The End of Easy Capital | Economic Digest: May 2026
Local Government | Financial Reform | Trade Surplus | Economic Stimulus and Rebalancing
For all the impressive achievements of China’s “new three” industries—EVs, batteries and solar—a number of Chinese economists are worrying that the scale of their expansion will deepen problems associated with China’s earlier state-backed, debt-led growth model. As some local governments “stampede into and then scatter out” of fashionable sectors, global trade dominance and industrial upgrading have often coincided with duplication and worsening debt.
In this context, May’s policy guidance is being interpreted through the lens of disciplining local-government overreach. Recent official discourse on further developing the “unified national market” is explained by Yang Zhiyong, President of the Chinese Academy of Fiscal Sciences, as aimed at curbing hidden local protectionism and imposing greater budget discipline on localities. Likewise, the success or failure of the current push to develop “future industries” is read by Xu Zheng of the Jiangsu Party School as hinging on whether a growth model based more on “patient capital” than another round of local government-raised debt can be developed.
One culprit blamed by economists for the difficulty of economic reform is China’s indirect financing model, still based largely on bank loans and supply-chain finance. Renmin University’s Wu Xiaoqiu and CUHK’s Zheng Yongnian see the US system of equity finance as demonstrating its advantages for reducing reliance on state-backed finance and supporting a healthier market economy. KPMG China’s Wu Xuchu adds that an economy funded by equity investment would be more resilient to risk contagion in the face of market contraction.
However, the challenges of switching to equity markets are clear. The apparent optimism of last year’s “savings migration” [存款搬家] narrative, in which it was hoped savings might move from real estate to the stock market, is now confronted by what several refer to as an asset shortage: cash is abundant, but a lack of sufficient high-quality assets impedes the entry of large funds. There is also a demand-side dimension to the problem. Financial analyst Wang Jian sees China’s undeveloped equity markets as arising from the developmental-state model reaching its economic limits before citizens have accumulated enough capital to support private investment-led development—a case of “transition before wealth” [未富先转].
This narrower discussion of financing models also feeds into a broader criticism of the role of local governments in the private economy. Both Wu Xiaoqiu and Zheng Yongnian present the broad economic role of local governments and SOEs in many localities as both a constraint on innovation and a misinterpretation of what an “active government” [有为政府] should mean. Zheng’s emphasis on the under-appreciated importance of a “vibrant society” is particularly noteworthy.
Yet trends may be moving in precisely the opposite direction. As local governments face growing fiscal strain, the pressure to develop monetisable assets is increasing. Former urban planning official Zhao Yanjing describes the shift towards managing wealth-generating assets as the only viable pathway for local governments out of indebtedness. Coupled with the need to rescue distressed firms, this could risk making the line between the state and private economy even harder to draw: Liu Xiaoxia and Yang Yuanyuan’s Jiangsu survey of state capital taking stakes in private firms suggests that this phenomenon of “reverse mixed-ownership reform” [反向混改] is spreading for those very reasons.
—James Farquharson
Wu Xiaoqiu on the need for local-government and capital-market reform for the age of the surplus economy.
Zheng Yongnian on the need for greater social vitality to achieve entrepreneurial breakthroughs.
Zhao Yanjing on land finance and the new fiscal model for local government.
Liu Xiaoxia & Yang Yuanyuan on the spreading phenomenon of reverse mixed-ownership reform—the injection of state capital into private enterprise.
Wang Qing on national market integration and breaking invisible local protection barriers.
Yang Zhiyong on a proposed national negative list for local government subsidies.
Wang Jian on how “transition before wealth” has caused underdeveloped capital markets.
Wu Xuchu on why local government-backed indirect financing is ill-suited to riskier industries like AI.
Li Yang on the paradox of plentiful money and scarce capital.
Xu Zheng & Zhan Zhiyong on the challenges posed to the development of “future industries” by overcapacity and weak commercialisation.
Huang Qifan on China’s trade surplus and structural adjustment.
Liu Yuanchun on China’s current-account imbalances and the need for demand restructuring.
Economic Stimulus and Rebalancing:
Yu Yongding on why the Fifteenth Five-Year Plan is right to prioritise infrastructure stimulus.
Li Xunlei on the limits of counter-cyclical stimulus.
Liu Shijin on weak end-user demand as China’s growth bottleneck and why infrastructure money would be better spent on pensions.
Lu Zhe on how population flows explain the consumption gap between first-tier and lower-tier cities.