The local government of the Chinese Communist Party is currently undergoing an extreme trend of “revitalizing” and “securitizing” state-owned assets in order to fill the massive fiscal gap and deal with complex debts. Assets ranging from underutilized bridge spaces, loss-making public transportation groups, to intangible data assets are being packaged and monetized. However, whether this fiscal operation is a solution to the crisis or a trigger for a financial storm has raised significant industry concerns.
The massive and highly risky local debt cleanup operation by the Chinese Communist Party has entered into a critical phase as of the mid-year of 2026. Despite authorities claiming a significant reduction in hidden debts, the indirect borrowing to shift the crisis onto the future, after years of the “land finance” bursting bubble, implies that local governments will face even more severe liquidity depletion crises.
According to Bloomberg, Wang Yuanhui, the Deputy Director of Research at the China Chengxin International Credit Rating Institute, stated on Thursday last week (4th) that the scale of hidden debts of Chinese local governments has significantly decreased after this round of debt issuance. By the end of this year, the hidden debt scale under the jurisdiction of the Ministry of Finance is expected to be around 3-3.5 trillion yuan.
However, the apparent improvement in data conceals the numerous holes in the true financial situation of local governments. A report by Caixin revealed that while budget data in some provincial-level regions seems to be recovering, it is not a genuine fiscal recovery but rather a rearrangement of the balance sheet.
Wang Yuanhui also admitted that the fundamentals of urban investment and construction have not substantially improved and still face different levels of pressure regarding cash flow operations, government subsidies and support, and refinancing. He believes that to move beyond the second half of debt restructuring, substantial reform measures such as financial and tax system reforms, promoting urban investment transformation, and real asset revitalization are necessary to break the cycle of repeated debt restructuring.
Caixin’s report pointed out that many provinces are mobilizing state-owned assets or physical infrastructure to go through the so-called “revitalization” and “monetization” processes to cope with the financial pressure caused by the collapse of the land market. For instance, state-owned enterprise equity, industrial parks, logistics facilities, public infrastructure like highways, and other assets are being monetized through securities issuance, franchising, or equity transfers to generate income.
Regarding the vigorous implementation of Real Estate Investment Trusts (REITs) and other asset securitization tools by authorities, seasoned media person Mike Li pointed out that such practices mirror the strategy from the early 1990s when the Shanghai Stock Exchange was established. The policy back then aimed to “lift state-owned enterprises out of poverty and trouble within three years,” by packaging struggling state-owned enterprises on the verge of bankruptcy for listing to “raise funds” and shift the crisis.
Caixin’s report indicated that hidden debts have been legalized and transferred to the official balance sheets of local governments, leading to a rapid increase in statutory debts from 40.7 trillion yuan at the end of 2023 to 54.8 trillion yuan two years later, resulting in a sharp surge in interest payments.
A more challenging issue, as mentioned in the report, lies in the operational debts of financing platforms owed to financial institutions, which reached a massive 14.8 trillion yuan as of the end of 2024. Due to the opacity of many operational debts involving high-interest non-standard loans, banks are reluctant to restructure them due to compliance risks.
Furthermore, many financing platforms are facing liquidity depletion, resorting to “borrowing new loans to repay old debts” last year to pay interest, while some platforms have been forced to take extreme measures such as several platforms in Henan Province issuing offshore bonds with double-digit actual interest rates.
As analyzed by Caixin, the core reason driving local governments towards extreme debt measures is the malfunctioning of the “land finance.” According to data from the Chinese Ministry of Finance, nationwide revenue from the transfer of state-owned land use rights fell sharply by 24.4% in the first quarter of 2026 compared to the same period last year, with a further 27.2% drop in the first four months, continuing the consecutive annual decline since 2022.
Data compiled by Dajiyuan further reveals that the self-sufficiency rate of general public budget finances in 28 provincial-level regions nationwide in the first quarter of 2026 is below 100%, including prosperous provinces and cities like Zhejiang (96%), Shanghai (90%), Guangdong (73%), Beijing (66%), where local revenues only cover 55.9% of expenses.
Chinese financial scholar Wang Yin (alias) warned during an interview with Dajiyuan that even with significant policy favoritism towards the highly developed Jiangsu, Zhejiang, and Shanghai regions, achieving financial self-sufficiency is difficult. He stated that if the self-sufficiency rate of these regions drops below 80%, most provinces and cities would have to shut down.
Professor X of Jiangsu University bluntly stated that with developers holding back on land acquisitions and slower house sales, reduced consumer spending is impacting the economy negatively, and no solutions to the financial tightness can be found until the economy revives.
Facing the dilemma of the malfunctioning land finance, local governments have rapidly adopted the ‘Hubei Model’ of monetizing idle state-owned resources nationwide. In October 2025, Hubei Province Governor Li Dianxun put forward the slogan of capitalizing on all state-owned resources as much as possible, securitizing all state-owned assets as much as possible, and leveraging all state-owned funds as much as possible.
By the end of 2024, Hubei had compiled a list of state-owned assets available for securitization, with an estimated value of 21.5 trillion yuan and realized over 300 billion yuan in 2025. Provinces such as Hunan and Anhui have followed suit, packaging underutilized spaces like bridge bottoms, parking lot revenue rights, or even selling reservoir sediments in the form of Asset-Backed Securities (ABS) financing.
This wave of securitization has driven the issuance of Chinese ABS to a historical high in 2025, reaching a trading volume of 2.3 trillion US dollars. However, concerns have been raised about the quality of underlying assets. A Chinese brokerage firm admitted to the Financial Times that high-quality assets were mostly sold or securitized in the early stages, leaving mostly lower-quality assets now.
In the case of Wuhan, a state-owned public transportation group that continued to incur losses reported a net loss of 821 million yuan in the first half of 2025, yet still issued 600 million yuan of ABS, leading to its notes facing discounts in the secondary market.
Even more concerning, a state-owned group in Wuhan rebranded a building with a mere 30% occupancy rate as an ‘AI Tower’, issuing 300 million yuan ABS for this property. However, onsite inspection revealed that the main tenant was a tech company involved in low-skilled short video review tasks.
As physical collateral values gradually deplete, some local governments have started looking towards virtual “data” assets, attempting to front-load potential future earnings. According to Wind data, the issuing volume of data asset ABS had reached 16.3 billion yuan by mid-May 2026, more than triple the amount issued for the entire year of 2025.
A financing platform in Zhejiang province attempted to capitalize on parking lot data like traffic flows and payment records and issue ABS, symbolizing the trend of ‘data finance.’
However, transforming data into financial assets faces a significant valuation and compliance gap. Li Yongzhuo, head of the Beijing Shengting Law Firm, pointed out to Caixin that current methods of valuing data assets have inherent flaws: the cost method cannot reflect commercial value, the income method heavily relies on subjective assumptions, and the market method fails due to the lack of real transaction cases.
Li Yongzhuo highlighted a key contradiction: companies generally do not want to disclose their most valuable data for trading, yet the data flowing into the market lacks value, making it challenging for banks to consider them as independent collateral.
This fundraising operation known as “revitalization innovation” but in essence, as a form of “indirect borrowing,” has raised serious concerns. Caixin cited investment bankers warning that local financing platforms are using these new financial products to repack high-interest non-standard debts as exchangeable securities to bypass lending regulations.
Both China Chengxin International Credit Rating Agency and the global rating agency Standard & Poor’s (S&P Global Ratings) have issued warnings: whether issuing REITs or ABS, securitization merely advances future income streams but does not eliminate underlying debts, essentially postponing repayment pressures.
Chinese political commentator Li Linyi stated that the debt cleanup work of the local Chinese Communist Party government appears to have stabilized on the surface through administrative directives and accounting sheet restructuring. However, with the core engine of “land finance” shutting down and the new path of “asset monetization” being riddled with property rights uncertainties, inflated valuations, and disguised borrowing, the dilemma of debt restructuring and maintaining economic growth forces the CCP to forcibly shift the huge crisis onto the future, potentially dragging the Chinese economy into a deeper and more severe structural quagmire.