The Looming Problem of Local Debt in China

An event with Victor Shih talking about local debt problems in China.

Speaker/Performer: Victor Shih, Northwestern University

Did China achieve the impossible by chalking up nearly 9 per cent GDP growth while maintaining deficit at a low level? The reality: only a small share of the 26 trillion yuan or so in central and local stimulus projects is financed out of Chinese government budget. To raise money for these stimulus projects, local governments set up some 8,000 local investment companies, which issued equity and bonds,and borrowed from banks.

I estimate that local government investment companies have borrowed US$1.68 trillion dollars (11 trillion yuan). Local investment companies continue to take on more debt to finance projects. This debt is onerous for local governments, most of which run perennial deficits. Besides being a financial risk, this debt burden has other broader implications. For one, because most of this debt is collateralized with land, in the years to come, millions more urban residents will be forced to relocate so that land can be sold -- to repay banks.