Press Release: China’s Growing Local Government Debt Levels Policy Brief

China’s Growing Local Government Debt Levels

New MIT Report provides a snapshot of debt levels over time

CAMBRIDGE, Mass., January 14, 2016 — High rates of debt growth by local governments are a cause for concern in any country. In China, where recent turmoil in the equity and foreign-exchange markets has put a spotlight on that country’s economy, increasing levels of borrowing by provincial and other lower levels of government has resulted in local indebtedness rising nearly fourfold since 2008, reaching about 40 percent of GDP.

Debt growth of that magnitude raises concerns about fiscal sustainability, debt affordability, transparency and accountability.  Cautionary tales abound. From New York City in the ‘70s, emerging market countries in the ‘80s, Russia in the ‘90s, and Detroit, Greece and Puerto Rico more recently, there is a long list of governments that have experienced the painful economic repercussions of taking on debt they could not afford.

A new report released today by the MIT Center for Finance and Policy, prepared by Xun Wu, a visiting scholar at the Center, provides a useful snapshot of local government debt levels over time. By gathering, analyzing and extrapolating from the limited sources of data available on this topic, Wu shines light on the political, economic and financial drivers of the tremendous increase in debt levels since the financial crisis of 2008, and also on the central government’s plan to curtail that growth in the future.

“Although not at crisis levels, the analysis suggests that the situation is a cause for concern,” said CFP Director Deborah J. Lucas. “Most worrying to me is the large structural imbalance between local spending and tax revenue that has yet to be addressed by policy reforms.”

The local government debt problem is set against a backdrop of economic change and growth prospects, as China attempts to turn its government-dominated economic growth model into a market-oriented one. From that perspective, how it manages its local fiscal imbalances will be telling about the commitment to and speed of those larger changes.

You can view the CFP report electronically here.