Across China, idle construction sites, delayed civil servant salaries and back-tax demands on businesses all point to a lingering fiscal crisis. Now entering its fourth year, the property market slump has crippled land sales – the primary revenue source for local governments, especially those in the hinterland regions and underdeveloped areas.
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With shrinking revenues, local governments are struggling to repay mounting debt while still trying to meet economic growth targets.
Policymakers have acknowledged the severity of the problem, signalling fiscal reforms to give local governments greater revenue-raising power and to ease austerity measures. At the same time, Beijing hopes to boost household consumption to reduce reliance on government-led investment.
Yet until these efforts take effect – which could take years – China must still lean on debt-funded infrastructure investment to achieve its target economic growth, widely expected to be 5 per cent this year.
Indeed, policymakers have signalled their intent to further ramp up borrowing to stimulate the economy. At last December’s central economic work conference, officials pledged to expand the issuance of the central government’s ultra-long special bonds and local government special-purpose bonds this year – both key to sustaining local infrastructure investment amid economic headwinds.
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But the strategy risks backfiring. Once dominated by state-owned enterprises (SOEs), local infrastructure development is increasingly controlled by local government financing vehicles (LGFVs) – shadowy entities that blur the line between public finance and commercial lending. Instead of efficiently funding projects, these vehicles are fuelling a dangerous debt cycle that threatens to destabilise China’s economy.