China’s dismal fiscal position
There is much talk in China these days about a K-shaped economy. Technology is growing rapidly while traditional manufacturing and other parts of the economy are declining. A technology investor from China told me he views this differently. China has an “i”-shaped economy, with technology as the dot. And that dot, as successful as China has been with EVs and robotics, is not large enough to prevent a decline in economic growth.
Recently released data for the January-July 2026 period confirms a grim picture of China’s economy, at least through the lens of the fiscal system. Most tax revenue in China is paid to local governments. This revenue is plummeting, forcing governments to cut back on expenditure. China’s fixed-asset investment dropped 7.2 percent YoY in the first eight months of the year due to the property slump, which will further slow fiscal revenue.
Although exports continue to support the overall economy, China is confronting increasing opposition within the EU (such as the proposals at the recent G20) and in the U.S. The central government has issued new financial support for the banks, the center of China’s capital flows, along with other modest fiscal stimuli. While the measures are aimed at increasing lending they also are necessary to prevent a financial crisis. But all told, these policy measures are stopgaps that avoid tackling larger, structural problems.
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