During the financial Crisis in 2008, China began using government debt to stimulate the economy and avoid a recession. With high-interest rates, the Chinese government has had trouble paying them off. In particular, local governments are the most indebted of China’s public institutions because their inability to generate enough tax revenue. Since 2007, China’s local government debt has doubled since 2007 from 20% of GDP to 40% of GDP today. In addition, since local governments can only borrow with explicit permission of the finance ministry, they have resorted to local government financing vehicles, or LGFVs. Since LGFVs receive money through shadow banking, it is unclear what the full amount of local government debt equals.
To try to diffuse the local government debt, China’s Finance Ministry has began to allow local governments to swap up to 1 trillion yuan of their existing high-interest debts to lower cost bonds. This will allow local governments to save 40-50 billion yuan this year alone.
Another problem China has is corporate debt. The debts of non-financial companies rose to 125% of GDP last year. Up from 72% in 2007. Although China has began to erode the nation’s debt, it is still only scratching the surface.