China’s Local Governments Tap State Assets as Debt “Explosion” Turns Into a Grey Rhino for the Economy

Local-Government Debt Expansion Amid a Property Downturn
China’s “Lost Decades” Risk Intensifies
China’s Debt Ratio Breaks Above 300% of GDP for the First Time

China’s local governments are sharply ramping up issuance of asset-backed securities (ABS) collateralized by state-owned assets to relieve severe fiscal stress. The strategy is widely seen as a tactical move to secure urgently needed liquidity while skirting the central government’s strict quotas on local bond issuance. Markets, however, are increasingly wary that expanding ABS issuance in an environment where a property-market rebound remains elusive will ultimately fuel further local borrowing and undermine the central government’s long-term fiscal soundness.

Record Issuance of State-Asset-Backed ABS

On the 29th (local time), the Financial Times (FT), citing Chinese financial data provider Wind, reported that the number of ABS issuances in China had reached 2,386 as of the 24th, surpassing the previous peak set in 2021. Total issuance also climbed to $2.3 trillion, the highest level in four years. This surge has been driven primarily by provincial-level and lower-tier local governments. With tax revenues slumping amid an economic slowdown, local authorities are under pressure to plug liquidity shortfalls and secure fresh funding for new investment projects to meet the central government’s growth targets. Hubei Province has gone so far as to promote the slogan: “Turn all state-owned resources into assets, and all state-owned assets into securities.”

Yubin Fu, an analyst at Moody’s, one of the world’s three major credit rating agencies, assessed the rapid rise in local-government ABS issuance as a sign that local debt burdens and fiscal pressures are intensifying at an accelerating pace. China’s local-government finances have deteriorated markedly since the COVID-19 pandemic, driving bond issuance to record highs. As of early this month, bond issuance this year totaled $1.41 trillion, marking the first time annual issuance has exceeded $1.39 trillion.

Outstanding local-government bonds have also swelled to $7.51 trillion. At the same time, proceeds from land sales have fallen as the central government tightened regulations on property developers. According to the International Monetary Fund (IMF), the combined total of local governments’ official debt and borrowing through off-balance-sheet financial vehicles surged to 84% of GDP in 2024, up sharply from 62% in 2019. As recently as 2014, when the budget law did not recognize direct bond issuance by local governments, annual issuance stood at just $55.6 billion. After bond issuance was authorized in 2015, issuance exceeded $417.3 billion, and then jumped to $834.6 billion in 2016. Bond issuance ballooned again through the pandemic, surging to $1.25 trillion in 2023, before crossing $1.39 trillion for the first time this year.

Behind the sharp rise in local bond issuance is the simultaneous push for fiscal expansion to counter mounting downside economic pressure, alongside efforts to restructure local-government debt. As revenues from land conveyance fees (usage payments collected in exchange for granting land-use rights to property developers for a set period) collapsed and local finances deteriorated rapidly, the central government has increasingly deployed local bonds as a core fiscal instrument for economic support. Revenue from land-use rights sales, a key funding source for local governments, totaled just $347.8 billion from January to October this year. That is less than one-third of the $1.21 trillion recorded in 2021, when such revenues were at their peak. Full-year land-use rights sales are projected at $417.3 billion, implying a decline of more than $695.5 billion from the peak.

Local-Government Debt “Explosion,” Limited Central-Government Firepower

Another major fault line is the debt of local government financing vehicles (LGFVs), often described as “hidden” or “shadow” local-government debt. Local governments have long relied heavily on LGFVs—special-purpose entities—to fund infrastructure investment. Because LGFVs do not count toward official local-government debt ceilings, there are no definitive statistics. However, a compilation of interest-bearing liabilities across roughly 4,000 LGFVs based on DZH data put the total at $12.10 trillion as of end-2024, while the IMF estimates LGFV debt at $9.04 trillion at end-2024. A widespread market view holds that local governments are carrying hidden liabilities in the range of $8.35 trillion to $11.13 trillion.

Profitability is also under acute strain. Only 3% of LGFVs post a return on equity (ROE) of 4% or higher, while about 10% of all LGFVs record net losses. Aggregate net profit for 2024 totaled $76.5 billion, yet government subsidies exceeded $139.1 billion—outstripping total profits. In other words, absent subsidies, nearly half would be loss-making. The key reasons the liquidity crunch did not immediately surface, even as debt piled up, were the local governments’ implicit guarantees and a prolonged low-rate environment.

Against this backdrop, China’s central government has moved to tighten controls, but critics argue its capacity remains constrained relative to the scale of the problem. The Ministry of Finance plans to issue $834.6 billion in special bonds over three years to raise local-government debt limits. As a result, the local-government debt ceiling would increase from $4.11 trillion at end-2024 to $4.94 trillion. The ministry has also, since last year, allocated $111.3 billion per year from local-government special bonds over five years—$556.4 billion in total—to swap into local governments’ hidden debt. By converting hidden liabilities into bond form, local governments are given more time to repay. Adding the additional $834.6 billion in debt capacity brings total funding earmarked for local-debt resolution to $1.39 trillion. The government says these measures could help local governments reduce interest costs by $83.5 billion over five years, thereby supporting investment and consumption.

China has also established a dedicated division for local-government debt, a “Debt Management Department,” under the Ministry of Finance. The new unit includes six sub-divisions: a General Office, a Central Debt Office, Local Debt Office I, Local Debt Office II, an Issuance and Repayment Office, and a Monitoring and Management Office. The Debt Management Department will oversee the formulation of domestic debt management frameworks and policies, the design of central and local-government debt management systems, sovereign and local bond quota planning, issuance and repayment management across government, and risk monitoring and prevention. Chinese authorities have previously categorized local-government debt—long cited as a major macroeconomic vulnerability—as a “key risk area,” pledging to repay liabilities through measures such as special bond issuance. The Fourth Plenary Session of the 20th Central Committee of the Chinese Communist Party, held in October, also specified local-government debt management as a central task for the next five-year plan.

Prolonged Property Slump Pushes China’s Economy Toward the Edge

At the core of China’s local fiscal crisis lies a protracted property downturn. Revenue from land-use rights sales has long served as a backbone of local-government finance. But weakening home sales and falling prices have driven land-related revenues sharply lower, and the losses have accumulated directly on local-government balance sheets. A substantial portion of the financial stress arising during the property development process has also been absorbed by local-government-affiliated entities. In this way, real estate has emerged as one of China’s most acute strategic vulnerabilities. Once the economy’s main pillar—at times accounting for more than 30% of GDP—the sector’s bubble burst, large developers fell into cascading distress, and a domino of defaults followed. China Evergrande Group alone carried debt of about $278.2 billion, and other developers such as Country Garden also collapsed under heavy liabilities, pushing China’s economy into a downturn.

Experts often point to China’s pre-sale system as a core driver of the current crisis. Lou Jiwei, a former finance minister, said the pre-sale model—under which developers sell homes before construction even begins to raise funds—amplified risk. It became widespread for developers to divert deposits collected for one project to plug gaps elsewhere, and once funding dried up, construction stoppages proliferated. In practice, many Chinese property firms expanded by collecting payments in advance of sales, purchasing land, and pouring capital into mega-projects. But as revenues fell, debt-servicing capacity collapsed with striking speed.

Resolving the long-running property-market slump is widely seen as the most urgent step to stabilize China’s deteriorating fiscal position, yet a recovery has remained out of reach for years. According to China’s National Bureau of Statistics, prices for newly built homes in 70 major cities fell 0.4% month-on-month in November. The annual decline reached 2.4%. Month-on-month declines were recorded in 59 of the 70 cities—down from 64 the prior month, but still above 80% of the total. In first-tier cities, new-home prices fell 0.4% from the previous month. Beijing, Guangzhou, and Shenzhen posted declines of 0.5%, 0.5%, and 0.9%, respectively.

This is further accelerating China’s debt deflation. According to the National Institution for Finance & Development (NIFD), a think tank under the Chinese Academy of Social Sciences, China’s total debt—household, government, and corporate combined—stood at 302.3% of GDP as of the end of the third quarter. After surpassing 300% for the first time at the end of the first half, the ratio rose by roughly another two percentage points in just three months. On the current trajectory, China’s annual total-debt ratio is expected to remain above 300% of GDP this year. This would be the first time China’s annual total-debt ratio has exceeded 300% of GDP. As of the end of the third quarter, China’s total outstanding debt stood at roughly $55.64 trillion. Beijing-based economic commentator Liang Wuzhen said, “Even though local-government finances are already in serious shape, they are competing to pile on more debt. It’s like they’re ready to swallow an ox whole,” adding, “But the central government is failing to control this atmosphere. If the status quo persists, the arrival of a grave scenario—such as a sovereign default—becomes inevitable,” arguing that local-government debt has become a deadweight that is increasingly constricting China’s economy.