Beijing (AsiaNews) – In China’s economic system, debts are being accumulated in a cascade.
Local governments do not pay on time state-owned enterprises that have built roads and industrial parks on their behalf.
In turn, state-owned enterprises, left without funds, are postponing payments to private subcontractors, while both large private and state-owned groups are delaying payments to small suppliers.
To continue operating, the latter often end up getting into debt with banks, whose balance sheets are burdened by bad loans.
Beijing recently decided to intervene at both ends of this chain, starting a campaign against the hidden debts of local authorities and strengthening the rules on payment times, asking large companies to limit the maximum deadline for suppliers to 60 days.
The problem is that often there simply is no money to pay off debts. The measures adopted so far therefore risk shifting losses from one entity to another, without actually reducing their level.
In early September, the Ministry of Finance and the Central Commission for Disciplinary Inspection, the main internal control body of the Communist Party, made public six cases concerning local administrations in as many provinces, which have not reduced the so-called hidden debt.
The latter refers to liabilities contracted off-balance sheet, in particular through financing companies controlled by local authorities, which, according to the criteria adopted by Beijing, effectively fall under the financial responsibility of the administrations.
Local authorities without money
The astronomical debt of local governments is primarily caused by a decline in revenues.
For years, local governments financed themselves by selling land to developers, but the 2020-21 housing crisis reduced this source of income.
In the first half of 2026, proceeds from land sales dropped by more than 31 per cent compared to the previous year, when the figure had already significantly decreased.
Today, no province is able to cover its expenses with revenue alone, to the point that in the first quarter of this year the average level of fiscal self-sufficiency was just 56 per cent.
Even Shanghai, which normally records a surplus, is unable to cover all expenses with its own revenue, while Zhejiang, one of the richest provinces, closed 2025 with a deficit of 360 billion yuan, equal to around US$ 53.6 billion.
Central government transfers now finance 42 per cent of provincial budget spending, compared to 37 per cent ten years ago. Faced with this serious lack of funds, local authorities have stopped paying.
According to a study by the People's University of Beijing, cited by the economic weekly Caijing, businesses' receivables from public administrations exceed 10 trillion yuan, around 8 per cent of GDP, and 4.5 trillion are already overdue.
They largely concern infrastructure works and missed payments end up having repercussions on all those involved, including the suppliers and workers of the subcontracting companies.
In a news conference, the People's Bank of China acknowledged that some large companies have the ability to pay on time, yet choose not to, thus forcing suppliers to get into debt with banks, effectively transferring part of their financial costs onto them.
However, behind this chain of debts there is a broader problem. Local authorities are urged to continue to support growth and employment and, in order to do so, they try to keep local businesses afloat even when they are in difficulty.
When margins are reduced, deferring payments to suppliers becomes a particularly convenient form of financing for a company, and the times become longer.
Increasing controls can limit some abuses, but this is not enough to break the mechanism that produces new debts.
The fiscal crisis is also putting industrial areas in difficulty with tax and other benefits which have played a central role in the growth of local economies since the 1980s.
In China there are more than 80,000 industrial parks of some kind, many of which have been stuck with unused land and empty warehouses for years.
Many areas were created with loans taken out by special purpose vehicles controlled by local administrations. But today such vehicles struggle to meet repayments as industrial land is sold at ever-declining prices.
The rules that came into force in 2024 also prohibit attracting investments by offering subsidies and tax breaks, tools with which the provinces have competed for decades.
Who bears the losses
To get the necessary resources, local authorities therefore resort to special bonds authorised by Beijing and dedicated bank loans, accumulating new debt. When these resources are also lacking, payments in kind are resorted to.
In Guizhou, for example, a county police office paid off a 26-million-yuan contract by selling 70 flats.
In other cases, however, part of the loss is passed on to the creditors.
A listed company that owed nearly 2.3 billion yuan to a district forestry office in Anshun, Guizhou, agreed to a settlement in July that reduces it to about 1.4 billion. The sum will be collected partly in the form of assets by the end of 2028, at a loss of 37 per cent.
Caijing has also reported cases in which debts appear settled in the books even when they have not been paid.
The official data on hidden debt improves above all through a financial alchemy of a similar nature, that is, the reclassification of liabilities.
Thanks to their conversion into bonds, the total hidden debt fell from 14.3 trillion yuan at the end of 2023 to 6.5 trillion at the end of 2025.
However, the overall liabilities of the special purpose vehicles of local authorities exceed 71 trillion.
Among the more than 2,100 companies of this type monitored by Yuekai Securities, none would be able to close their accounts with a profit without public subsidies.
The solution proposed by the central bank to reduce payment delays also follows a similar logic.
Large groups are encouraged to get new credit through loans and bonds in order to pay suppliers, resulting in some of the debt being shifted from small businesses to banks.
Economist Michael Pettis explained to the Wall Street Journal that state control over banks and capital movements allows China to prevent financial difficulties from escalating into a crisis that would bring the entire system to its knees.
Yet, the liabilities do not disappear and must still be absorbed by someone, for example through higher taxes or lower returns for households.
