China has signaled a definitive end to its era of “debt discipline,” outlining a plan to expand the projected fiscal deficit to 3.5% of GDP or higher, a structural shift intended to arrest a deflationary spiral and stabilize the crumbling property sector.
The move marks a departure from Beijing’s long-standing resistance to Japan-style demand-side management. By moving central government leverage to the forefront, policymakers appear ready to absorb liabilities previously shouldered by local governments and the private sector.
According to the signaled framework, the deficit expansion will be funded largely through the issuance of 1 trillion to 2 trillion yuan in ultra-long special sovereign bonds. This liquidity injection aims to counter a prolonged economic freeze, evidenced by the Producer Price Index (PPI) recording over 25 consecutive months of contraction.
The Numbers
The fiscal pivot comes as key economic indicators flash red. Real estate investment and sales volumes have declined approximately 10-15% year-on-year, creating a drag on the broader financial system that supply-side investment can no longer offset.
Market analysts view the 3.5% deficit-to-GDP target, up from the conventional 3% “red line” previously observed, as a tacit admission that raw fiscal expansion is now necessary to prevent stagnation. The plan prioritizes state-funded survival and consumer demand stimulation over the “high-quality growth” narrative that characterized recent years.
Structural Shift
The issuance of ultra-long special sovereign bonds suggests a long-term commitment to centralizing debt. This strategy mirrors the “balance sheet expansion” tactics seen in other major economies, effectively choosing the risk of inflation over the certainty of a deflationary depression.
While official timelines for the bond issuance remain subject to finalization, the scale of the proposed stimulus indicates a priority on immediate liquidity relief for local governments struggling with debt servicing and falling land revenue.
Chain Street’s Take
Beijing just blinked. A 4% deficit target admits that the deleveraging experiment failed.
The central government is stepping in to monetize the rot in the property sector because the alternative is a depression. Global M2 is the only chart that matters for Bitcoin, and that chart is about to expand aggressively.
Sovereign balance sheets are absorbing the risk, and the market knows exactly how to price that injection. The liquidity taps are open.
