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Explainer | China’s hidden debt: how much is it and what is Beijing doing to curb the financial risk?

  • Debt levels among China’s local government financing vehicles (LGFVs) are an issue of growing concern for authorities
  • Beijing has begun tightening bond issuance criteria for LGFVs and ordered local governments to clear existing credit by 2028

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China is trying to reduce debt among local government financing vehicles (LGFVs), which were created to skirt restrictions on local government borrowing. Photo: AFP
Amanda Lee
Local governments in China are racing to clean up off-balance sheet borrowing as cutting debt is now top of the political agenda for Beijing.
Late last month, the State Council said it would allow Guizhou, one of China’s poorest and most indebted provinces, to delay credit repayments and undergo restructuring, underlining the government’s focus on debt management despite a slowing economy.

In recent years, the central government has stepped up supervision of local government financing vehicles (LGFVs), which were created to skirt restrictions on local government borrowing and have proliferated since the global financial crisis in 2008.

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These platforms, opaque in nature, are often used to raise funds for infrastructure spending that does not immediately generate returns, leading to the accumulation of hidden debt in the regional economy.

Because the main lenders to LGFVs are banks, a large-scale default could trigger contagion in the banking sector.

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Since 2015, Beijing has been promoting the transformation of LGFVs from focusing on public welfare into more commercialised entities, effectively reducing the risk to the financial system and chances of a state bailout.

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