China’s $7.8 Trillion Municipal Debt Crisis Began in 1994
A 29-year-old formula allowed Beijing to tax more than it spends, forcing regional governments to turn to shadow banks. Only a powerful politician like Xi can overhaul that arrangement.
Hidden debt.
Source: AFP/Getty Images
This must be a matter of deep frustration for President Xi Jinping. In 2015, during his first term, he conducted a thorough audit and cleanup of hidden municipal debt. Less than a decade later, local government borrowings have once again reached dangerous levels.
How much debt have local government financing vehicles — or off-balance-sheet shell companies regional officials use to finance infrastructure projects — accrued? Their accounting is so murky even Xi may not know. The International Monetary Fund pegged LGFV debt to 57 trillion yuan ($7.8 trillion) as of 2022, or 48% of China’s gross domestic product. But that’s a conservative estimate. This figure excludes borrowings from tens of thousands of smaller LGFVs that do not have access to the bond market and thus are not required to disclose financial data.