Finance Minister Lan Foan’s latest article offers an authoritative glimpse of Beijing’s fiscal compass. Its timing is telling: demand is flagging, external headwinds are stiffening and the Central Committee’s fifth plenum convenes in late October. Beneath the dry prose lies a weighty message: the real test is not only how hard to stimulate the economy but how to mend local governments’ battered finances.

Stimulus comes first. The keywords are “precision” and “effectiveness”, signalling Beijing wants to avoid repeating the broad, debt-fuelled expansion of September 2024. The latest package, while significant, is narrower. It includes a rate cut for policy banks and the country’s first interest subsidy for new commercial mortgages for first-time homebuyers. This restraint is sensible. Growth is near the official target, and earlier measures, such as ultra-long special government bonds, are still being absorbed. With banks’ net interest margins at a historic low of 1.4 per cent, broad rate cuts would hurt lenders. Targeted measures coordinated by the finance ministry and central bank offer a better path. Beijing is right to reserve its fiscal firepower.

The harder issue is local debt. Unresolved, it blocks any meaningful lift in domestic demand and remains a major economic risk. Lan reports about 5.8 trillion yuan (US$865 billion) of a 6 trillion yuan bond programme to swap local governments’ hidden debt has been issued, suggesting that resolution is entering its final stage. Equally telling is his warning that new hidden debt and false debt-reduction claims will be strictly investigated and punished. Deleveraging and risk control remain a priority; Beijing will not simply flood the economy with cash for short-term growth.

That is the right direction, but the swap deals with existing debt, not the conditions that created it. Lan now turns to deeper structural risks, such as the operating deficits of local government financing vehicles. He stresses strengthening local public budgets, hinting they may widen tax sources and keep a larger share of value-added tax.

The case is strong. Local governments carry most spending responsibilities, from social welfare to infrastructure, yet rely for revenue on land sales and transfers from Beijing, both squeezed by the long property slump. Central government spending rose 6 per cent in the first eight months, but local spending grew just 0.3 per cent, so overall general public budget spending rose only 1.2 per cent. The general budget deficit more than doubled from 2.76 trillion yuan in 2019 to 5.66 trillion yuan last year, with a record 5.89 trillion yuan budgeted this year.

Short of money, authorities have withdrawn promised tax incentives and closed loopholes. In July, a 20 per cent tax was imposed on gains from offshore trusts with mainland beneficiaries or assets. In September, a 1994 dividend tax exemption for foreign individuals was scrapped. These are stopgaps. On September 28, a cabinet meeting chaired by Premier Li Qiang called on local governments to utilise unused borrowing limits. Beijing did the same in 2024 and 2025, allocating 400 billion yuan and 500 billion yuan respectively. But local governments have often used less than their quotas, suggesting more room to borrow is not the whole answer.

For decades, local officials were rewarded for pumping up gross domestic product, producing breakneck construction and encouraging rampant property speculation. Beijing now wants an end to wasteful local subsidy races, hence the State Council’s planned “negative list” of entities local authorities may not subsidise. It also wants them to shift from a production-centred model to providing public services. Without steady revenue, they cannot do so.

Lan’s often vague wording is understandable: policymakers must guide the public without upsetting markets while retaining leeway to act.

Beyond strict fiscal policy, the greater challenge is ensuring there are bigger payoffs after years of investment and infrastructure building. Fixed-asset investment has fallen 7.2 per cent this year, a sign the old growth engine is running out of steam. As the plenum approaches, Beijing needs to turn hints into concrete reform. Lasting growth in domestic demand depends on putting local finances on a sound footing.