The ongoing local debt crisis in China continues to worsen. Exiled former officials from the Chinese Communist Party (CCP) system revealed that during his time in prison, they discussed the tipping point for the collapse of the CCP, and one official pointed to local debt as the factor that would ultimately crush the Party.
On May 25th, Du Wen, former executive director of the Legal Advisory Office of the Inner Mongolia Autonomous Region government, posted on an overseas online platform, highlighting the unprecedented crisis the Chinese economy is facing, with a particularly acute issue being local debt.
Du Wen, who was imprisoned on charges related to bribery with public funds from the Inner Mongolia government, disclosed that while in prison, he had conversations with a group of fallen CCP high-ranking officials, including former municipal party secretaries and mayors, about the breaking point of the CCP’s collapse. One former official, who served 15 years as the director of the finance bureau and five years as deputy mayor, remarked, “In my view, it will definitely be local debt that ultimately brings down the Communist Party.”
According to the fallen deputy mayor, in their region, there are no major corporations, and therefore, there is no stable source of tax revenue. He described the challenges faced during his term, emphasizing the pressure to push for rapid infrastructure development projects that required substantial funding. The cycle of borrowing and investing to boost local GDP led to a situation where the ability to repay debts became increasingly uncertain, eventually resorting to borrowing more to pay off existing debts, creating a dangerous financial snowball effect.
Du Wen questioned the practice of banks lending without collateral and asked how they justify lending without considering repayment. The deputy mayor explained that loans were granted based on faith in the CCP, and with the current strict enforcement measures and consequences for non-compliance, bank executives were reluctant to deny loans to local governments. The lack of accountability for repayment and the shifting of debts signaled a troubling financial landscape that could potentially lead to the disintegration of the party.
He warned against underestimating the corrupt elements within the CCP, as they hold critical insights into the party’s operations.
Prior revelations by insiders have shed light on the escalating crisis of local debts in China. Renowned scholar Wen Tiejun’s recent video lecture circulated online, exposing how CCP local governments accumulated massive debts to sustain high growth rates over the years.
Wen explained the intricate mechanisms through which debts were concealed through land appropriations and financial transactions, shifting the burdens from one administration to the next. The current government is burdened with the accumulated debts from previous administrations, with official figures indicating government debt ranging from 50 to 60 trillion RMB, a significant portion of GDP. When factoring in private debt, the situation appears even more precarious.
As of the end of 2023, the official disclosed local government debt in China had exceeded 40 trillion RMB (approximately 5.5 trillion USD), with even larger hidden debts estimated by the International Monetary Fund and Wall Street banks. The outstanding implicit debts of local governments are believed to range from 7 to 11 trillion USD.
In April, Fitch Ratings downgraded the credit outlook of six Chinese state-owned banks to negative, citing concerns about the government’s ability to support the banking sector under mounting pressure. Moody’s followed suit by adjusting the outlook of eight mainland Chinese banks to negative in December, signaling long-term risks for state-owned enterprises, regional governments, and local authorities facing financial difficulties.
The continuous downgrades in credit ratings and growing uncertainties surrounding China’s economic model indicate a deepening financial crisis that poses a significant challenge to economic stability and growth prospects.