Rising Hidden Debts Plague Chinese Cities’ Financial Stability

Strict COVID-19 measures and a collapsing real estate market have depleted the funds of Chinese local governments, causing difficulties in providing even basic services and raising the possibility of default.

Experts predict China’s government debt has surpassed 123 trillion yuan ($18 trillion) in the past year, including almost $10 trillion in “hidden debt” owed by unstable local government financing platforms supported by cities or provinces.

As financial difficulties continue to mount, local governments have taken measures such as reducing wages, transportation services, and fuel subsidies.

The shortage of natural gas has affected residents in Hebei province during the winter, partly due to cuts in government subsidies. Meanwhile, in Heilongjiang province, the city of Hegang faced a shortage of heat in January because of the reduction in government subsidies for local firms.

Widespread complaints on social media have arisen due to the unavailability of heating during the harsh winter months. The central government in Beijing has issued a directive mandating cities to ensure heating is provided, but with no mention of who will bear the cost.

The expenses incurred in implementing frequent Covid lockdowns, conducting mass testing, and establishing quarantine centers have depleted the budgets of local governments. The sudden change in policy in December, marking the end of the zero-Covid policy initiated by Xi Jinping, has further worsened the situation.

“Beijing is confronted with a self-created economic crisis,” stated Craig Singleton, a senior fellow at the Foundation for Defense of Democracies in Washington. “Overall, China’s current debt crisis constitutes a complete catastrophe.”

China Struggles with Pandemic Expenses, Slumping Economy

The total amount spent by the country to combat the pandemic remains unknown. However, Guangdong province disclosed that it has incurred $22 billion in expenses over a three-year span starting from 2020.

The decline in revenue over the same period was substantial, as widespread lockdowns impacted household incomes and led to a decrease in spending and tax revenue for local governments. Additionally, the government’s provision of substantial tax breaks to support businesses during the pandemic further decreased government revenue.

Moreover, the housing market decline, with a continuous drop in home prices for 16 consecutive months, added to the financial strain. Local government revenue, which is largely dependent on land sales accounting for over 40%, saw a sharp decline.

Due to budget constraints, cities such as Leiyang in Hunan and Yangjiang in Guangdong suspended bus services, as per announcements made by operators. Meanwhile, Hegang city in Heilongjiang made headlines in early 2022 for being the first city to undergo a fiscal restructuring, which resulted from its severe debt crisis, as reported by state media. As a consequence, it must reduce spending on infrastructure, decrease government subsidies, halt new hiring, and sell assets as per regulations set by the State Council.

Furthermore, public sector jobs, which are considered secure, were also affected in other regions. In June, wealthy provinces including Guangdong, Zhejiang, and Jiangsu, cut salaries by up to 30%, as reported by the Chinese news website Caixin.