In Liuzhou, a city in southern China’s Guangxi region, the bustling vision of local leaders once promised a bright future. Back in early 2019, Mayor Wu Wei proudly spoke of the city’s economic achievements, highlighting a new industrial district and an elevated light-rail system under construction. “The achievements of the past year have not come easily,” Wu said. Yet, what was left unsaid was the staggering off-the-books debt that funded these developments.
A Mirage of Prosperity
For years, cities like Liuzhou across China have accumulated trillions of dollars in hidden debt to finance various economic development projects. These include industrial districts, resorts, transit systems, and housing projects—many of which have now failed. Economists estimate this hidden debt to be between $7 trillion and $11 trillion, about twice the size of China’s central government debt. The opaque nature of these financial arrangements means that even Beijing may not fully grasp the extent of the problem.
This hidden debt was amassed through state-owned financing vehicles known as local government financing vehicles (LGFVs). These vehicles allowed cities to bypass borrowing limits and appear financially stable by not recording the debts on official ledgers. As a result, the seemingly booming cities are now littered with overgrown construction sites, deserted highways, and abandoned tourist attractions—stark reminders of illusory growth.
The Collapse of Liuzhou’s Grand Projects
Liuzhou’s ambitious plans included creating an industrial district where a state-owned financing group acquired land, built hotels, and even opened an amusement park. However, many of these areas now lie vacant, with abandoned buildings and empty streets. Birds flit through the rows of deserted buildings at an unfinished apartment complex, painting a grim picture of wasted resources. One local resident, watching the faltering project from her shop across the street, lamented, “The government is broke.”
Central to the crisis are the LGFVs that borrowed heavily on behalf of local governments. These LGFVs funded projects with little economic return, relying heavily on land sales to real estate developers—a revenue stream that dried up as China’s real estate market deteriorated over the past three years. The financial strain on local governments has become severe, with some projects abandoned midway due to lack of funds.
A National Crisis
The hidden debt crisis isn’t confined to Liuzhou. Across China, many LGFVs are struggling. Estimates suggest that $800 billion of this debt is at high risk of default. This puts Beijing in a precarious position: either bail out these LGFVs, encouraging more reckless borrowing, or let them fail, potentially causing a credit crunch and further economic slowdown. “The reckoning has arrived,” said Victor Shih, a professor at the University of California, San Diego, who researches China’s politics and financial system.
China’s annual growth has slowed significantly, from 7.8% a decade ago to 5.2% last year. The financial strain on local governments means less ability to stimulate the economy, further exacerbating the slowdown. Top Chinese leaders are expected to discuss this looming threat at a long-awaited summit that will chart a course for China’s economy.
The Weakness in China’s Economic Foundation
The municipal debt crisis stems from a fundamental issue: the way Chinese cities fund themselves. Beijing controls the purse strings and limits local government bonds, yet expects cities to drive economic growth and provide services. LGFVs offered a solution, allowing cities to take on debt indirectly. This arrangement led to risky financial practices. LGFVs often guaranteed each other’s debts, making their liabilities seem safer to investors.
In many cases, these entities shifted assets around to appear financially stable, a practice that masked the true extent of their debt. For example, in Liuzhou, one LGFV received guarantees from 13 other state-owned entities, making all of them liable if it defaulted. This created a tangled web of debt that is now unraveling.
The Fallout of Failed Projects
The situation in Liuzhou is emblematic of a broader issue facing China. Other cities are also halting infrastructure projects that once fueled growth. Moody’s Investors Service and Fitch Ratings have downgraded their outlook on China’s credit rating, citing doubts about local governments’ ability to manage their debt. The financial strain has led to a series of consequences, including the suspension of the city’s light-rail project, leaving behind half-built tracks.
After China’s real estate bubble burst in 2021, home sales collapsed, and prices sank. Private developers showed little interest in buying land from the local government, so Dongcheng, an LGFV, stepped in. It used borrowed cash to purchase large tracts and help refill government coffers. Since 2022, subsidiaries of Dongcheng have purchased 67% of all land parcels sold in the new district, records show. Despite spending billions of dollars on new development, the city’s economic output last year was slightly smaller than it was in 2019. General revenue fell by about 30% over the same period.
A National Financial Sinkhole
The problems with LGFVs are not just about mismanagement at the local level. The broader economy is facing significant challenges, including a downturn in the property market, declining consumer confidence, and a shrinking labor force. The central government’s response has often been to exert more control, further stifling the private sector and innovation.
The collapse of projects like those in Liuzhou highlights the dangers of over-reliance on debt and the need for more sustainable economic practices. The hidden debt has led to significant financial instability, with the IMF estimating that LGFV debt across China will grow 60% by 2028 compared with 2022 levels.
Lessons for the Future
China’s economic troubles are not just about hidden debt. The broader economy is facing significant challenges, including a downturn in the property market, declining consumer confidence, and a shrinking labor force. The central government’s response has often been to exert more control, further stifling the private sector and innovation.
The global community, including countries with similar economic practices, should take note. The lessons from China’s hidden debt crisis underscore the dangers of socialist/fascist approaches to economics. Private industry is always smarter than government and in China’s case we see the stupidity has come home to roost. Unfortunately, we see some of that in America as well.
ACZ Editor: Remember this debt has been used to attack the West, in flooding the markets with heavily subsidized cars, electronics and other goods.
