It’s Finally Here: China’s Local Governments Go Broke Under $18 Trillion Debt

Added: 2026-05-09

[00:00:00]Local government finances in China are facing a crisis of unprecedented scale. The public sector has seen delays in salaries payment, cuts in performance bonuses, and reductions or suspensions of public service in many regions. With a steep collapse in land sales revenue and a local debt crisis, the situation is dire. Beijing's cofferers are nearly empty and Jonah at a loss while local officials are facing increasingly difficult times. Both the 2025 central economic work conference and the 2026 budget report have highlighted the urgent need to address local fiscal challenges. This highlights the severity of the situation. In 2026, the first year of the so-called 15th 5-year plan, three negative economic indicators have reached record highs. First, general public budget expenditures have surpassed 30 trillion yen and government fund expenditures have reached 1.19 billion yen. Second, new government debt has reached 11.89 trillion yen. Third, the central government's transfer payments to local governments have surpassed 10.42 trillion yen, exceeding central government revenues for the fourth consecutive year, growing by 2.2%.

[00:01:20]State media continues to promote a narrative of economic optism. In reality, China's fiscal situation is declining at an unprecedented pace.

[00:01:28]First, the fiscal deficit is growing rapidly. In 2025, the gap in the general public budget was 7.14 trillion yen and the government fund budget deficit was 5.51 trillion yen, amounting to a total of 12.6 trillion yen, an increase of 2.22 trillion yen from 2024.

[00:01:49]Second, government debt is skyrocketing and the scale of hidden debts remains unclear. According to a report by Canadian data research firm Visual Capitalist, China's government debt has surged from 1.2 trillion in 2008 to 18.7 trillion in 2025, a 15.6fold increase over 17 years with a compound annual growth rate of 17.5%.

[00:02:18]This is far higher than the US at 7.7% and the EU at 3% during the same period.

[00:02:25]Third, local government have a low self-sufficiency rate with excessive transfer payments from the central government leading to an unhealthy fiscal pattern between central and local governments. This severely limits the effectiveness of fiscal policies in stimulating the economy. The central government is also concerned about a vicious cycle of fiscal and economic collapse. Despite increasing fiscal efforts this year, the GDP growth target has been lowered to 4.5 to 5% indicating that the authorities recognize the instability of China's economy. However, with no other options available, there are attempting to maintain the situation on the surface by using fiscal measures to prop it up. But China's economy, which exceeded 140 trillion yen in GDP by 2025, is in deep trouble, and the fiscal system is unable to handle it.

[00:03:17]Propping it up will only result in fiscal ruin. The root cause of the local fiscal issues lies in the collapse of the land finance model. For years, local governments have relied on revenue from land sales to fund infrastructure, pay salaries, and maintain public services.

[00:03:33]This model, which has long propped up China's local governments, now belongs to the past. As the housing market continues to struggle, the land finance system has completely broken down.

[00:03:44]According to data recently released by China's Ministry of Finance, local government's land sales revenue for the first quarter of 2026 amounted to 517.6 billion yen, a 24.4% year-on-year decrease. This figure represents a significant drop compared to the same period last year. In 2021, land sales revenue by local Chinese authorities reached a historic high of approximately 8.7 trillion yen. However, with the real estate market in China sinking into a slump, land sales revenue has dropped sharply in both volume and price. With revenue for 2025 estimated at around 4.2 trillion yen, as 2026 begins, the downward trend in land sales revenue shows no signs of reversing. The primary cause of the continuous decline in land sales revenue is the ongoing weakness in the housing market as property developers are unwilling to acquire new land. According to data from the National Bureau of Statistics of China in the first quarter of this year, national real estate development investment decreased by 11.2% yearonear.

[00:04:48]The area of newly sold commercial housing dropped by 10.4% and funds available to real estate developers fell by 17.3%.

[00:04:58]In March, the price of newly built commercial housing in first tier cities dropped by 2.2% compared to the same period last year. Second tier dropped by 3.3% and third tier cities dropped by 4%.

[00:05:11]Yen Yuen Jing, deputy director of the Shanghai E-House Real Estate Research Institute, predicts a potential 5% drop in land transfer income for the whole year compared to last year. The decline in land sales revenue has also led to reduced fiscal income for many local governments. In Inner Mongolia, government fund income in the first quarter fell by 32% yearonear, while Hainan saw a 29.6% drop. Lee Rang, a professor at the School of Finance at Reming University of China, stated that the widening decline in land sales revenue in the first quarter indicates significant fiscal pressure on local governments. The long-standing reliance on land sales to increase fiscal spending is no longer viable. On the other hand, the debt crisis in China has further intensified this year. In the first four months of the year, the scale of debt insurance by local governments in China reached a new high with bonds issued amounting to about 3.9 trillion yen, a yearon-year increase of about 11%, setting a new record for bonds insurance during this period.

[00:06:15]Observers believe that the new high in bond insurance is part of the Chinese government's efforts to address economic downturn by issuing large amounts of local government debt to fund major projects and stimulate domestic demand.

[00:06:28]However, some commentators argue that the move represents a return to the old path of relying on infrastructure investment to boost GDP growth.

[00:06:37]Historical data suggests that while such measures may provide short-term improvements to GDP figures, the long-term economic benefits are minimal.

[00:06:45]According to the Ministry of Finance of China, by the beginning of 2026, local government debt has reached 56.6 trillion yen. However, official Chinese data often conceals unfavorable figures and the actual debt could be much worse with hidden liabilities not accounted for. The International Monetary Fund, IMF, and the Bank for International Settlements, BIS, estimated that by 2024, China's total government debt could reach 100 trillion yen. Since 1978, when China began its reform and opening up policies, the country shifted from a centrally planned economic model to a more decentralized one with local governments having more financial autonomy. This shift caused central government finances to depend on borrowing from local governments to meet expenditures. After 1992, in an effort to increase fiscal revenue as a proportion of GDP and the share of central government revenue, China began implementing a tax sharing system starting in 1994. This system divides tax into central taxes, local taxes, and shared taxes between central and local governments while also establishing a financial redistribution mechanism through transfer payments. However, a problem arose with the allocation of fiscal responsibilities between central and local government under the tax sharing system leading to a situation where central finances became abundant while lower levels of government faced difficulties. During the tenure of former Premier Wabal in 2008, it was announced that the government would push forward fiscal reforms within 5 years.

[00:08:21]But this initiative ultimately failed.

[00:08:24]In 2013, former Premier Lee Kch emphasized the need for fiscal and tax reforms, but progress has been slow.

[00:08:31]Since 2023, the highest decision-making bodies have called for a new round of fiscal and tax system reforms, though no breakthrough comprehensive strategy has been proposed yet. Commentator Wang Hur stated that theQi administration has lost its ability to implement major reforms. Over the past decade since Xi Jinping took office, there have been small changes in the fiscal and taxation system, but substantial reforms have been almost non-existent. The lack of direction in fiscal and taxation reforms and the inability to establish reasonable goals are the core issues threatening China's fiscal system.

[00:09:08]Without a clear path forward, current specific fiscal problems such as local issues, short-term land finance practices, and local government's hidden debt have only become more tangled and difficult to resolve. China's fiscal system has long been imbalanced in its structure. The centralized fiscal power and decentralized responsibility structure has put local government on the front line during economic downturns. Land finance and debt financing were once seen as effective solutions to fill fiscal gaps. However, with the collapse of the housing market and rising debt, local fiscal difficulties have now exploded. While Beijing has acknowledged the issue, it has yet to propose genuine reform plans.

[00:09:50]Local governments are struggling to cope, yet the central government continues to pretend all is well.

[00:09:55]Commentator Wool Gong Ming argued that when local governments can only cover wages and basic operations, it reflects a political system focused on self-preservation rather than improving people's livelihoods. For instance, in 2024, some central and western provinces saw reductions in public services and infrastructure investments by over 20% while expenditures on administrative cost and wages remain stable or even increased. The Chinese Communist Party's commitment to not to improve public welfare, but to maintain political stability. China's recent methods of addressing fiscal struggles have also been the subject of mockery. The first method is to target private enterprises.

[00:10:35]Local government across provinces have been engaging in robbery of private enterprises. Law enforcement agencies nationwide have intensified efforts to capture executives of relevant companies with many cases showing a clear profit-driven motive behind these actions. This behavior is referred to as high seas fishing in China's legal community. In the first half of 2024, non- tax income in China, primarily through fines, increased by approximately 25.2% compared to the previous year. The second method is to seize the wealth of corrupt officials.

[00:11:08]Recently, there have been an intensified of internal purges within the Communist Party with anti-corruption efforts reaching new heights. On April 23rd, the Central Commission for Discipline Inspection, CCDI, announced the results of its first quarter anti-corruption campaign, reporting that 56 provincial and ministral level officials had been disciplined four times the number from the same period last year. Data for 2025 show that 115 provincial and ministeral level officials had been investigated, a 42% increase from the previous year, marking a historic high. Former Shanghai entrepreneur Huli Ren revealed on social media that Xiinping's ongoing anti-corruption campaign is a form of internal party cultural revolution while also robbing corrupt officials of their assets. He also pointed out that the Communist Party's inspection teams have quotas for arrest. Who said that almost all Communist Party officials are involved in corruption and the authorities often target wealthy officials for their inspections, seizing billions of yen in assets from a single individual. Particularly for central level officials, their ill- obtained assets rarely fall below tens of millions of yen. Insiders in several regions have reported that the number of detainees in prisons and detention centers has noticeably increased with more officials involved in corruption and bribery being incarcerated.

[00:12:34]An insider in a Zurdown municipal government disclosed that facing fiscal difficulties, the Communist Party has developed a corrupt official economy model. In 2024, many new prisons were built specifically to house fallen officials, which have been dubbed corrupt officials prison. A key component of this corrupt official economy is that the Communist Party uses corrupt officials to undermine private entrepreneurs and then the disciplinary inspection commission arrests these officials and seize their wealth.

[00:13:03]Australian-based legal scholar Yan Honging has stated that the large-scale purge initiated by Shiinping is not only aimed at eliminating political rivals but also at rooting out officials deemed political disloyal. At the same time, she aims to address the severe economic crisis by seizing the assets of these officials. When ordinary citizens have been thoroughly squeezed, the focus shifts to seizing the wealth of businessmen. After almost exhausting the private sector, now the larger scale plunder is directed at corrupt officials, he said. Yonging also pointed out that she's targets for wealth accumulation have shifted towards two specific groups, temples across China, especially those with flourishing incense offerings, which have become prime targets for the tax authorities and the growing underground sex industry. Chinese officials and police have targeted these sex workers, primarily punishing them through fines.

[00:13:56]He expressed this outrage, calling the situation a reflection of the dire state of China's fiscal crisis. A source within China's tax system recently revealed that religious sites in Jerang and Fuen have been ordered to hand over their financial records, close their legal distribution centers, and report the fees and total income of each religious gathering. The local tax systems have been instructed to increase scrutiny of temples, and any discovered tax issues will be heavily penalized.

[00:14:25]Zjang cities of Hong Ningbul and Johan which are some of China's busiest Buddhist centers generate vast sums from Insense offerings, donations and ticket sales with individual temples seeing revenue reach tens of millions of yen and some even exceeding a billion yen.

[00:14:43]As for the underground sex industry, it has become widespread. Local government used periodic crackdowns as a way to generate revenue, allowing the industry to grow unchecked for a while before targeting the illegal sex workers and seizing their earnings. After the crackdown, the cycle begins again. An insider revealed that local police are well aware of the situation, refrain from truly clearing the industry as it has become a profitable venture. Police often act as protectors for business owners in the industry, collecting regular protection fees. However, because it is an illegal industry, there are no comprehensive statistics on the income generated from these crackdowns.

[00:15:20]Recently, foreign dignity figures have visited China, possibly giving the impression that the CCP's regime is stable. However, signs indicate that internal turmoil within the party is increasing. On April 24th, the Chinese government issued a statement criticizing former Chongqing Vice Mayor Jang Dental for his impatient and reckless approach during his tenure in Shandong, forcing through numerous projects that led to massive local debt.

[00:15:47]However, the statement did not disclose the scale of this new debt. Chinese issues expert Leeling E noted that the statement officially targeted Jan's impatience and recklessness, a rare move in official language. The central government's failure to mention the amount of new local debt suggest the figure could be staggering. In reality, the central government also shares responsibility for approving these projects, but Jang has been left to shoulder the blame. Lee Yingi believes that China's economic challenges, especially the unresolved local debt issue has created a climate of blameshifting between central and local governments, exaggerating internal power struggles. Chinese economist Lee Huning has argued that the formation of local debt is part of a broader systemic issue between the central and local governments. Former Chinese finance minister Leo Quinn once stated, "We won't raise your children for you.

[00:16:42]you're on your own. The central government's shift of responsibility to local government is intended to create a narrative that the central government is still good, but the local officials are too corrupt or incompetent. This strategy, however, poses a significant risk by causing everyone to adopt a layback attitude. Lie further explained that the Communist Party's performance metrics are based on economic growth, meaning local governments are pressured to boost GDP figures. This often results in borrowing, building skyscrapers, constructing metro systems, or falsifying data if the economy doesn't perform as expected. Xiinping's earlier career in Fujen and Jdown follow the same pattern. And it is a method that has been consistently used by many high-ranking Communist Party officials at the local level. On April 21st, the Chinese Communist Party's People's Daily published an article criticizing grassroots officials for frequently stating that they can't decide on this matter or that they need to ask for approval from above. The article describes this as a reflection of a blameshifting mentality and a passive attitude in government work. After the article was released, some grassroot officials in mainland China were interviewed by independent media questioning, "We are being criticized for constantly seeking approval, but has anyone given us authority to make decisions." One official who has worked at the grassroot level for 10 years expressed dissatisfaction with the criticism from the party media, saying, "I don't accept this criticism." Chinese issues expert Yen Shan commented that it is rare for grassroot officials to publicly challenge statements from central level party media. He pointed out that the party media is promoting Xiinping so-called performance-based governance which suggests that grassroot officials harbor deep resentment towards higher level officials and that local governments are dissatisfied with the central government. The boldness of grassroots officials and challenging party media signals brought a dissatisfaction with Xi Jinping's leadership, reflecting a decline in his authority. Several informed sources in Beijing disclosed that the Communist Party is in trouble. Over the past year, public servants at the grassroot level have openly criticized both the Communist Party and Xiinping.