How Can China Contain Its $8.3 Trillion Fiscal Crisis?

Call it luck or stellar crisis management. China, one of the world’s most indebted nations, has not experienced a full-blown financial crisis, yet. There were a few close calls. In 2019, the government had to seize a regional bank, for the first time in decades, to prevent a run on deposits. Last year, a wave of real estate developer defaults ended up with homebuyers threatening mortgage boycotts. Both scares got defused. One may even argue that China is now a safer place for investors after Beijing tightened regulations on unruly local banks and aggressive home builders.

But there is one more elephant in the room: Borrowings from local government financing vehicles. For years, municipalities have been relying on these off-balance-sheet entities to fund infrastructure and support the local economy. LGFV debt rose to 57 trillion yuan ($8.3 trillion) in 2022, or 48% of China’s gross domestic product, according to estimates from the International Monetary Fund.