China’s economists warn of near-term “firefighting” risks and longer-term debt strains
Published 18 March, 2026
China's economy has entered a critical juncture, with policymakers seeking to stabilize key markets, expand domestic demand, and prepare for the next development-planning period. Against this backdrop, an article published in Risk Sciences—based on an interview with economist Professor Li Daokui from Tsinghua University—assesses the economic and financial risks China faces and summarizes reform measures he considers actionable.
The article groups current risks into two categories: short-term "firefighting" risks and long-term systemic risks. The short-term risks are described as sudden and prone to contagion, with the financial sector especially sensitive. In China's case, the core pressure is portrayed as financial fragility closely linked to the real estate sector, as weakening housing demand and mounting stress among major developers can amplify uncertainty and strain financial stability.
A key warning is that these challenges should not be treated as ordinary housing-market fluctuations. Because real estate finance has relied heavily on pre-sales and high leverage, a shift in expectations can trigger chain reactions—tightening risk appetite, increasing market-wide risk aversion, and potentially creating pressure through expectations and spillovers.
The article argues that swift and orderly handling, with unified cross-agency coordination, clearer communication, and better expectations management, is vital to prevent localized shocks from escalating.
Long-term systemic risks are likened to "the Titanic striking an iceberg." Citing economist Rudi Dornbusch, the article notes that once macroeconomic risks surface, they can have "overwhelming and irreversible effects." It highlights local government debt sustainability concerns and an imbalance between production and consumption shaped by incentives that favor production. Proposed reforms include shifting toward longer-dated financing tools for local debt, adopting VAT-sharing aligned with the "destination principle" to strengthen incentives to support consumption, and redesigning local performance evaluations to emphasize income growth, consumption expansion, and public service effectiveness.
Contact author name, affiliation, email address:
Runhuan Feng
School of Economics and Management, Tsinghua University, China
National Center for Economic Research, Tsinghua University, China
Corresponding author at: School of Economics and Management, Tsinghua University, China.
Conflict of interest:
"The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper."
See the article:
Yexin Chen, Runhuan Feng, David Daokui Li, China's economic and financial risks and the prospect of reforms: An interview with David Daokui Li, Risk Sciences, Volume 1, 2025, 100025, ISSN 2950-6298, https://doi.org/10.1016/j.risk.2025.100025.