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Multiple reports have appeared recently in Chinese state media urging local government officials to cut back on spending and support the government’s growing austerity campaign. Last week, the central government also announced that “guidance groups” – tasked with monitoring local officials’ spending habits and how they align with state priorities – would soon be dispatched to certain provinces. Local leaders who don’t meet the government’s austerity standards will likely have to undergo reeducation programs, involving meetings in which officials reflect on the ways they have failed and how they can better meet policy objectives before returning to their posts. The expectation of fiscal prudence extends past local authorities; the State Council has also advised officials from central government bodies and the Communist Party to “implement frugality and cut waste.”
The focus on frugality isn’t new. The Chinese government initially introduced a broad austerity agenda more than a decade ago. But this is the first time the leadership has implemented a fiscal responsibility program in such a targeted and wide-ranging manner. In the past, austerity guidelines were applied mostly in rare and extreme cases, such as when officials were caught spending excessively. But the government has now introduced a detailed and strict set of regulations designed to slash expenditures, and it appears intent on applying them rigorously. It even recently banned civil servants from dining out in groups of more than three to curb excessive spending and “ensure ethical conduct.”
This is just one of many signs pointing to Beijing’s growing anxiety over the state of the country’s economy. Others include the introduction of aggressive stimulus measures last year to help prop up key industries. While these measures have yielded some positive results, giving the government time and space to map out its options, major challenges are bound to reappear in the long term. In fact, the recent moves indicate that the government, despite its continued public projection of confidence, is well aware of the hurdles ahead and could be anticipating a downturn down the line.
Beijing’s Plan
After years of pushing for a consumer-driven rebound, the government has finally decided to take more concrete action to help boost growth. The stimulus measures introduced since late last year have included a consumer goods trade-in program, debt support for local governments, as well as policies to boost the struggling real estate market and fund infrastructure development. Early this year, China’s central bank also announced a shift to a “moderately loose” monetary policy – characterized by lower bank reserve ratios, liquidity injections, and rate cuts – to ease deflation and support fiscal reform. Beijing previously avoided such measures, which it believed could deepen fiscal problems, weaken the yuan, increase inflation or delay longer-term structural reforms. But Chinese President Xi Jinping and other policymakers have since recognized that structural issues – including the property crisis, local government debt, lagging industrial production and investment, and youth unemployment – require action from Beijing.
The People’s Bank of China has repeatedly cut already low benchmark rates. It also announced supplementary measures to boost consumption, support the elderly and bolster the country’s science and technology sectors. These and other measures had positive effects in several areas early this year. Exports beat market expectations, showing consistent monthly growth throughout the first quarter and increasing 8.1 percent in April year over year. Real estate also showed signs of improvement. As a result of cuts to mortgage and down-payment rates, as well as easing home purchase restrictions and reduced taxes on property transactions, new home sales jumped 125.6 percent in March from the previous month, while previously owned home transactions increased 61.4 percent. As a result, the country’s gross domestic product growth rose to 5.4 percent year over year, surpassing analyst expectations for up to 5.1 percent growth.
Top Chinese officials have boasted about the progress, claiming it as evidence of the economy’s ability to withstand U.S. tariffs. It should be kept in mind, however, that the upticks in certain sectors were achieved only through aggressive stimulus measures, which previously were used only as a last resort in China and which are unsustainable in the long term.
What’s more, this approach has no guarantee of success, especially considering the serious external challenges facing China’s economy today. While some of the country’s crucial sectors delivered positive results, others have shown no improvement at all. Even some of the progress from earlier this year began reversing in May when U.S. tariffs came into full effect. According to recent data, export growth dropped in May to a three-month low, the first signs of the fallout from the trade war. While overall exports still increased 4.8 percent year on year, sales to the U.S. dropped last month 34 percent – the steepest fall since February 2020 at the start of the COVID pandemic – after contracting 21 percent in April.
Producer deflation increased to its highest level in two years, while consumer prices continued their four-month slump. Even the real estate market, which finally appeared to respond to stimulus measures, is again showing concerning signs: In May, new home prices across 70 Chinese cities fell 0.2 percent compared to April, while prices of previously owned homes fell 0.5 percent, marking the fastest decline in seven and eight months, respectively. Newly released figures also show that real estate investment dropped 10.7 percent in the first five months this year.
Targeting Spending
While Chinese leaders continue to project confidence in the country’s economy, the government’s renewed focus on austerity indicates it sees cause for concern. Central and provincial government officials have been instructed to cut back on extravagant trips, lavish celebrations and high-end personal items. While such restrictions could make a marginal dent in spending, they are more likely meant for public consumption, aimed at avoiding backlash against overly indulgent use of taxpayer funds.
In addition to reining in wasteful expenditures, Beijing has also introduced salary cuts and layoffs targeting civil servants in bureaus across the country and major state-owned enterprises. These measures are increasingly being applied in wealthier regions: In Zhejiang, one of the country’s richest provinces, civil servants’ salaries have plummeted by 50,000-60,000 yuan ($7,000-$8,300) since the beginning of the year. Even civil servants holding senior positions have seen serious cuts of roughly 80,000-100,000 yuan to their annual pay. Beijing is also slashing salaries by approximately half for staff at its top financial regulators, including the People’s Bank of China, the National Financial Regulatory Administration, and the China Securities Regulatory Commission.
The cuts are ostensibly meant to address concerns about the high pay scales previously enjoyed by personnel at these institutions – which should presumably allow the government to offer more competitive salaries to other public workers. However, the money has yet to trickle down to lower-paid civil servants. The government could also intend to use the savings for other much-needed demands: investing in the tech sector, helping local governments with skyrocketing debt, and funding public services and social benefits. Indeed, it has introduced reemployment assistance measures, including vocational training and support schemes for laid-off workers. It has also encouraged companies to retain employees through tax breaks, loan benefits and subsidies, especially for sectors that employ youth and recent graduates.
China’s National Debt to GDP
These programs, however, will have only a limited impact. The cuts and layoffs could actually stifle domestic consumption, which the central government is counting on to become the new driver of economic growth. Meanwhile, the financial strain is only growing for local governments, despite a substantial debt relief package unveiled late last year. The debt problem is compounded by businesses that struggle to pay their taxes and declining revenue from land transfer sales amid weak demand in the property market.
While it’s true that some crucial sectors have seen long-awaited improvements this year, most of the recovery will likely be temporary – a result of government stimulus rather than genuine economic growth. China’s economy won’t collapse anytime soon. But with U.S. tariffs beginning to take effect, salary cuts and layoffs placing downward pressure on domestic demand, and with local governments struggling under severe debt, Beijing doesn’t have as much wiggle room in trade negotiations with Washington as it would like people to believe. And the belt-tightening push is a good sign that even the Chinese government knows it.
Source: Geopolitical Futures June 27, 2025 | By Victoria Herczegh