China Establishes ‘Debt Management Bureau’ to Oversee Local Government Liabilities: Fiscal Capacity Secured, but Recovery Momentum Lacking

$6.6 Trillion in Local Debt Becomes Beijing’s Economic Time Bomb
Central Government Takes Direct Control of Local Bond Issuance
Stimulus Capacity Secured, but Long-Term Stagnation Persists

As China’s mounting local government debt emerges as a major risk to its economy, Beijing has established a new bureau dedicated to managing liabilities and has decided to place all local bond issuance under centralized control. The move marks a fundamental shift from allowing local governments to borrow autonomously toward direct supervision by the central government. While this centralization is intended to prevent excessive borrowing from destabilizing regional finances and the broader economy—thereby securing additional fiscal capacity for stimulus—China still lacks credible momentum for an economic rebound. Complicating matters, Beijing must simultaneously address overproduction through structural reform, a process likely to trigger bankruptcies and unemployment, leaving policymakers with limited room to maneuver.

Finance Ministry Launches Debt Management Bureau

According to Chinese financial outlet Caixin on November 5, the Ministry of Finance announced the establishment of a new Debt Management Bureau on November 3. The bureau will oversee both central and local government debt, managing issuance limits for national and local bonds, repayment, external debt operations, and hidden liability audits. Previously, responsibilities were divided among multiple divisions—the Budget, Treasury, and Financial Departments—but the reform consolidates all debt management directly under the Ministry of Finance. In effect, Beijing will now exercise substantial, hands-on control over local government debt.

Although China had already required central approval for local bond issuance, local governments routinely bypassed this by creating investment vehicles to borrow freely. The new structure effectively tightens these lax controls, shifting from a nominal approval system to full-scale central supervision. In contrast to South Korea—where local governments need Ministry of the Interior approval and the Finance Ministry manages overall debt ceilings—China’s reform introduces a fully centralized model in which the Ministry of Finance both approves and limits issuance.

Analysts view the reform as an institutional implementation of the Communist Party’s stated goal of “controlling local government debt risk.” The resolution from the Party’s Fourth Plenary Session of the 20th Central Committee last month explicitly called for “actively and prudently defusing local government debt risks.” Earlier, Finance Minister Lan Fo’an stated in September that Beijing would “keep local government debt within controllable limits and strictly prohibit any new hidden liabilities.”

According to the Ministry of Finance, as of the end of last year, China’s total government debt stood at roughly $12.7 trillion, comprising about $4.7 trillion in central government bonds, $6.5 trillion in local government liabilities, and approximately $1.4 trillion in hidden debt—equivalent to 68.7% of GDP. The Debt Management Bureau’s initial mandate is to eliminate hidden local debt by June 2027 and restructure underperforming public investment firms. The ministry is already implementing a “debt restructuring program” that swaps short-term, high-interest obligations for long-term, lower-interest bonds, with the bureau set to provide continuous oversight.

$1.6 Trillion Debt Swap Provides Fiscal Breathing Room

China’s massive local debt burden is the legacy of years of growth-at-all-costs policy. Hidden debt largely stems from the borrowing binge of local government financing vehicles (LGFVs) established by China’s 31 provincial-level regions during the property boom to fund infrastructure expansion. These LGFVs raised funds through banks and capital markets but kept liabilities off the official government balance sheets. Local officials, motivated by performance metrics, often concealed the full scale of their debts.

When the property market collapsed, however, LGFVs’ repayment capacity evaporated, forcing local governments—the real guarantors—to surface as de facto debtors. This has deepened fiscal distress amid a slowing economy. Despite China’s relatively low overall debt ratio compared to the G20 average of 118.2% and the G7 average of 123.4%, debt disparities among local governments are severe, with some facing near-bankruptcy conditions. Additionally, tens of trillions of yuan in quasi-public debt remain hidden within state-owned enterprises and local financial institutions, further fueling global investor unease.

By the end of 2023, the Ministry of Finance had identified roughly $2.7 trillion in off-balance-sheet local liabilities and conducted a $1.6 trillion debt swap. It also approved the issuance of $550 billion in special local bonds through August this year, reducing average interest costs by more than 2.5 percentage points. In theory, when the central government issues bonds to absorb local hidden debt, it can contain financial risks and restore growth momentum—effectively creating new fiscal room for stimulus.

Deflationary Pressures Mount, Further Stimulus Urgent

China’s economy is now in dire need of large-scale stimulus. Quarterly GDP growth slowed from 4.7% and 4.6% in the second and third quarters of last year to 5.4% in the fourth quarter and the first quarter of this year, before slipping back into the 4% range. Meanwhile, deflation fears have intensified: consumer prices fell 0.3% year-on-year in September after a 0.4% decline in August—worse than the 0.2% drop forecast by Reuters.

Producer prices have also declined for 36 consecutive months, down 2.3% year-on-year in September. Structural headwinds—including demographic shifts, weak demand, destructive price competition across industries, youth unemployment near 20%, and chronic liquidity shortages—have pushed the economy to the brink. Combined with a collapsing property market and an overheated electric vehicle sector on the verge of a bubble burst, Beijing’s official growth target of “around 5%” appears increasingly out of reach.

While the government has expanded fiscal spending and absorbed local debt to spur growth, economists doubt the effectiveness of such measures without deep structural reforms. The lingering aftereffects of past stimulus packages continue to haunt the economy. Following the 2008 global financial crisis, China relied heavily on construction-driven stimulus, and by 2016, investment in real estate and infrastructure peaked at 33% of GDP—remaining high at 31% in 2020.

But as overinvestment fueled asset bubbles, the government introduced strict lending curbs, triggering deleveraging and defaults such as the collapse of Evergrande, China’s second-largest developer. Although Beijing later rolled out multiple housing market rescue policies from late 2022 onward, the downturn persisted. Infrastructure investment by local governments continued, but inefficiencies mounted as funds were concentrated in smaller, third-tier cities.

Experts warn that such spending, if not accompanied by real recovery, simply re-emerges as debt. The growing liabilities of households and local governments alike are eroding consumption capacity and fiscal sustainability. Ultimately, this could further weaken China’s economic resilience and trap it in a prolonged cycle of stagnation.