China’s Local Debt Crisis

Published on Author Asher
Source: Bloomberg Businessweek (
China’s official debt figures (as % of GDP) are dwarfed by the inclusion of local borrowing

Local Chinese debt—borrowing by provinces, counties, and townships—has grown 67% since 2010, faster than the 40% growth of the national economy during the same period. On December 31st, UBS Securities’ chief China economist Wang Tao described this rate as “alarming,” a day after the National Audit Office released a report tacking this debt at USD 2.96 trillion (RMB 17.9 trillion).  These numbers include borrowing from nonbank lenders (some 10000 shady financial vehicles set up to dodge direct borrowing limits) and borrowing by some public corporations (called “contingent liabilities,” which have topped USD 1.15 trillion (RMB 7 trillion), up 75% since 2010).

However, like the US, the central Chinese government neither includes these numbers in its national budget, nor is it legally liable for their repayment. In fact in the US, nine states defaulted on credit obligations during the 1840s, but most of those states eventually repaid all of their creditors. The primary concern for China is not just localities defaulting on their loans, but rather slower future growth of government revenues and higher interest rates, which could make it harder to fight inflation.

The National Audit Office acknowledged the “potential risks” of rising debt, and that the current pace is “not sustainable.” Comparisons have been drawn to the “lost decade” of Japan in the 1990s which followed a period of rising debt. Avoiding such a fate, according to a report from JPMorgan Chase & Co., is contingent on China’s ability to readjust growth targets, boost local revenues, and discourage lending to poorly-managed local governments. Later this year, municipalities will begin issuing special bonds to repay these loans, and increases in property and consumption taxes are being considered.

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4 Responses to China’s Local Debt Crisis

  1. While Beijing is not obligated to bail out provincial and local governments, it does face the “too big to fail” issue so may do so in practice. If one borrower fails, the government can stand back – there was actually a case a decade back – but if large numbers go belly up, the entire economy can be affected, and hence the debt get nationalized.

    More important is that it’s a sign of a “repressed” financial system where deposit interest rates are so low that savers seek other outlets – rates near zero in an economy growing at 15% or more inclusive of inflation.

    I made a minor correction: China is not a federal system, so you should refer to “central” government.

  2. I think an increase in debt is necessary for an economy to grow. However, too much borrowing can cause lots of problems. Just like Professor mentioned above, if only a few fail, then the government can do something about it. However, if there are a lot of them borrowing too much and need help, then how would the Chinese government react?
    One of the previous posts was about the ghost towns in China. If the borrowed money was spent to build a number of “ghost towns” and they are worthless now, then it is just increase in debt for no reason (without any positive impact on the economy).

    • Yes, in practice, the central government will usually have to take responsibility for credit-default on the part of the lower levels of government–facing the same questions as the as the US government did with Detroit about whether to bail out these municipalities or take them through bankruptcy. Deficit spending is often growth-inducing, but as G mentions, this depends on what the spending goes towards–if it is spent on frivolous building projects, this does not have a net-zero impact on the economy, but a rather strongly negative one. What China really wants to avoid is a serious debt-crisis like the one Japan faced in 1989.