At first glance, fiscal policy does not seem a pressing medium-term policy challenge for China. The measured debt stock is low, and the reported budget deficit is modest and easily financed. However, fiscal activity in China extends well beyond the state budget, and public finances will face a number of difficult challenges in the next few years. There is a sizable amount of quasi-fiscal debt in the form of nonrecoverable loans in the banking system, the legacy of central planning. Further, although efforts are being made to limit the flow of new nonperforming loans, through state-owned enterprise (SOE) and financial sector reforms, the possibility that part of ongoing bank funding will become nonperforming cannot be ruled out. The budget also faces heavy future expenditure demands for health and education, pension reform, and the government’s ambitious infrastructure program.