Cooking the books | The weekly recap

If you want to know what's going on inside China's fiscal system, don't just rely on the official statistics – read the National Audit Office's (NAO) annual report.

Published last week, this year's audit lifts the lid on a familiar set of problems: Local governments inflating revenue figures, fudging debt data, and gaming the rules on infrastructure financing. 

• The findings are striking – but what’s arguably more striking is that they mirror the same problems the NAO has flagged for years.

Let's start with what this year's audit uncovered.

First, local governments are inflating their reported fiscal revenues. 

• 21 provinces and municipalities artificially inflated fiscal revenue last year by a combined RMB 60 billion.
• They did this by transferring funds to government agencies, public institutions, and state-owned enterprises, then having the same money returned as tax or non-tax revenue. 

Why go to the trouble? Because fiscal revenue growth and debt-to-revenue ratios are key KPIs in local officials' performance evaluations. Revenue targets are also often set for counties and townships as preconditions for the disbursement of subsidies and transfer funds. 

• That creates enormous pressure for officials to hit their numbers – and, when genuine revenue growth falls short, to make up the difference on paper.

Second, some local governments are fudging the numbers to secure special-purpose bond (SPB) funding. 

• SPBs are local governments' primary debt instrument for supporting infrastructure investment, and can only be used to fund projects that generate sufficient returns to cover their own repayment. 
• Projects that don't clear that bar are supposed to be funded by general bonds instead, backed by tax revenue. 

But the NAO report uncovered 17 counties that inflated projected revenues to package RMB 12.2 billion of SPB-funded projects as self-sufficient when they weren't. 

• Actual returns later proved insufficient, meaning the bonds will ultimately need to be repaid from fiscal revenues or additional borrowing – compounding the very fiscal stress Beijing is trying to alleviate.
• The NAO report didn’t specify how large its sample pool was – but given China has about 3,000 county and district-level regions, it’s likely the NAO ran a spot survey instead of a nationwide investigation.
• This means the true extent of data falsification is likely much higher than the 17 counties the report uncovered.

Third, local government financing vehicles (LGFVs) are fudging the numbers to meet hidden debt repayment deadlines. 

• LGFVs are investment companies that borrow on behalf of local governments. Localities often guarantee LGFV credit lines, or provide LGFVs with collateral to borrow, making them implicitly responsible for this “hidden debt.”
• In 2023, Beijing compiled a list of the most heavily indebted LGFVs and ordered them to clear their hidden debts and exit the list by June 2027. 

In response, some LGFVs are gaming the system to exit the list without actually clearing their debts.

• The NAO found that 6% of the LGFVs it surveyed have done exactly that – some by taking on new debt to "repay" old debt, others by simply deleting records from the debt monitoring system.

These findings may sound shocking – but the practices behind them aren't new. The NAO's audits from the past few years identified the same practices we've just walked through:

• Local governments recycling funds through state entities to boost reported revenues
• Packaging low-return projects as SPB-worthy investments
• Using new borrowing or accounting sleights of hand to make hidden debt disappear from the books

While the specific numbers vary year-to-year, the mechanisms and scale of data manipulation have remained broadly consistent.

That poses a massive challenge for central authorities, which have been trying to fix these problems for years.

• Central officials have adjusted SPB rules, ordered LGFVs to exit indebted lists, and pushed waves of debt restructuring – yet the same data distortions keep surfacing because the underlying incentives haven't changed. 
• Local officials face impossible fiscal pressures and have their careers tied to headline metrics that reward creative accounting – unless Beijing addresses those incentives directly, next year's audit will read very much like this year's.

For businesses and investors trying to make sense of China's local fiscal picture, the NAO's findings are a useful corrective. Official statistics on local government finances paint a rosier picture than the reality on the ground – and the audit shows this isn't an isolated problem or a one-year blip. 

• It reflects a system where local officials are trapped between rising fiscal demands and shrinking revenues, and where the temptation to smooth things over on paper is too great to resist.

Wenye Sun, Senior Analyst and Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What you missed

US-China

China’s commerce ministry (MofCom) spokesperson He Yadong said China and the US had “agreed in principle to include relevant agricultural products in the reciprocal tariff reduction framework.”

• Removing China’s remaining tariffs on American agricultural products would make them much more competitive with South American exports – a surge in purchasing could follow.

Foreign affairs

China is serious about addressing its trade imbalance with Europe – that was the message Commerce Minister Wang Wentao relayed to his EU counterpart, Maroš Šefčovič, during his visit to Brussels on Monday.

• Šefčovič was chuffed, saying the talks had featured: “Much more understanding for the common challenges for the European situation from our Chinese counterparts than we had before.”

Xi Jinping hosted Belarusian President Alexander Lukashenko in Beijing on Monday.

• Belarus has faced sweeping Western sanctions since 2020 – first over Lukashenko’s widely disputed re-election, and later over Minsk’s military support for Russia’s invasion of Ukraine.
• Beijing kept Minsk close throughout, framing the relationship as a model “all-weather” partnership.

Business environment

China’s legislature opened a 30-day public comment period for the draft revision of the Government Procurement Law, which sets the rules for how companies bid for government contracts – a market worth over RMB 3 trillion a year.

• The draft guarantees all business entities “equal participation” and bars anyone from illegally restricting or obstructing suppliers from entering a local or sectoral procurement market.

Corporates

Regulators have concluded that NEV owners need to pay more towards road maintenance – but are undecided as to how to collect this revenue.

• Funding for road maintenance mainly comes from consumption tax revenue collected on refined oil purchases – as NEV penetration surges, road maintenance funds are dwindling.

Tech

Anhui province has issued a 2026–2030 action plan to vault to the top of national brain-computer interface (BCI) rankings.

• Anhui’s plan sets a hard target of at least three approved invasive BCI clinical trials – electrodes implanted in human brains – by 2028.

On Tuesday, Meituan open-sourced LongCat-2.0, a 1.6 trillion-parameter model trained entirely on a cluster of over 50,000 domestic AI accelerators.

• It is the largest model to date to complete full training on Chinese-made chips.

Coinbase CEO Brian Armstrong posted on X that Coinbase is exploring how to keep AI costs low while token spend increases, including experimenting with Chinese models like Zhipu’s GLM 5.2 and Kimi 2.7.

• US AI startup Lindy made a similar announcement on June 24, announcing the company’s switch to DeepSeek V4 and citing cost as the main reason.

Politics

The Ministry of Civil Affairs (MCA) has a new head, Li Changguan.

• An ethnic Zhuang from Debao County, Guangxi, Li spent most of his early career in Guangxi’s personnel system. 
• His trajectory – along with that of other rapidly promoted ethnic minority officials – suggests the Party is accelerating promotions to address a persistent shortage of senior ethnic minority cadres.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.