Skip to content

China’s Local Governments Are at Risk of a Puerto Rico Moment

A slumping real estate market and slowing economy are crimping revenue, while expenditures rise.

relates to China’s Local Governments Are at Risk of a Puerto Rico Moment
Illustration: George Wylesol for Bloomberg Businessweek

For the amount of work they’re expected to do, China’s regional governments are simply not paid enough. As the economy slows and real estate enters a bear market, a financial collapse on the order of Puerto Rico’s is a real possibility.

The central government collects more than 8 trillion yuan ($1.3 trillion) from local tax offices every year, then redistributes most of it across the country. But the share going to local governments has declined since a major tax reform in 1994. In 2020 they got 55% of the total, down from 73% in 1993, before the changes were enacted. Meanwhile, the regional governments, which are responsible for most public services—such as building roads and providing clean drinking water—have been spending more: Their share of total government spending in China rose to 86%, from 73%, over the same period.