Key Points
- China's local governments are facing a debt crisis, with heavily indebted cities cutting back on spending.
- Beijing has room to borrow, but the government's spending has declined 3.5% in the first eight months of the year.
- The debt crisis could impact China's economic growth, with the IMF estimating the country's economic growth to slow to 4% in 2027.
Why China's Local Governments Are Struggling
China's local governments are facing a debt crisis, which could impact the country's economic growth. Beijing has room to borrow, but heavily indebted local governments are cutting back on spending, raising the stakes for growth and for how China manages its local debt.
The debt crisis is a result of local governments relying on selling land to developers to fund development projects, which has collapsed since the property slump began in 2021. Beijing has since moved to stop local governments from piling up new hidden debt, curbing off-the-books borrowing and removing a key engine of growth.
As a result, combined fiscal spending has declined 3.5% in the first eight months of the year, after growing 3.6% last year, according to Ting Lu, chief China economist at Nomura. This decline has become a real drag on the economy, with urban fixed-asset investment declining for the first time in decades.
At a Glance
| China's General Government Debt | 68.4% of GDP According to the International Monetary Fund |
| Augmented Government Debt | 126.6% of GDP Including local government financing vehicles and off-balance sheet borrowing, according to IMF estimates |
| Land-Sale Income | 4.2 trillion yuan ($590 billion) A decline of more than half since 2021, according to CF40 estimates |
Behind the Debt Crisis
Behind the Debt Crisis
Beijing has ordered the state-backed borrowers to clear hidden debt and transition into market-oriented commercial state-owned enterprises by mid-2027. However, many of the vehicles still lack the cash flow to pay interest and remain burdened with unprofitable public projects, according to S&P Global Ratings.
The IMF wants Beijing to square the circle with a medium-term fiscal framework, one that lets China 'expand fiscally in the near-term but claw back the support over the medium term so that you ensure debt sustainability,' said Krishna Srinivasan, director of the fund's Asia and Pacific department.
What It Means for China's Growth
What It Means for China's Growth
China's economic growth is expected to slow to 4% in 2027, according to the IMF. This slowdown could be a result of the debt crisis and the decline in fiscal spending.
Beijing needs to address the debt crisis and implement a medium-term fiscal framework to ensure debt sustainability. This could involve increasing fiscal spending in the near-term while clawing back support over the medium term.
Risk & Opportunity Assessment
| Commercial Risk | High | China's local governments are heavily indebted and cutting back on spending, which could impact the country's economic growth. |
| Regulatory Risk | Medium | Beijing has ordered the state-backed borrowers to clear hidden debt and transition into market-oriented commercial state-owned enterprises by mid-2027, but many of the vehicles still lack the cash flow to pay interest. |
| Reputation Risk | Low | The debt crisis is a result of local governments relying on selling land to developers to fund development projects, which has collapsed since the property slump began in 2021. |
| Commercial Opportunity | Medium | Beijing needs to address the debt crisis and implement a medium-term fiscal framework to ensure debt sustainability, which could involve increasing fiscal spending in the near-term while clawing back support over the medium term. |
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