In January 2019, Xie Junchi eagerly signed a contract to provide 20,000 tons of steel to the Zunyi Road and Bridge Engineering Construction Group every month, a company controlled by the local government of Guizhou, for public road construction.

Four years later Mr. Xie has received only $30,000 of the $550,000 he was owed, with no explanation.

“These debts are practically the last remnants of our company,” Mr. Xie said. “We can’t even afford to rent office space now, and we still owe our employees’ salaries.”

On a state-owned media official complaint platform, Zunyi Group responded to another landscaping company that was owed money, saying: “Due to the severe financial difficulties we are currently facing, we are unable to pay the remaining project funds in a short period.”

The Hundreds of thousands of dollars is a mere fraction of the total debt burden carried by Zunyi Group and hundreds of other Local Government Financing Vehicles (LGFVs) in Guizhou. On Dec. 30, 2022, the Zunyi Road and Bridge Engineering Construction Group announced it would undertake a comprehensive loan restructuring plan, aiming to alleviate its staggering $2.2 billion debt load.

It isn’t just Guizhou. According to China’s Ministry of Finance, as of the end of 2022, the debt of China’s 31 provincial-level governments stood at approximately $5.1 trillion, a 60% increase compared to pre-pandemic levels. An estimate from the International Monetary Fund put the figure at $9.5 trillion, which is equivalent to half of the country’s economy.

Those debt loads are weighing heavily on local-government budgets, with serious consequences for residents. Former Finance Minister Lou Ji Wei wrote in February 2021 that during the 14th Five-Year Plan (2021-2025), around a quarter of provincial level would use more than 50% of their revenue to pay debt. That is forcing some local governments to cut salaries for public-sector workers, reduce health care benefits and fuel subsidies for households and in some cases default on debts.

Guizhou is one of the provinces in China with the most serious debt. Its total debt, including the “hidden debt” issued by the government’s financing arms, had reached $388 billion by the end of 2022, according to the most recent available data.

On April 11, Guizhou local government acknowledged in an article on an official think tank its inability to resolve Guizhou’s debt problems independently and sought support from the central government. Although the article has been removed, it had previously circulated widely on social media.

A slow-burn debt crisis

Before the COVID-19 pandemic, many provincial governments relied on the sale of land to develop their economies. But during the pandemic, the strict testing, quarantine, and lockdown measures of the “zero covid” policy drained resources, depleting their coffers. Real estate developers were reluctant to buy land as the government implemented lockdown policies time and time again.

In 2022, with weakness on the sales side of real estate and a decline in land grant revenue, the property sales by floor area fell 24.3% year-on-year in 2022, according from the National Bureau of Statistics. As a result, China’s GDP growth in 2022 is estimated at about 3%, the worst (apart from 2.2% in 2020) since 1976, when the Chinese economy shrank by 1.6% after the death of Chairman Mao Zedong.

Massive infrastructure development was a quick and effective way to boost GDP. This year, Guizhou province has arranged more than 4,000 major provincial projects, with an annual expected investment of more than $11.4 billion, an increase of 24% over last year，including infrastructure projects such as roads, power plants, and coal plants.

The problem is that local governments now have no money to pay off their infrastructure projects. The three-year pandemic has accelerated and worsened the financial problems of local governments in China, many of which are on the verge of bankruptcy. 

The debt burden is having real-life consequences. Some cities have lowered civil servants’ salaries. Some cities’ bus services were shut down or at risk. On Jan. 3, a heating company in Hegang, the city in northern China, caused residents to shiver amid this year’s record-breaking cold wave because the government had not provided the promised subsidies. This city had publicly announced in 2019 and 2020 its inability to repay the principal and interest of its maturing government debt.

To help the local economy recover, debt-ridden local governments must take on more debt, which could set off a vicious cycle. In March, China’s local debt issuance reached almost $127 billion, up 44% year-over-year.

Tao Wang, chief China economist and head of Asia economic research at UBS Investment Bank, said there’s nothing that can compensate for the lost land revenue. “It’s now necessary to take on debt to support economic recovery after the pandemic. ” She said.

What’s the next step？

It’s hard to make more money to cover expenses in Guizhou. This area has always been poor. Its endless foggy hills have made it tough to travel, and its villages have been low-income for hundreds of years.  Guizhou’s economy relies on the connectivity offered by its new roads and tunnels，financed with huge debt.

This region has few manufacturing industries, with just one important company – Moutai, a state-owned manufacturer of firewater – as one of the most valuable companies in China. In 2019 and 2020, Moutai transferred 4% of its shares to the Guizhou State-Owned Assets Company for free, respectively. These shares were worth more than 💲21.3 billion at market prices, almost equivalent to half of Guizhou’s fiscal revenue last year, and helped Guizhou repay its debt.

Eleven days after Guizhou’s government think tank sought help from the central government, a top state-owned asset management company dispatched 50 experts to Guizhou to resolve its debt issue. 

That action was surprising, since the central authorities in Beijing had indicated they wouldn’t be providing aid for the local government.

“You should take responsibility for your own baby,” the Ministry of Finance advised earlier this year in a declaration targeting local governments. ” The central government will definitely not bail out.”

But if the central government decides to stand by and do nothing, in the end, someone still will eventually have to foot the bill for these debts.

“This could lead to higher taxes and lower savings rates. ” Tao said. ” Ordinary people will surely pay for it.”