BYD production cuts an early signal of crisis in China’s EV industry; Beijing’s 2024 audit report exposes gov’t, debt problems

  1   BYD production cuts an early signal of crisis in China’s EV industry

  BYD cuts production, slows expansion

June 25
Reuters reported that Chinese electric vehicle company BYD has slowed production and delayed capacity expansion in China in recent months, citing two people with knowledge of the matter.

Key points in the article include:

• BYD cut night shifts and dropped output by at least a third of the capacity of at least four factories. The company also suspended some plans to establish new production lines. One of the sources said that the measures were aimed at saving costs while the other source said the moves were made after BYD did not meet sales targets.
• BYD sold 4.27 million cars in 2024, mostly in China. The company has at least seven car factories in the country and it has targeted a near-30 percent increase in sales to 5.5 million in 2025.
• BYD’s output slowed to 13 percent and 0.2 percent from a year ago in April and May 2025 respectively, according to data from the China Association of Automobile Manufacturers. The output for both months was the slowest since February 2024, when factory activity was affected by the Chinese New Year holiday.
• BYD started increasing monthly output from the second quarter of 2023 and 2024, according to data. But the trend changed in 2025, with average output in April and May being 29 percent lower than in the fourth quarter of 2024.
• BYD dealers held an average inventory of 3.21 months per a survey by the China Automotive Dealer Association in May 2025, the highest among all brands in China (average inventory industry-wide was 1.38 months).
• In early June, the China Auto Dealers Chamber of Commerce urged automakers to stop offloading too many cars on dealerships and to set “reasonable” production targets based on sales performance, noting that intense price wars were pressuring cash flow and bringing down profitability.

  Other notable BYD problems in recent months

BYD demands price cut from suppliers
Nov. 26, 2024
An email titled “2025 Cost Reduction Requirements for BYD Passenger Cars” by BYD Group executive vice president He Zhiqi was widely circulated and discussed online.

In the email, He requested that BYD’s suppliers cut prices on components sold to the company by 10 percent. He said that the price cut was necessary because competition in China’s new energy vehicle sector (fully electric and hybrid cars) is entering the stage of “final battle” and “mass elimination.” He urged suppliers to “take this seriously, thoroughly explore cost-cutting potential, and actively work toward meeting the requirement.” He added that final quotes must be submitted via a designated system by Dec. 15, 2024.

BYD’s largest dealer in Shandong goes bust?
May 28
Mainland media reported that rumors circulating online alleged that BYD’s recent policy changes for its dealership network caused Jinan Qiancheng Auto Trade Co. (henceforth referred to as Qiancheng Auto), the company’s largest dealer in Shandong Province, to run into financial difficulties and collapse.

BYD refuted the reporting and the online rumors. BYD claimed that problems at Qiancheng Auto were due to the latter’s flawed business strategies, including reckless expansion and high-leverage operations that resulted in cash flow problems.

However, Qiancheng Auto claimed in an April 17 statement regarding its prepaid services and warranty package that dealers suffered cash flow problems after being placed under “immense pressure” by BYD’s policy adjustments. Qiancheng’s “severe funding challenges” also stemmed from the widespread collapse of auto dealers in Shandong and restrictive bank policies on financing.

***
Founded in March 2014, Qiancheng Auto was a BYD-exclusive dealership that once took in an annual revenue of 3 billion yuan. But the company and its auto sales services (4S shops, or sales, spare Parts, service, survey) have fallen into an “operational crisis” since April 2025, according to mainland media.

Mainland media cited Li Yanwei, a member of the expert committee of the China Automotive Dealer Association, as saying that auto dealer bankruptcies follow similar patterns. While the bankruptcies appear to be due to cash flow issues on the surface, it is the operational model of Chinese automakers that is giving dealers problems:

• Automakers push excessive inventory onto dealers.
• Dealers power prices to recover cash flow and deplete their cash reserves.
• Dealers rely on selling long-term insurance and maintenance service packages to consumers to generate cash flow.
• The lengthy delay in manufacturer rebates is a primary cause of dealers’ financial strain and broken capital chains.

Mainland media added that Qiancheng Auto is unlikely to be an isolated case and other BYD dealers in different cities are likely under pressure, particularly those who signed on with BYD after 2020.

Mainland media cited the China Automotive Dealer Association’s 2024 national auto dealership survival survey report as showing that 84.4 percent of dealers experienced price inversion (purchasing vehicles at high prices and selling at low prices) in 2024, with 60.4 percent of dealers facing price inversion margins exceeding 15 percent. Severe price inversion has eroded dealers’ working capital, making liquidity constraints the greatest challenge and risk for them.

BYD’s ‘financial engineering’ game
BYD has leveraged supply chain finance to extend suppliers’ accounts receivable turnover periods, channeling these funds into wealth management products to create off-balance-sheet liquidity pools, according to mainland media and financial analysts’ reviews of its financial statements. Although technically compliant with accounting standards, this strategy significantly heightens systemic risks across the automotive supply chain, potentially destabilizing suppliers and amplifying financial vulnerabilities in an already strained sector.

At the heart of BYD’s “financial engineering” is a sophisticated supply chain finance model that leverages extended payment terms and asset-backed securities (ABS) to optimize liquidity. The company issues divisible, deferrable electronic promissory notes to over 2,000 suppliers, with payment cycles averaging 317 days and terms ranging from six to 12 months to a maximum of two years. Suppliers can split these notes to pay lower-tier partners or secure low-interest discounting from partner banks at rates 1.5 percent to 2 percent below market levels, effectively granting BYD substantial interest-free liquidity while shifting debt off its balance sheet through ABS.

This integrated production-finance model has significantly bolstered BYD’s financial position, with net cash flow from operating activities outpacing net profit, rising from 9.4 billion yuan in 2019 to 120.1 billion yuan in 2024 — a compound annual growth rate exceeding 60 percent. The cash flow-to-profit ratio peaked at 9.13 in 2021 and stabilized between 1.7 and 4 from 2022 to 2024. By tightly controlling its supply chain through technical dependencies and discounted financing, BYD has built a formidable competitive moat, outpacing rivals in China’s cutthroat EV market.

However, this strategy has placed severe financial strain on second-tier suppliers, many of whom face liquidity shortages and resort to private lending at annualized rates above 15 percent, fueling a snowballing triangular debt crisis across the industry. According to Wind data, the average accounts payable period for 16 listed Chinese automakers is 182 days, or nearly double that of global peers. BYD’s accounts payable, the largest among domestic automakers, reached 244 billion yuan in 2024, climbing to 250.7 billion yuan this year, underscoring the scale of its supply chain leverage and the risks it imposes on the broader automotive ecosystem.

  China’s electric vehicle sector faces ‘involution’

China’s auto industry has its ‘Evergrande’?
May 23
In an interview with mainland media, Great Wall Motor chairman Wei Jianjun warned that the price war among new energy vehicle makers in China has escalated into vicious competition. This has forced upstream industries to cut costs and caused a series of serious consequences. Wei blamed these industry distortions on overcapitalization.

Wei said, “If this continues, the safety and stability of China’s auto industry will be seriously threatened. The equivalent of an Evergrande already exists in the auto sector — it just hasn’t collapsed yet.”

Wei’s comment about an “Evergrande” in China’s auto sector sent shockwaves and prompted widespread speculation about which automaker he was referring to. BYD was one of the companies that found itself subjected to public scrutiny and controversy.

Auto forum turns into complaint session
June 6
The 2025 China High-End Automotive Forum was held in Chongqing City with the theme “Shaping the Future of the Industry in an Era of Transformation.” At the forum, several prominent attendees voiced their concerns about vicious competition in the auto sector, complained about escalating price wars, and made personal attacks.

i) Geely Group’s senior vice president Yang Xueliang said at the forum: “Involution is the lowest form of competition, pushing China’s auto industry toward collective collapse.” He voiced support for Great Wall Motor chairman Wei Jianjun, lauding him as an “auto industry whistleblower” and demanded that the scandals he exposed be made public and not be brushed aside.

Geely chairman Li Shufu said that the company would “no longer build new factories,” opposing redundant investments and asserting that the auto industry is a marathon, not a 100-meter sprint. He remarked: “The competitive tactics of some domestic companies are truly unspeakable.”

ii) Chery chairman Yin Tongyue said, “Price cuts are the most helpless response to competition,” likening them to “drinking poison to quench thirst.” He added that Chery would not follow the trend of price wars, nor export such practices abroad, warning against Chinese automakers “undermining themselves.”

iii) Changan Auto Chairman Zhu Huarong lamented that the industry’s fierce competition has made life unbearable (喘不過氣) for the company’s 1 million employees. He highlighted three major industry disorders: an excess of brands (up to 70 passenger car brands), price wars disrupting market order, and spillovers to overseas markets causing export challenges. He urgently called for the industry to return to “rational competition,” warning of dire consequences otherwise.

iv) BYD’s public relations general manager Li Yunfei called for combating involution through innovation, urging the auto industry to reduce exaggerated marketing, smear campaigns, and mutual takedowns. Li also described some of his peers as “both foolish and malicious,” and his remarks were interpreted as a response to online debates around whether BYD was the “auto industry’s Evergrande.”

v) PRC officials also expressed their concerns about the situation with China’s auto industry at the forum. Xu Niansha, president of the China Machinery Industry Federation, cautioned: “To shape the future of China’s auto industry, we must rely on innovation, not mutual slaughter.”

Former commerce vice minister Chen Jian outlined four major industry issues, warning Chinese automakers against veering off course between “openness and protection” and “self-reliance and foreign introduction.”

‘Zero-mileage’ used cars
June 10
Mainland media National Business Daily reported that thousands of so-called “zero-mileage” vehicles — ranging from brand new to those that are less than a year old with under 100 kilometers on the odometer — from mainstream domestic brands are being listed on major Chinese used-car trading platforms.

National Business Daily said that used-car dealers candidly admit these vehicles are essentially new and are registered in advance solely to be sold as used cars. An industry insider told the media outlet that new energy vehicle manufacturers have been particularly aggressive in clearing inventory due to concerns about battery degradation, exacerbating the phenomenon of “zero-mileage” vehicle sales.

National Business Daily attributes the phenomenon to the auto industry’s unique sales operations. Ahead of model upgrades, quarter-end, year-end, or widespread new-car price cuts, dealers rush to register soon-to-be-discontinued vehicles and offload them at steep discounts as “used cars” to accelerate cash flow and meet automakers’ sales targets. This tactic not only minimizes book losses but also boosts reported sales figures, securing year-end manufacturer rebates.

National Business Daily also noted that China’s used-car exports have surged in recent years, with a lot of the exports being “zero-mileage” vehicles. A “seasoned expert” told the media outlet that since 2023, large volumes of these cars have flowed through border ports to Central Asia, with some rerouted to Russia. In doing so, companies and traders can exploit China’s used-car export tax rebates of 13 percent or 3 percent, or bypass import restrictions on new cars in certain countries, or both.

***
Great Wall Motor chairman Wei Jianjun exposed the inner workings of the “zero-mileage” vehicle phenomenon in a candid media interview in May 2025. Wei said that some automakers, eager to post impressive sales figures and bolster capital market performance, deliberately create a false impression of strong demand through these vehicles. In doing so, those automakers masked severe inventory backlogs and financial strain.

  Automakers announce payment controls to suppliers

June 10
Dongfeng Motor announced that it will control payment terms to suppliers within 60 days to ensure efficient capital turnover in the supply chain and promote healthy collaborative development of the industry chain. Subsequently, several automakers, including China FAW, Changan, GAC, Geely, Chery, Leapmotor, and BYD, announced that they would do likewise.

***
The State Council’s revised Regulations on “ensuring timely payments to small- and medium-sized enterprises” came into effect on June 1.

Key provisions in the Regulations include:

• Government agencies, public institutions, and large enterprises — including central and state-owned enterprises — must pay SMEs for goods, construction projects, and services within 60 days.
• Government agencies, public institutions, and large enterprises are prohibited from forcing SMEs to accept non-cash payment methods such as commercial bills or electronic receivables certificates, and cannot use these non-cash methods as a disguised way to delay payments.

  Our take

Mounting reports of production cuts, dealer bankruptcies, inventory overhangs, and supply chain finance vulnerabilities at BYD have raised alarms about the leading Chinese electric vehicle maker’s financial stability and the sustainability of the broader industry. These red flags suggest a looming crisis in China’s EV market, potentially rivaling the fallout from the collapse of China Evergrande. The root causes — cutthroat competition and automakers’ reliance on high-risk financial maneuvers — are fueling systemic instability across the sector.

1. BYD’s tactics for raking in profits are sparking systemic risks in China’s EV sector. For one, the company’s aggressive price-slashing strategy cemented its market leadership, but at a steep cost. On May 23, 2025, the company unleashed a new round of discounts, with select models cut by up to 34 percent, triggering similar moves by rivals like Leapmotor and Geely. BYD’s official reported May sales of 382,476 vehicles, a 15.3 percent year-on-year surge and a monthly peak for the year. Yet, this “involution”-driven (“involution refers to cutthroat competition and reckless expansion) pricing spree, which lifted BYD’s market share from 15 percent to 17 percent in the first five months of 2025, has battered its stock, which slid nearly 20 percent from HK$155.067 on May 23 to HK$124.200 by June 27.

Dubbed “zero-profit car sales,” BYD’s low-margin approach squeezes competitors but burdens its supply chain and dealers, with inventory backlogs averaging 3.21 months, or more than double the industry’s 1.38-month average. The resulting new energy vehicle price wars have destabilized the market, prompting state media to criticize the industry for undermining the global credibility of “Made in China” through practices such as the use of substandard components, slashed after-sales services, and underfunded R&D.

BYD’s rapid growth hinges on sophisticated supply chain finance tactics. Its 2024 financials show accounts payable of 250.7 billion yuan, with payment terms averaging 317 days — well above the industry’s 182-day average. By issuing divisible, deferrable electronic promissory notes (six to 12 months, extendable to two years), BYD secures interest-free liquidity, with suppliers able to discount notes at partner banks at rates 1.5 percent to 2 percent below market or pass them downstream. This model drove the company’s 2024 operating cash flow to 120.1 billion yuan, dwarfing its net profit and reflecting a 60 percent compound annual growth rate since 2019.

BYD further leverages asset-backed securities to shift debt off-balance-sheet, creating liquidity pools that lower financing costs. While accounting-compliant, these tactics transfer risks to suppliers, many of whom resort to taking private loans at rates above 15 percent and fueling a ballooning triangular debt crisis. In November 2024, BYD’s push for a 10 percent supplier price cut deepened the financial strain on its supply chain.

To mask inventory gluts and sustain sales momentum, BYD turned to the “zero-mileage” used car scheme and pressured dealers with excess stock, intensifying their financial woes. The China Automotive Dealer Association’s 2024 national auto dealership survival survey report noted that 84.4 percent of dealers faced price inversion, with 60.4 percent seeing margins above 15 percent. The financial troubles of Qiancheng Auto, BYD’s largest dealer, underscore the toll of BYD’s inventory strategies and hint at broader risks to China’s EV industry stability.

2. BYD’s recent production cuts and expansion slowdown signal deepening cracks in China’s involution-driven EV industry.

Per data from the China Association of Automobile Manufacturers BYD’s production growth decelerated to 13 percent in April 2025 and was a mere 0.2 percent in May. This meant that the company’s recent growth was the slowest since February 2024, falling short of its ambitious 5.5 million vehicle sales target for 2025 (up nearly 30 percent year-on-year). Several factors underpin this retreat:

• Inventory overhang: BYD dealers hold an average inventory of 3.21 months, more than double the industry’s 1.38-month. This results in decreased cash from operating activities.
• Waning demand: China’s economic downturn and a saturated ride-hailing market have curbed EV demand. Many middle-class individuals had previously used layoff compensation to purchase EVs for ride-hailing work, but this trend is now fading.
• Export barriers: High tariffs — 17 percent from the EU, with tightened U.S. and Canadian restrictions — have stifled the growth of EV exports.
• Regulatory pressure: The State Councils revised regulations on payments to small- and medium-sized enterprises cap payment terms at 60 days. This threatens BYD’s reliance on extended supplier payment cycles.

BYD’s low-margin, finance-heavy operating model allows for short-term gains, but also masks long-term vulnerabilities. Should systemic risks in China’s EV sector get triggered, BYD and other new energy vehicle companies are at risk of an “Evergrande-style crisis.” BYD is already seeing early danger signs:

• Dealer failures: Price inversion and excessive inventory are creating severe financial problems for BYD’s dealers and putting them at risk of insolvency, as in the case of Qiancheng Auto in Shandong Province.
• Supplier squeeze: Extended payment terms averaging 317 days and reliance on loans with rates above 15 percent have pushed smaller suppliers toward financial ruin, risking a cascade of bankruptcies. In the first quarter of 2025, BYD’s accounts payable and notes payable hit 190 billion yuan, outstripping its quarterly revenue by 11.3 percent. This means that financial institutions are potentially at risk of being saddled with BYD’s bad debts.
• Financial fragility: BYD’s use of off-balance-sheet funding pools and mounting triangular debt amplify systemic risks. A rupture in its capital chain could trigger a liquidity crisis, with supplier failures inevitably circling back to BYD.

3. BYD’s troubles expose deep vulnerabilities in China’s EV industry and threaten ripple effects across the broader economy.

Industry-wide fallout
With EVs comprising 50 percent of China’s auto market and with BYD as the linchpin of the EV sector, BYD’s challenges could precipitate a crisis rivaling the collapse of China Evergrande. Potential disruptions include:

• Supply chain collapse: BYD’s 2,000-plus suppliers, as well as many small and medium enterprises burdened by high-interest loans and extended payment terms, face insolvency risks. A default on BYD’s 250.7 billion yuan in accounts payable could trigger a wave of supplier failures, disrupting component supplies for the broader auto industry.
• Banking sector exposure: A BYD default could inflate bank bad debts. Bank financial losses could be steep with EV assets like factories offering limited liquidation value compared to real estate holdings of Evergrande and other distressed developers.
• Competitor contagion: The profit margins of BYD’s competitors have been eroded by relentless price wars. A BYD-triggered crisis could prompt lenders to tighten credit to other automakers, risking financial contagion. Survivors would grapple with weakened consumer demand amid industry turmoil.
• Job and spending declines: As a cornerstone of China’s employment and economy, the auto sector’s woes could spark mass layoffs. This would further curb consumer spending in an already sluggish economy.

Mounting local fiscal pressures, global NEV strategy problems
China’s auto industry, much like real estate, is a critical revenue driver for local governments. An EV sector crisis could intensify local debt burdens in an echo of the situation following the real estate sector’s downturn.

As a standard-bearer for China’s “new energy strategy,” BYD’s struggles could also undermine Beijing’s global EV ambitions, jeopardizing doubts about the PRC’s strategic push into renewable energy markets.

Looming ‘Evergrande’ for autos?
A full-blown auto industry crisis could have an economic impact eclipsing that of the real estate crisis. While Evergrande’s high-leverage model leaned on liquidatable property assets, the EV sector’s low-margin operations and supply chain finance risks are tied to less recoverable assets like manufacturing facilities.

The auto industry’s deep ties to manufacturing, finance, and exports amplify its potential fallout. S&P Global projected that a 30 percent drop in Chinese EV output could reduce 2025 GDP growth by 0.8 to 1.2 percentage points, underscoring the sector’s economic weight.

BYD’s precarious path ahead
BYD’s risk of a crisis depends on its internal recalibrations and external pressures. Persistent economic weakness, export curbs, and rigorous enforcement of the State Council’s regulations on ensuring “timely payments” to SMEs could further strain BYD’s liquidity and lead to cash flow problems by the fourth quarter of 2025 or the first quarter of 2026.

Should BYD come under serious risk of failure, Beijing could step in and deploy financial aid or policy relief to prop up the company and forestall a broader collapse of the EV industry. However, escalating government fiscal constraints and global headwinds could hinder timely intervention, leaving the BYD and its ecosystem vulnerable.

 

  2   Beijing’s 2024 audit report exposes gov’t and debt problems

  Beijing releases 2024 audit report

June 24
The PRC National Audit Office released its audit report on the implementation of the 2024 central budget and other fiscal revenues and expenditures (2024年度中央預算執行和其他财政收支的審計工作報告).

The report said that by the end of March 2025, issues identified in the 2023 audit have been rectified, involving an amount of over 654 billion yuan. Also, more than 1,710 regulations and systems have been established or improved, and over 4,120 individuals have been held accountable.

The report is divided into seven sections. Noteworthy content includes:

i) Central fiscal management audit

Overview of revenue and expenditure

• General public budget revenue: 10.8844 trillion yuan.
• Expenditure: 14.2244 trillion yuan.
• Deficit: 3.34 trillion yuan (in line with the budget).
• Social security fund surplus: 8.558 billion yuan.

Major issues identified

• Overcollection of taxes and fees: 88.997 billion yuan across 28 provinces.
• Unimplemented tax incentives: 280.631 billion yuan in benefits not delivered.
• Rigid fiscal spending: 19.286 billion yuan in ineffective expenditures not reduced.
• Delayed and inaccurate special transfer payments: Up to 289 days late.
• Idle or misused state asset funds: 6.35 billion yuan misallocated.
• Poor management of special local government bonds: 132.597 billion yuan in issues.
• Errors in the central budget draft: Over 7 billion yuan in misstatements.

ii) Central department budget execution audit

Audited

• 42 departments, 244 subordinate units.
• Found issues totaling 28.146 billion yuan (4.5 percent of allocated budget totaling 619.957 billion yuan).

Key problems

• Profit-seeking by nonprofits: Associations, foundations, and publishers took in 700 million yuan illegally.
• Illegal charges for awards/evaluations: 188 million yuan.
• Violation of “Eight-point Regulation”: Eight affiliated entities exhibited “hedonism” and “extravagance,” involving an amount of 18.1943 million yuan. Among them, 10 employees of a subsidiary under the China Financial Electronic Group (affiliated with the People’s Bank of China) had an average office space of 393 square meters per person.

iii) Major projects and risk audits

• Flood control projects delayed: Of the 594 dredging and cleanup projects in the Yellow River basin that were supposed to be completed by the end of 2015, 264 projects (44.4 percent) remained incomplete as of September 2024.
• Post-disaster recovery: Of the 1 trillion yuan in 2023 bonds, 32.4 billion yuan was idle or misused.
• “Two New and Two Heavy” projects:
  • 37.91 billion yuan was fraudulently claimed during the application process.
  • 72.3685 million yuan was misallocated during the distribution process.
  • 15.368 billion yuan was misused during the utilization process.
• Data and public resource platforms: Poor data sharing, use of “tainted” experts, and illegal fees totaling 747 million yuan.
• Local hidden debt: Over 13 billion yuan in illegal or disguised borrowing.
• Financial risks:
  • Illegal loans: 20.968 billion yuan.
  • Concealed bad loans: 51.18 billion yuan.
  • Expanding risks from local financing platforms.

iv) Key livelihood funds audit

Compulsory education

• 2,429 schools with severe problems.
• 4.089 billion yuan misused from facility improvement funds.

Pension funds

• Total issues: 60.161 billion yuan.
• Misappropriated or defrauded: 41.408 billion yuan.
  • 13 provinces misused 40.626 billion yuan for debt repayment.
  • 20,000-plus ineligible persons fraudulently insured.
  • 28,300 retirees defrauded 519 million yuan via fake records. For instance, a Center for Disease Control and Prevention employee from Shanxi’s Pu County falsified records to “retire” at age 22 and received 690,000 yuan in retirement funds while continuing to work at another place.

High-standard farmland projects

• Severe overreporting and repeated declarations.
• Poor quality projects, no water sources, and land abandoned.

Rural subsidies

• 4.164 billion yuan withheld or misappropriated.
• Delays of up to 9 years in disbursement.
• 23.29 million yuan fraudulently claimed by local officials.

v) State-owned assets audit

Regular SOEs

• Underreported assets: 144.2 billion yuan.
• Losses from failed investments and projects: 84.1 billion yuan.
• Idle assets: 14.3 billion yuan.
• Improper guarantees: 60.7 billion yuan.

Financial SOEs

• Exaggerated support to the real economy: 508.4 billion yuan.
• Concealed bad loans: 51.1 billion yuan.
• Illegal lending, marketing, and inflated financing costs.

Administrative institution assets

• Unclear accounting of assets, with properties left idle for extended periods.
• Illegal occupation and low-price leasing.
• Unauthorized transfer of land, with proceeds not remitted to the state treasury.

Natural resources

• Overstated afforestation area by 6.39 percent, with crude pollution treatment.
• Serious issue of “chemical industry encircling the Yangtze River”; only 7.5 percent of Poyang Lake restoration investment completed.

vi) Major disciplinary and legal violations

• Over 430 cases, involving 1,400-plus individuals, 63 billion yuan-plus.
• High corruption in key sectors: Corruption remains rampant in power-concentrated, capital-intensive, and resource-rich sectors such as finance, SOEs, and energy.
• “Petty official, major corruption” in the livelihood sector (public welfare): Rampant corruption among low-level officials in areas impacting public welfare.
• Complex new forms of corruption: Emerging corruption types are covert and sophisticated, including power rent-seeking, non-cash transactions, and use of third-party accounts to obscure funds.
  • For example, since 2011, Ling, a former director of a provincial securities regulatory bureau, and others colluded with the controlling shareholders of three companies. They used relatives’ accounts to acquire shares before the companies’ IPOs, employing non-cash and unconventional transfer methods, such as bank bill endorsements, to conceal the source of funds. During the IPO process, Ling and associates provided guidance, filing support, and sponsorship for the listings. After the IPOs, they gradually sold off their pre-IPO shares, cashing out hundreds of millions of yuan, with profits held in third-party accounts and transferred to personal accounts only when needed.

vii) Audit recommendations

Strengthen policy coordination and synergy

• Strictly address excessive taxes and fees, implement tax reductions, and optimize expenditure structures.
• Enhance coordinated use of funds for “dual priorities and dual innovations” projects.

Deepen reforms

• Zero-based budgeting reform.
• Optimize SOE governance and strengthen the “three majors and one critical” (i.e. major decisions, projects, funds, and appointments requiring oversight) mechanism.

Prevent major risks

• Implement penetrating supervision of special-purpose bonds.
• Mitigate risks in real estate, local government debt, and financial institutions.

Safeguard livelihood issues

• Consolidate the education baseline, improve pension fund coordination, and strengthen oversight of farmland and subsidies.

Anti-corruption and fiscal discipline

• Rigorously investigate corruption, control fiscal burdens for personnel support, and hold individuals accountable.

  Our take

1. Beijing’s government audit report reflects the CCP’s tendency to emphasize positive news while downplaying negatives, trivializing major issues, and exposing minor problems to conceal larger ones.

While the National Audit Office’s report appears comprehensive, covering areas such as central finances, local government debt, and public welfare funds, the issues disclosed likely represent only the tip of the iceberg. Audit reports are typically subject to strict political scrutiny in the CCP regime, with publicized information carefully filtered to highlight “manageable” problems to maintain the regime’s legitimacy while obscuring more severe structural issues. The art of “turning big issues into small ones and small issues into nothing” is vividly embodied in the report. For instance, it mentions rectified amounts exceeding 654 billion yuan and holding over 4,120 individuals accountable — figures that seem substantial but are negligible relative to China’s economic scale. The figures also suggest that the CCP likely targeted only “minor issues” to placate public opinion or meet internal accountability demands.

Moreover, the report’s data and conclusions often focus on technical issues (e.g., idle funds, misappropriation, or falsified reporting) while remaining vague about underlying systemic corruption, power abuses, or policy failures. This likely reflects the central government’s effort to uphold the political narrative of “stability above all,” avoiding exposure of deep-seated crises that could undermine CCP rule. In sum, the audit report is more of a political and propaganda tool than a genuinely transparent government review.

2. The audit report hints at an intensifying governance crisis marked by growing tensions between local and central authorities. Despite the Xi Jinping leadership’s emphasis on political indoctrination and demands for officials to “resolutely implement” central policies, governing problems remain severe.

i) The report highlights a local debt crisis and the misappropriation of public funds. For instance, it notes the lax management of local special-purpose bond projects involving 132.597 billion yuan, the diversion of 41.408 billion yuan of pension insurance funds to debt repayment, and over 13 billion yuan tied to issues like unauthorized additions to hidden debt and falsified debt resolution. These figures indicate that local governments, under pressure to manage debt, have resorted to irregular means, such as diverting public funds (social security funds, agricultural subsidies, etc.) to cover fiscal shortfalls. This not only underscores the severity of local debt but also exposes the desperate measures taken by local governments amid economic downturn pressures.

At a deeper level, such misappropriation conflicts with the central government’s policies of deleveraging and strictly controlling local debt. Local governments’ engaging in non-compliant practices to avoid defaults reflects the challenges of implementing central policies at the grassroots level. While the Xi leadership has called for belt tightening and fiscal discipline in recent years, the actions of local governments reveal poor policy execution and the deployment of “countermeasures” to the central government’s policies (上有政策, 下有對策).

ii) The report’s highlighting of issues like falsified reporting, fraud, and fund misappropriation indicates that the “prefer left rather than right” (寧左勿右) is still pervasive among local officials. To meet performance evaluations, officials often resort to data falsification or formalism rather than addressing root issues. For example, high-standard farmland construction projects suffer from duplicate reporting and inflated figures, which suggest a wasting of resources and the potential exacerbation of rural economic distress.

Meanwhile, certain behaviors identified in the report like delays in flood control and disaster reduction projects or idle funds reflect the phenomenon of “lying flat” and passivity by local officials. Fearing accountability as they come under intense scrutiny by the anti-corruption authorities and as China’s economic problems mount, officials appear to be resorting to inaction or covert forms of corruption (power rent-seeking, non-cash transactions, etc.) to evade oversight and punishment.

iii) Issues mentioned in the report like “rigid fiscal expenditures” (財政支出固化) and “inaccurate or delayed special transfer payments” (專項轉移支付分配不準、遲發) points to a significant disconnect in the execution of the central government’s fiscal policies at the local level. For example, the central government aims to stimulate the economy through “dual priorities and dual innovations” (major projects and new infrastructure). But the exposure of falsified reporting and misappropriation (3.791 billion yuan falsely reported or siphoned off, 153.68 billion yuan diverted) indicates that local governments are only superficially complying with central directives.

Improper compliance by local governments leads to the wasting of fiscal resources and prevents the central government’s major projects from achieving their intended outcomes. Continued governing problems heighten the risks of economic downturn.

3. The audit report also indirectly reveals that economic and social problems are being worsened by the misbehavior of local officials

i) The report’s revelation that 28 provinces had overcollected fees amounting to 88.997 billion yuan and tax relief policies totaling 280.631 billion yuan were not implemented reflects the short-sighted behavior of local governments under fiscal pressure. Local governments have resorted to excessive taxation to bridge budget deficits, a direct contravention of the central government’s policies to reduce taxes and fees. While not mentioned in the report, local governments have been engaging in so-called “deep-sea fishing” and the collection of non-tax revenue, which severely undermines the business environment.

The overcollection of fees and non-delivery of tax relief measures further compress the survival space of enterprises, particularly in the already weakened private sector. This potentially leads to business closures, rising unemployment, and heightened social instability.

ii) The report highlights widespread misappropriation and fraudulent acquisition of public welfare funds, such as the interception of 4.164 billion yuan in rural subsidies. This suggests that corruption in the public welfare (“people’s livelihood”) sector has permeated local governments down to the grassroots level, directly harming the interests of vulnerable groups most in need of protection. The case of the CDC employee from Shanxi’s Pu County (“working for the CDC at age 1, retiring at age 22”) exposes the absurdity of corruption at the grassroots and is likely a microcosm of systemic issues.

The diversion of public welfare funds not only undermines the stability of China’s social security system but also risks fueling public discontent. Amid a worsening economy and mounting employment pressures, such corruption could serve as a flashpoint for social instability.

iii) The significant delays by local officials in flood control and disaster relief projects as revealed in the report reflect not only execution failures but also potential corruption and fiscal constraints. Cases like the delay of 350 flood projects in the Yangtze River basin and 44.4 percent of 595 dredging and cleanup projects in the Yellow River basin remaining incomplete by September 2024 underscore governing inefficiency and effectiveness. Governance failures are in turn likely driven by officials increasingly “lying flat” under intense anti-corruption scrutiny, funding shortages, or interest-driven misallocation of resources. These delays waste fiscal resources (32.4 billion yuan of 1 trillion yuan in 2023 national bonds were left idle or misappropriated) and lead to substandard work, compromising flood control quality.

4. The National Audit Office report indirectly reveals that challenges from covert and new forms of corruption persist despite over a decade of Xi Jinping’s anti-corruption campaign. In particular, the case involving a former director of a provincial securities regulatory bureau as outlined in the report demonstrates that corrupt actors are always “innovating” new ways to evade oversight. The new and covert forms of corruption (power rent-seeking, non-cash transactions, use of third-party accounts to obscure funds, etc.) are hard to trace and may involve the networks of influential Party members.

Another area that would concern the Xi leadership is the report’s note that corruption remains rampant in power-concentrated, capital-intensive, and resource-rich sectors such as finance, SOEs, and energy. This admission indicates that the effectiveness of Beijing’s anti-corruption efforts is likely overstated and the systemic vulnerabilities that Xi Jinping sought to fix since taking office in 2012 have not been fundamentally addressed. Over time, Beijing’s inability to clamp down on persistent and evolving corruption will challenge Xi and the CCP’s credibility.