In China, Unweaving the Tangled Web of Local Debt

Jul 17, 2018 | 09:00 GMT

A delegate catches up on some reading during a meeting of the Gansu delegation at the National People's Congress in March 2018.

A delegate reads papers during the Gansu delegation meeting at the Great Hall of the People during the National People's Congress in Beijing on March 7. China's finance minister brushed aside persistent concerns that the country's ballooning debt could spark a financial crisis, stressing that debt levels are well within control.

(WANG ZHAO/AFP/Getty Images)


  • A slower economy, sluggish construction growth, weaker local government revenue and a sharp jump in maturing debt could boost the risk of default for some local government-related debt, particularly in the central and southwest regions.
  • Despite previous announcements, Beijing may step in to assist or even bail out some loans if defaults accelerate.
  • The urgency of the risk will compel the central government to accelerate efforts to revamp the country's tax structure, but its ability will be limited by the uncertain economic situation.

The sword of Damocles is hanging over Chinese local governments. After the 2008 financial crisis, Beijing began embracing economic stimulation as it scrambled to prop up growth and protect its near-universal employment. In doing this, the central authorities demanded that local governments bear the brunt of the fiscal and financial responsibilities for road, railway and other infrastructure projects; it rewarded them with lucrative credit and looser oversight amid a skyrocketing real estate market. A decade later, local debt – and the tangled web behind some of the loans – has become the greatest pain to the economy as local revenue fails to keep pace with spending, investment returns fall and the property market dips. And all of these are plucking at the single thread holding the sword over the heads of local governments, threatening the once unimaginable: default – along with all the resulting social and political fallout....

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