Vocal for Local (and National)
Covering Chinese policy and rhetoric on external events and actors, military and security issues, economy and technology, and bilateral relations with India.
In this Edition:
EconWeekly: China’s Local Government Finances
Guarding the Great Wall: Quick Breakdown of China’s New National Security White Paper
EconWeekly: China’s Local Government Finances
Amit Kumar
China’s economy has been undergoing a structural slowdown after witnessing four decades of near double-digit growth rates. For the third time in a row, China has set an annual growth target of around 5 per cent for 2025. And to a great extent, whether it achieves the target will be contingent on the performance of its local governments, which are responsible for around 88 per cent of the national expenditure. However, their fiscal situation continues to worsen. Not only has their general budgetary revenue as a percentage of GDP dropped, the revenue from the sale of land use rights has also sharply declined. To further compound their misery, local government debt, including hidden debt, has soared to over 50 percent of GDP. With the central leadership’s crackdown on illegal debt, coupled with falling revenues, the fiscal space for the local governments has drastically reduced. However, their expenditure mandates continue to expand, thereby creating a structural fiscal imbalance. This has, in turn, severely limited the local governments’ ability to keep the economy running.
Takshashila’s latest Issue Brief assesses the challenges facing China’s local governments in their budgetary endeavours in detail.
A few excerpts of interest:
Unlike virtually any other nation, China’s local governments carry out the vast bulk of national expenditure. In 2024, China’s local governments were responsible for more than 85 percent of the national general budgetary expenditure. In aggregate numbers, China’s total national government general budgetary expenditure in 2024 amounted to CNY 28.4 trillion ($3.9 trillion), and local government spending made up CNY 24.4 trillion of that.
In contrast, local government expenditures in Brazil, often touted as the most fiscally federal country, account for roughly 50 percent of the national budgetary expenditure. But those figures alone are not the complete story of China’s local finances. Neither does it encapsulate the sheer scale of China’s local governments’ spending. China’s local governments, like the centre, maintain four separate budgets, and the general budget is only one among them. The other three budgets are the government-managed funds budget, the state capital operations budget, and the social insurance fund budget, each with its own streams of revenue and separate expenditures.
Put together, China’s local governments’ combined budgetary expenditure shoots to ~88% (CNY 44.7 trillion, 2024) of the national expenditure (CNY 50.6 trillion, 2024). While this arrangement has worked wonders for Beijing in the past, mounting pressure on China’s local government finances – increasing expenditure amidst shrinking revenue - has become a drag on an already slowing economy.
The general budget and the managed funds budget are the two primary financial accounts of local governments. And both these budgets have witnessed a sustained decline in their revenue pool. Local general budgetary revenue has declined from a high of 20 percent of the GDP in 2015 to 17.5 percent in 2024. The development is in line with a sustained fall in China’s national general budgetary revenue (tax and non-tax revenue) as a percentage of GDP. It has also declined from 29 percent in 2018 to just 22.1 percent in 2024. China’s national tax receipts in 2024 fell by 3.4% year-on-year.
Local governments’ primary budget was never fully equipped to shoulder the requisite expenses. However, the falling revenue has further restricted their already limited capability to fulfil their mandates. With the off-budget financing model already under scrutiny, falling general budgetary revenues and lack of taxing powers have compounded their misery. However, a preliminary reading of China’s local governments’ budgets doesn’t suggest an immediate crisis. For instance, local governments’ total general budgetary revenue receipts in 2024 stood at CNY 22 trillion, of which CNY 10 trillion were received as central government transfers. Adding the funds from the local budget stabilisation fund, local government-managed funds budget, local government state capital operations fund, and carryovers, the gross budgetary revenue for local governments reached CNY 23.6 trillion.
The puzzle remains. If indeed local governments’ finances are in a dire state, why isn’t it showing up in the official figures? The answer to the question lies in China’s accounting practices. The figure of 1.85 percent was arrived at by subtracting the total revenue from total expenditure and then expressing it as a percentage of the GDP. While this method is correct, there is an error in accounting. It regards the money raised through the special-purpose bonds as revenue.
Adding the CNY 3.9 trillion debt raised through special purpose bonds, and subtracting the surpluses recorded by social insurance funds and state capital operation funds, the effective budget deficit of the local governments stood at ~CNY 5 trillion in 2024. This raises their fiscal deficit to 3.6 percent of the GDP, higher than the 3 percent national fiscal deficit limit set for 2024. If one adds the central government’s fiscal deficit numbers, the national fiscal deficit breaches the 6.5 percent mark.
The scale of China’s local debt, official and hidden, means that the fiscal space for the local governments is fast shrinking. Even Beijing’s proposed tax and fiscal reforms, unveiled at the Third Plenum last year to alleviate the local governments’ fiscal difficulties, face several challenges. To begin with, the proposal to increase central transfer payments to the local governments doesn’t seem plausible in the current situation. In 2024, the central government’s total general budgetary revenue amounted to CNY 10.8 trillion, of which CNY 10.03 trillion (~93 percent) were given away in transfers to the local governments. Thus, unless the central government raises its share of debt or its general budgetary revenue increases substantially, the room for increased central transfers is limited.
Raising the central government’s share of national expenditure can relieve the pressure on the local governments. But given that the former already transfers ~93% of its budgetary revenue to the latter, this measure can only materialise if the central government expands its tax base, which seems difficult at present, or raises additional debt, which will further complicate the national debt situation.
Guarding the Great Wall: Quick Breakdown of China’s New NatSec White Paper
Anushka Saxena
China’s latest White Paper, released by the State Council Information Office on May 12 and titled, ‘China’s National Security in the New Era’, speaks to the increasingly assertive nature of China as a global and regional power. Further, the White Paper (abbreviated ‘WP’ going forward) clearly defines national security as the central pillar of development and prosperity going forward – a marked enhancement in the narrative on balancing development and security.
The WP defines China’s national security approach as “comprehensive, systematic and relative security.” It sets out a grim picture of the world order, one where opportunities for China’s growth are declining and “deficits in peace, development, security, and governance are growing more severe.” In this regard, five underlying pillars define Beijing’s NatSec approach:
Implementing the purpose of people’s safety, which is the fundamental position of China’s national security in the new era,
Persisting in putting political security first, which is the lifeline of China’s national security in the new era,
Adhering to the principle of safeguarding national interests, which is the basic requirement for China’s national security in the new era,
Preventing and resolving national security risks, which is the central task of China’s national security in the new era, and
Promoting Common International Security, which is China’s responsibility as a major country in terms of national security in the new era
While a lot of the articulation surrounding these pillars is the usual, on preventing nat-sec risks, the WP recommends that China must not allow ‘non-political risks’ from transforming into political risks, so as to ensure the long-term rule of the Party and the long-term stability of the country.
Even though there hasn’t been a comprehensive WP on ‘National Security’ by China, some fundamentals of security and military strategy can be gathered from previous White Papers on China’s ‘National Defense’ in the New Era (specifically the WP from 2019). Here are a few things of note that this WP points out, that perhaps weren’t priorities previously. I also briefly discuss some differences in tone and tenor of the 2019 Nat-Def WP & the 2025 Nat-Sec WP.
Firstly, the 2019 WP projected a cooperative image of the world. It explicitly referred to China’s security policy as ‘defensive’, touting that China voluntarily downsized its military. It largely acknowledged that the “gravest immediate threat” to China was posed by “Taiwan independence” forces and “external interference.” At the same time, it noted that the PLA “still lags far behind the world’s leading militaries,” and that the military’s modernisation was only necessitated by a “complex security environment.”
The 2025 WP, is noticeably more confident, arguing that China “injects certainty and stability into a turbulent world,” and has an “unprecedented ability to maintain and shape national security.” The tenor reflects a nation that is capable of coordinating development and security, preventing risks, and responding to external shocks. It is more direct in identifying perceived external threats, specifically mentioning “Western anti-China forces” attempting containment and interference, and openly criticises the actions of “some countries” (implicitly the US) regarding tariffs, trade wars, and “long-arm jurisdiction” as seriously threatening China’s security and development. It also lists the Taiwan Strait, the South China Sea, the East China Sea, Xinjiang, Tibet, and Hong Kong as no-go areas for external intervention, arguing:
Unresolved territorial and maritime rights disputes have become more difficult and complex due to external interference.
Explicitly, the 2025 WP also warns the US that four red lines must not be challenged: the Taiwan issue, democracy and human rights, political systems and development paths, and the right to development (I discuss the last one below). These, it says, must not be challenged. Also, the WP opposes the pursuit of something it refers to as “absolute security” (绝对安全), which means a situation where security supersedes everything (BaiDu definition refers to US policy after 9/11 as an example for this). In the 2019 WP, there was no mention of this, except where Beijing said that “The US is engaging in technological and institutional innovation in pursuit of absolute military superiority.”
Further, in terms of the scope of security, the 2019 WP focused on the military’s role in safeguarding national sovereignty, security, and development interests, including deterring aggression, opposing separatism, and protecting overseas interests. Further, it discusses the military strategic guidelines, modernization efforts, and international military cooperation. Taking a much broader view of security, the 2025 WP introduces and centers its arguments around the Overall National Security Concept (ONSC; 总体国家安全观为新时代国家安全指引方向), describing it as the guiding ideology and “soul” of China’s national security in the new era. ONSC is presented as a comprehensive concept covering numerous fields beyond traditional military defense, such as political, economic, financial, cultural, social, technological, cyber, ecological, and data security. In that sense, the WP positions the military’s role within this broader framework.
The discussion on the relationship between development and security, as I mention above, is expanded and firmed up, too. The 2019 WP particularly discusses strengthening national defence and the military as a “security guarantee” for China’s “peaceful development,” and aims to build a military commensurate with the country’s “security and development interests.” The 2025 WP is harsher in that it explicitly frames development and security as equally important, stating that development is a “hard truth and security is also a hard truth.” It argues the two-fold line that the lack of development is the “greatest insecurity,” while high-level security is the “premise of development.”
As far as the former of these two is concerned, high-quality development is seen as requisite for security from great power competition and the resultant supply chain disruptions and protectionism. To this end, the 2025 WP also lists “military science and technology, culture and social security” as a “guarantee” for overall national security, and applauds the Chinese people’s focus on self-reliance and self-confidence in economic, technological, and cultural development. The problematisation of the challenges of development and security in this particular paragraph is interesting:
Some core and critical technologies remain under foreign control. The foundation of economic recovery is not yet solid. Major natural disasters, industrial accidents, public health incidents, and violent crimes continue to occur, affecting social safety and stability. Chinese institutions, projects, and personnel overseas face real security threats.
Further expanding on “external interference,” the 2025 WP provides a more detailed account, dedicating a section to promoting the “mutual promotion and coordinated improvement of openness and security,” and “resolutely safeguarding the ‘right to open development’ as a ‘red line’.” This is an interesting articulation, given that among other things, China now has a new ‘red line’ which cannot be crossed – that it has the right to develop in a free and open manner, without its growth being curtailed. To this end, it also talks about working toward safeguarding the multilateral trading regime.
In the 2019 WP, by slight contrast, there was a relatively descriptive discussion on the threat of external forces, who were then “strengthening military presence and conducting reconnaissance near China.” The WP also stated that China will “never give in on issues of principle” in the face of what it refers to as “unreasonable suppression.” But the 2025 WP explicitly details China’s legal and policy countermeasures, such as the Law on Countering Foreign Sanctions, Export Controls Law, and Foreign Relations Law, as sure-shot tools to counter suppression and interference.
In line with these enunciations, on May 15, the State Council also announced its legislative priorities for the year 2025. In it, there is a push to bolster legal frameworks related to foreign affairs, for which the agenda includes a proposed revision to the Foreign Trade Law and new rules for implementing China’s Anti-Foreign Sanctions Law.
In terms of the key pillars of China’s national security, as discussed above, the 2025 WP has laid great emphasis on elevating political security to the position of the “lifeline” and foundation of national security. It further states that the most fundamental aspect of nat-sec is maintaining the leadership and ruling status of the Communist Party of China. To this end, guarding against and cracking down on “color revolutions” and “street politics” instigated by hostile forces, is listed as a priority (this could pertain to Taiwan “independence” and “separationist” forces, domestic opposition, terrorism, and “religious extremism,” etc.). As for the 2019 WP, it largely lists the need to safeguard various interests, including political security and people’s security, among the goals of national defence.
Finally, on the issue of how Beijing sees itself on the international security stage, the 2019 WP described China’s military as contributing to world peace and stability. It further highlighted how the defence apparatus actively provides “international public security goods” through peacekeeping, anti-piracy, and HADR. While peacekeeping still finds a mention in the 2025 WP, the main pillar it focuses on is the Global Security Initiative (GSI) as “China’s significant contribution to global security governance.” It links the GSI directly to the ONSC and frames it as responding to the international community’s urgent needs (which include public health and food).
The new priorities of Nat-Sec in the New Era are reflected along a few of the following pointers in the 2025 WP:
The Overall National Security Concept (ONSC): The 2025 WP introduces ONSC as comprehensive, systematic, and covering a wide range of domains including political, military, territorial, economic, financial, cultural, social, science and technology, cyber, ecological, resources, nuclear, overseas interests, space, deep sea, polar regions, biology, artificial intelligence, and data security. Even though these domains were also highlighted in the 2019 WP, their ‘umbrella-fication’ under ONSC is distinct.
Emerging Areas as a Security Frontier: The 2025 paper identifies “emerging areas stemming from technological innovation” as a new frontier for national security. It highlights the challenge posed by the imbalance between technological development and security governance in all the above-mentioned fields under ONSC. To this end, the WP also acknowledges the “double-edged nature of a new wave of technological revolution,” and passingly mentions that they pose a risk to the “global security landscape.” In a slightly more moderate articulation, the 2019 WP referred to these tech threats as “looming large,” while also touting China’s participation in multilateral dialogues and negotiations on the challenges they posed.
While the “Global South” finds no mention in the 2019 WP, the 2025 WP talks about how its value has grown significantly in promoting global peace and cooperation to address common challenges. In the same breath, the WP invokes/ warns:
“All countries are now aboard a ship with a shared destiny. No country can retreat into self-isolation, and humanity’s only way forward is mutual help and harmonious coexistence.”
Finally, one important bit in the 2025 WP is its section on the structure of the national security system. The WP touts the vitality of the Central National Security Commission, which was established in 2014, but was not discussed in the 2019 Nat-Def WP. There has been little information on the working of the CNSC, but largely, it has been assumed to be an administrative coordinating body for various national security tasks and between various nat-sec agencies. This WP definitely seems to elevate its role.
Further, the WP highlights the following five pillars of China’s nat-sec apparatus: Working Mechanism System; Emergency Management System; Risk Monitoring and Early Warning System; Strategic and Policy System; and Rule of Law System.
The priorities for the nat-sec system going forward, have been highlighted as follows:
Actively promoting national security legislation in key areas, emerging areas, and foreign-related areas, improving the foreign-related legal system and legal implementation system, improving the party’s internal regulations on national security, and clearing the pain points and bottlenecks in legislation, law enforcement, justice, and popularisation of law;
Implementing the energy supply diversification strategy and improving the overall coordination and connection system of strategic mineral resource exploration, production, supply, storage, and marketing;
Increasing basic investment in the construction, operation, and maintenance of monitoring and early warning infrastructure, the construction of indicators and standards systems, risk investigation, investigation, and statistics, strengthening talent team building, and policy support guarantees;
Adhering to and developing the ‘Fengqiao Experience’* in the new era, and enhancing the ability to prevent and resolve social conflicts and disputes; and
In response to major needs in the field of national security, carrying out key core technology research with a new national system.
*Named after Fengqiao Township (枫桥镇) in the city of Zhuji in Zhejiang province, the ‘experience’ recalls Mao Zedong’s efforts in the 1960s to create a system of grassroots surveillance and ‘rectification’, where people at a community level identified and reported on ‘reactionary elements’ (四类分子) to carry on Mao’s exalted ‘class struggle’ (阶级斗争). In 1963, Mao praised the namesake township for its excellence in this regard. Since the Third Plenum last year, the Fengqiao experience has entered the “New Era,” and security officials and cadres at the grassroots are expected to integrate its practice in day-to-day affairs.
There are other priorities concerning strengthening national security publicity and education, and enhancing the national security awareness of the people as a whole; coordinating the construction of military forces and military struggle preparations in traditional security areas and new security areas; and dynamically improving and adjusting the national security strategy to better play the role of strategic macro-leading and overall coordination.
In all, these priorities, some repeated and some new, are likely to see renewed impetus. This is given that the WP acknowledges that today, China has entered a critical period of comprehensively promoting the construction of a strong country and the great cause of national rejuvenation through Chinese-style modernization.
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Eye on China is a weekly newsletter curated by the Indo-Pacific Studies Programme at The Takshashila Institution, a public policy think-tank based out of Bengaluru, India.
