The debt situation in the US and Europe is unsustainable. Och, wait…

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Bloomberg recently reported that Beijing is preparing to mobilize over 1 trillion yuan in loans from state-owned and policy banks to help local governments clear overdue payments to private enterprises. On the surface, this appears to be a bold and innovative step to alleviate local debt pressures and bolster private sector confidence. Yet behind it lies a harsher reality: China’s policymakers are still grappling with the country’s persistent local debt crisis.

China’s local debt woes are nothing new, nor are the central government’s efforts to tackle them. In recent years, the slowdown in the property market has slashed land sale revenues – a critical fiscal lifeline for local governments. Compounding this, the surge in local debt issuance during the pandemic years has pushed local finances to the brink. The risk of uncontrolled debt has grown acute, prompting Beijing to repeatedly intervene with debt restructuring initiatives. These measures aim to prevent widespread defaults that could unleash catastrophic ripple effects across the broader economy and financial system.

At the heart of this debt crisis lies “hidden debt,” a type of liability that includes corporate arrears and is largely channeled through local government financing vehicles (LGFVs). These entities, established by local officials to fund infrastructure and public projects, operate as quasi-commercial platforms to circumvent borrowing restrictions on their local government patrons. LGFVs raised funds via bank loans, bond issuance, and wealth management products to finance everything from roads and bridges to industrial parks and social housing. By design, they allow local governments to borrow indirectly, but their opaque operations have ballooned into a systemic risk.

Unlike officially sanctioned special-purpose bonds (SPBs), which are transparently recorded, much of LGFV debt exists off-balance-sheet and makes precise accounting impossible. For instance, unpaid contractor and supplier arrears are often negotiated privately and leave few public traces.

This opacity has led to strikingly divergent estimates of the scale of the problem. Earlier this year, central bank governor Pan Gongsheng pegged LGFV debt at 14.8 trillion yuan. In stark contrast, the International Monetary Fund estimates it to be over four times that figure and nearly half of China’s GDP. Chinese economist Li Daokui has suggested that unpaid contractor fees and civil servant wages alone total 10 trillion yuan.

https://thediplomat.com/2025/09/china-is-still-struggling-to-manage-local-debt-stress/