiscal easing
Wu Xiaoqiu on the need to increase guarantees for households’ returns from financing innovation
Wu Qing on promising stronger dividends and protection for investors
Liu Gang, Peng Yifu & Xin Xiangli on how AI’s financing demands are squeezing other sectors
Sheng Songcheng on government borrowing lying behind the rise of direct financing
Cai Fang on the hiring freeze before AI displacement reaches unemployment data
Lu Zhe & Li Changmeng on China’s employment buffers against AI disruption
Xun Yugen & Tian Di on when AI’s gains might reach the wider economy
Still waiting for rebalancing:
Yang Ruilong on stepping up public job creation
Li Xunlei on the hidden costs of growth targets
Liang Jianzhang on fertility subsidies as an alternative “infrastructure” investment
The export boom and its limits:
Shen Jianguang on the inability of export prices to feed into wage increases
Luo Zhiheng & Ma Jiajin on the domestic weaknesses behind China’s trade surplus
Guan Tao on overseas assets and China’s investment-income potential
Zhang Ming on boosting international renminbi circulation through overseas investment and government debt issuance