Fiscal policy and the government balance sheet in China

Abstract

This paper presents the most comprehensive estimates to date of China’s government balance sheet over 1997–2019 and develops a unified framework linking fiscal policy, institutional reform, and balance-sheet dynamics. Using a consolidated public-sector framework, we trace how major policy shifts shaped the health of China’s public finances prior to the COVID-19 pandemic. We find that China holds the world’s largest stock of public financial assets, about US$12.5 trillion, yet its net financial worth as a share of GDP—though still above most peers—has declined steadily over the past decade. This deterioration reflects long-standing weaknesses in the intergovernmental fiscal system and the slowdown of state-owned enterprise (SOE) reforms after the global financial crisis, which increased leverage and reduced profitability. The framework offers new insights into the institutional drivers of fiscal balance-sheet dynamics and provides a replicable tool for assessing fiscal sustainability in data-constrained environments. • This paper presents the most comprehensive government’s balance sheet of China to date. • We find that China has the largest stock of financial assets in the world. • Net financial worth declined over the last decade due to local governments. • Large payoffs from SOE restructuring came faster in China than comparators. • State-owned enterprises remain a source of vulnerability despite reform efforts.