Investment Institute

Market Views

Bonds, bridges, and burdens: China’s local government debt in focus

18 October 2024 (10 min read)

KEY POINTS

China's decades-long period of investment-driven growth has undoubtedly fuelled impressive economic development; however, its debt-financed investments now weigh heavily on the slowing economy. This is particularly true for local governments, which bear the largest share of the debt

So-called ‘land finance’ has been a key mechanism behind China's economic miracle, transmitted via local governments and bolstered by the once-booming property market

Triggered by the property market's downturn, this once positive, self-reinforcing feedback loop has swung into reverse, in turn constraining local governments' fiscal capacities and putting pressure on the banking sector

Ultimately, only China’s central government can resolve these issues through immediate fiscal support and long-term reforms to its fiscal framework, ensuring a sustainable model for all levels of government

It is widely acknowledged that China’s “economic miracle” over the past three decades was largely driven by industrialisation – shifting from an agrarian economy to an industrialised one. The impressive GDP growth during this period was accompanied by rapid infrastructure development, a historic property market boom, and high demand for Chinese manufactured goods from Western economies. This was a capital-intensive process, especially for a country emerging from predominantly agricultural roots. Inevitably, debt levels surged over these decades as it invested in a new future but it suited China’s political landscape to see local governments shoulder much of this burden.

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