On August 1, the Ministry of Finance of the Chinese Communist Party reported six typical cases of hidden debts held accountable by local governments. The highest increase in hidden debts in a single case reached 683.96 billion yuan. Chinese experts believe that these cases highlight the sharp contradictions between central and local government finances, stemming from institutional issues, with limited accountability mechanisms.
In this latest report, the total amount of hidden debts disclosed in the six cases was 1410.14 billion yuan. Two cases exceeded 600 billion yuan each. One case involved Xiamen, Fujian Province using state-owned enterprises to finance land development and housing projects, resulting in an increase of 683.96 billion yuan in hidden debts. The other case was Chengdu, Sichuan Province using state-owned enterprises to finance urban renewal projects, construction of public infrastructure, and contribution to railway construction funds, leading to an increase of 614.08 billion yuan in hidden debts.
By the end of 2024, Fujian and Sichuan provinces had recognized hidden debt balances of 3589.3 billion yuan and 8208.2 billion yuan, respectively. The newly disclosed hidden debts of 683.96 billion yuan and 614.08 billion yuan represent approximately 19% and 7.5% increases, respectively.
Hidden debts refer to debts assumed or guaranteed by the government through the operation of other entities beyond the legal limit, not recorded on the government’s balance sheet, hence termed “hidden debts”. In contrast, statutory debts include national bonds issued by the central government and local government bonds issued by provincial governments.
The issue of hidden debts in local Chinese Communist Party governments has been long-standing. Official figures state that by the end of 2023, the total hidden debt balance nationwide confirmed by the central government was 14.3 trillion yuan, with a goal to resolve all hidden debts by the end of 2028.
On August 2, Chinese expert Wang He told a news outlet, “The revelation of these six cases with outstanding amounts is unprecedented, surpassing any typical cases exposed since 2022, reaching a historical peak.”
Wang added that the authorities initially concealed the actual scale of hidden debts, estimating it to be as high as 50 trillion yuan, although the central government only acknowledged 14 trillion yuan.
Regarding the root of hidden debts, Wang highlighted that it’s not simply a corruption issue but mainly a violation of fiscal discipline. The Ministry of Finance concluded its report by emphasizing the need for “serious accountability.”
Sun Guoxiang, a professor at the International Affairs and Business Department of South China University in Taiwan, expressed on August 2 that while short-term accountability measures can be effective, the long-term effects are limited.
Sun explained, “While these accountability reports serve as political tools to convey the central government’s determination to address hidden debts, China’s local debt issue is systemic and structural, not something that can be resolved solely by punishing a few officials.”
Sun elaborated on how China’s fiscal decentralization since the 1994 tax system reform has led to a situation where local governments, burdened with significant spending responsibilities, such as education, healthcare, and infrastructure, struggle to cope with increasing expenditure obligations. This has resulted in a reliance on local government financing platforms to undertake projects and construction.
The evaluation of officials based primarily on GDP growth has incentivized local governments to borrow to boost investments, with debts becoming a tool for political achievements, especially under years of infrastructure stimulus policies, contributing to a continuous expansion of the debt burden.
Sun highlighted the close relationship between China’s local finance and real estate sectors. For years, revenue from land sales supported local finances and debt repayments, but the decline in the property market in recent years has led to the collapse of land finance, further exposing debt risks.
Lastly, the lack of transparent supervision and risk-transfer mechanisms has allowed many hidden debts to evade inclusion in local government budgets, leading to regulatory delays. Various strategies like urban investment bonds, PPP models, or government service purchases have been used by local governments to circumvent regulation.