China’s trillion-dollar dilemma of local government ‘hidden debt’

  • China’s financial system remains plagued by trillions of dollars in local governments’ hidden debt, as they have long turned to off-the-books borrowing to plug funding shortfalls, which have grown significantly due to the pandemic and property crisis.
  • To solve the problem, policymakers may need to take drastic measures, such as allowing local governments to sell bad debt to asset managers and giving them a bigger slice of tax revenue, financial scholars said.
  • Research showed that interest-bearing LGFV debt had ballooned to 54.6 trillion yuan ($7.8 trillion) as of the end of 2022 from 32.6 trillion yuan four years before, up two-thirds, despite the central government’s persistent efforts to resolve it.
  • Outstanding local government debt on the books totaled 38 trillion yuan as of the end of July, official data showed.
  • If both on-the-books debt and all of the interest-bearing LGFV debt were taken into consideration, local governments would have had to spend 19% of their total fiscal revenue — which consists of general public budget revenue and government-managed fund revenue — paying interest to creditors last year.

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