China’s local governments will accumulate hidden debt

Significance Local governments’ fiscal positions have become increasingly untenable post-pandemic amid a property market downturn. Record numbers of local government financing vehicles (LGFVs) have failed to make payments on short-term debt. An alarmed Beijing is expanding control over local government spending. Impacts Servicing rising debt levels will consume the government’s budget, leaving fewer resources for infrastructure and public welfare provision. The higher debt levels of western and northern provinces will cause them to fall further behind their east coast counterparts. Most of China’s debt is held domestically, which gives authorities greater control over debt management and mitigates exchange rate risks. The central government’s fiscal reserves, moderate inflation and low interest rates for state entities will also help mitigate debt risks.