The Hidden Costs of Provincial Debt in China

China’s rapid economic growth has been driven by both central and provincial governments, but the latter's role in fueling the nation's development has also created an increasingly concerning problem—provincial debt. Although this debt has been mostly been the resulting of financing essential infrastructure projects and stimulating local economies, the long-sighted impact of this debt may destroy the economic stability of China. The article discusses the reasons and the implications of provincial debt in China and why the central government is making efforts to control the overwhelming debt pile of the provinces.

The major cause of provincial debt in China is the tendency of the local governments to resort to borrowing as the main source of infrastructure development and developing the economy in general. Over the past two decades, local governments have been responsible for financing a substantial portion of China's development, including building roads, bridges, and even entire cities. This has proved to boost growth, though there is an increasing level of debt as a result. 

The important instruments of provincial debt in China are Local Government Financing Vehicles (LGFVs) that enables local governments to bypass borrowing restrictions stipulated at national level. These vehicles enable the local governments to borrow funds through financial institutions to fund huge projects in infrastructure development, essentially infinitely. Further, these loans are not always reflected in official debt figures, thus, making it a kind of non-accounted or disguised debt. As of 2021, the total debt of LGFVs was estimated to be over 50 trillion yuan, accounting for a significant portion of the country's overall debt. This covert borrowing has complicated the process, for both the central government and external observers, to determine the real extent of debt in China.

In recent years, the central government has acted to slow down the reckless rise of provincial debt. In 2014, China’s National People's Congress introduced new regulations allowing local governments to issue bonds directly, with the goal of reducing reliance upon borrowing via LGFVs, which cannot be tracked by the government. These bonds are to be for certain types of infrastructure investments, their repayment being serviced by the central government or provincial sale of assets. Although this has somewhat checked provincial borrowing, it has failed to reduce the rate at which the province debts are growing.

The rising provincial debt poses a number of threats to China’s economy. The high cost of debt service is one of the challenges: the more that the local governments borrow to finance development projects, the more it will cost them to pay off the debt. Local governments already cash-strapped on land sales find that they have few choices when repaying their debts, which may lead to the creation of a boomerang effect regarding borrowing, eventually damaging local economies, and ruining overall financial stability of the nation.

Additionally, local governments usually find themselves in a tight spot of having to decide whether to pay their debt or finance vital services. As a result, some provinces are delaying payments to contractors or cutting back on public services in order to meet debt obligations. A downturn in state spending in education, health care and other social services may undermine the very social fabric of Chinese society and diminish long-term economic growth potential.

Debt of the local governments in China has also contributed to the inequalities in regions. Provinces like Guangdong and Jiangsu, have been rich enough to raise a lot of money through sales of lands and development of industries and therefore have the ability to pay their debts better. Conversely, less economically developed provinces, such as Guizhou and Yunnan, are hardly able to collect enough revenue to service debts. The result of this imbalance has been that repayment of debts has become easier in the economically vibrant areas, whereas the less developed provinces have to work with more financial pressure.

This has in most instances contributed to additional borrowing as the local governments strive to reduce the development gap. It has created the scenario where at least some provinces are literally borrowing to keep up the semblance of growth, even when they are structurally in no state to meet their debt position in the future. Measures by the central government to control this matter have been restricted borrowing capability of the poorer provinces, and making them pursue more transparent management of their finances. Such efforts however have met with opposition, with local governments being unwilling to curb the pace of development.

To curb this increasing problem, the central government has tried a number of times to bring the provincial debt under control. The People’s Bank of China has taken steps to tighten credit conditions for local governments, while the Ministry of Finance has implemented measures to limit borrowing by LGFVs. The government has also been putting emphasis on enhancing transparency in the finances of the local government, and mainly in the area of off-budget borrowing.

In spite of these, the critical problem of controlling provincial debt remains. Reduction in spending in infrastructure by the local governments has proved difficult since it has played a significant role in economic growth. Meanwhile, the central government can only do so much, since balancing growth and financial stability is necessary. Consequently, the future of provincial debt in China is likely to be determined based on how well the government will be able to introduce more efficient fiscal reforms as well as hold the local governments to account with regard to their borrowing.

Works Cited

“China’s Treatment of Local Debt 'Ulcer' Threatens Growth Target.” Financial Times, 13 Mar. 2024, https://www.ft.com/content/901bc68e-ad35-42eb-97e0-542c631b9033. Accessed 12 July 2025.

“China’s LGFVs: Debt Challenges Ahead.” CKGSB Knowledge, https://english.ckgsb.edu.cn/knowledge/article/a-bridge-too-far-can-chinas-lgfvs-tackle-their-debt-issues/. Accessed 12 Jul. 2025.

“The ABCs of LGFVs: China’s Local Government Financing Vehicles.” Reserve Bank of Australia Bulletin, Oct. 2024, https://www.rba.gov.au/publications/bulletin/2024/oct/the-abcs-of-lgfvs-chinas-local-government-financing-vehicles.html. Accessed 12 July 2025.

“Local Government Implicit Debt and the Pricing of LGFV Bonds.” VoxChina, 2022, https://voxchina.org/show-3-281.html. Accessed 12 July 2025.

Shih, Victor C. “Local Government Debt Dynamics in China.” University of California, San Diego, 2023, https://china.ucsd.edu/_files/2023-report_shih_local-government-debt-dynamics-in-china.pdf. Accessed 12 July 2025.

“Tapped Out: LGFV Debt Reaches 54 Trillion Yuan by End‑2022.” Rhodium Group, 2023, https://rhg.com/research/tapped-out/. Accessed 12 July 2025.

“Trillions in Hidden Debt Drove China’s Growth. Now It Threatens Its Future.” The Wall Street Journal, 14 July 2024, https://www.wsj.com/world/china/china-economy-debt-borrowing-33f08b5e. Accessed 12 July 2025.

“What You Need to Know about China's $1.4 Trillion Debt Package.” Reuters, 10 Nov. 2024, https://www.reuters.com/markets/asia/what-you-need-know-about-chinas-14-trillion-debt-package-2024-11-10/. Accessed 12 July 2025.

Yang, Wanping, et al. “Impact of China’s Provincial Government Debt on Economic Growth and Sustainable Development.” Sustainability, vol. 14, no. 3, Jan. 2022, p. 1474. DOI.org (Crossref), https://doi.org/10.3390/su14031474.