MNI: China NPC To Unveil More Off-Deficit Debt, Rate Cut Eyed

China will further expand off-deficit government debt to support domestic demand and help local governments resolve debt risks, while maintaining low interest rates and ample liquidity to facilitate government bond issuance, economists and policy advisors told MNI.

The Government Work Report due March 5 will likely keep the fiscal deficit-to-GDP ratio at around 4.0%, reflecting less urgency to stabilise growth than a year earlier, though off-deficit borrowing will continue to rise, said Wang Qing, chief macro analyst at Orient Golden Credit Rating International. He expects new government debt in 2026 to reach about CNY13.2 trillion, up CNY1.3 trillion from 2025, but below last year’s CNY2.9 trillion increase.

In China, the headline fiscal deficit refers to the shortfall in the general public budget. Special treasury bonds and local government special-purpose bonds (LGSB) are excluded as they are tied to designated uses or backed by assets, though they form part of broad government debt and represent effective fiscal expansion. (See MNI INTERVIEW: China’s Growth To Slow Without Model Changes–Wu)

Wang said issuance of ultra-long-term special treasury bonds could rise to around CNY1.8 trillion from CNY1.3 trillion in 2025, with infrastructure allocations increasing to CNY1 trillion from CNY800 billion last year. Around CNY500 billion in special treasury bonds is also expected to be used to inject funds into large state-owned insurers and continue replenishing capital at major state-owned banks, he added.

Yuan Haixia, director of the Research Institute at China Chengxin International Credit Rating, said the broad fiscal deficit could increase to CNY15 trillion, CNY1 trillion higher than the previous year.

Bruce Pang, senior fellow at the National Institution for Finance and Development, said ultra-long-term special treasury bonds and LGSBs will continue to play a central role in stabilising investment, addressing structural gaps and strengthening growth drivers. Expanding their scale and broadening usage – including for technological innovation, urban renewal and the green transition – would be necessary if downward pressure intensifies.

LOCAL DEBT

New LGSB issuance is expected to rise to around CNY5 trillion from CNY4.4 trillion last year, as local governments seek to offset fiscal strain from declining land-sale revenues, Wang said.

Proceeds will also fund land buybacks, purchases of commercial housing for affordable housing, infrastructure investment and capital injections into local government investment funds, he added.

Yuan said local debt resolution remains a key priority, with bonds issued for debt swaps potentially exceeding CNY3 trillion. Beyond refinancing, authorities will further leverage local state-owned enterprises by improving asset returns and profit remittance ratios, expanding REITs and securitisation issuance to revitalise existing assets, and transferring or monetising listed equity holdings to support deleveraging.

Authorities will refine policies allowing LGSBs to replenish capital at small and medium-sized banks, while issuance rules for perpetual bonds, convertible bonds and Tier-2 capital instruments could be relaxed to strengthen financial institutions’ capacity to manage debt risks, Yuan said.

POLICY COORDINATION

Fiscal-monetary coordination is set to deepen further. In addition to maintaining low rates to support local debt swaps, the central bank is expected to step up government bond trading to smooth liquidity fluctuations tied to heavy issuance and to provide ample collateral for open market operations, Yuan said.

Closer coordination should also support price stabilisation. Pang expects the 2026 CPI target to remain around 2% even as realised inflation stays subdued, while weak global demand and commodity prices will constrain PPI recovery.

The central bank will maintain ample liquidity and expand structural support for technological innovation, equipment upgrades and consumer credit, improving financing conditions for firms and households.

Yuan expects a 10bp policy rate cut as soon as this quarter, alongside one to two reserve requirement ratio reductions around mid-year and in Q4 to offset liquidity strains from concentrated bond issuance between June and August and large MLF maturities in October–November. (See MNI INTERVIEW: Big PBOC Easing Unlikely Despite Price Focus) Structural monetary tools will remain a focus, supporting consumption, technology, green development and elderly care, coordinated with fiscal interest subsidies, she said.

Wang is more optimistic on easing, forecasting 20-30bp of rate cuts and a 50-100bp RRR reduction later this year.