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He Huifeng

China’s plans to issue special government bonds to help local governments get their debts under control as it pushes them to pay their overdue bills gave Edward Zeng, the founder of a tech start-up, a glimmer of hope this month because he has been waiting for payment for years.
In 2019, Zeng’s tech company was acquired by a state-owned enterprise (SOE) for millions of yuan.
As part of the deal, his team took part in research and development tasks for a local government’s smart city project in southern China.
But the local government failed to pay the SOE, meaning it lacked the funding to complete the acquisition.
“Those smart city projects were the most important business segment for each local government at the time, with tens of billions of yuan invested in each across the country,” Zeng said.
However, following the emergence of the Covid-19 pandemic, many smart city projects began to default on payments to downstream companies, and the one Zeng’s team was working on laid off 30 per cent of its staff, including Zeng.


Zeng’s plight is just a small glimpse into a larger picture: over the past few decades, as Beijing pursued economic growth, local governments played a crucial role.
They financed major projects through local financing platforms to meet growth targets. Over time, they also accumulated massive levels of debt and began defaulting on payments to suppliers.
According to data from the International Monetary Fund, China’s local government debt had reached 92 trillion yuan (US$12.9 trillion) by 2022, equivalent to 76 per cent of that year’s gross domestic product.
After two lawsuits, Zeng has recovered about one-third of the acquisition money he was supposed to receive.
“It’s very common for local governments to default on payments to businesses when a lot of projects are being abandoned halfway,” Zeng said.
“But they are the ones in power, and we can’t do anything about it and can only turn to other industries.”
Li Daokui, a professor at Tsinghua University and a government policy adviser, described local governments’ arrears in accounts payable to enterprises as “shocking” in an interview on October 14, saying they owed companies and employees an amount equivalent to 10 per cent of GDP.
That delay in payments is a key reason consumers are not spending, Li said, because they are simply not getting paid. He said local governments must make paying back their debts a priority, rather than launching new infrastructure projects.
Most local governments have changed their leadership, and they have little incentive to actually repay their predecessors’ arrears
Edward Zeng, tech start-up founder
After the Ministry of Finance announced a large debt ceiling increase this month to allow local governments to swap out their hidden debts, calling it “the most powerful debt-reduction measure in recent years”, the General Office of the Communist Party Central Committee and the General Office of the State Council issued a joint circular on Thursday addressing arrears to enterprises.
It outlined improvements to legal and regulatory systems, supervision of government projects, and the establishment of a unified platform for small and medium-sized enterprises (SMEs) to report payment defaults.
Private entrepreneurs are waiting cautiously to see how effective those policies are, citing previous cases of inconsistent implementation at the local level.
Zeng said it is essential to ensure the bonds are used to pay off existing arrears, rather than propping up projects by the new leaders of local governments.
“Most local governments have changed their leadership, and they have little incentive to actually repay their predecessors’ arrears to businesses, especially to SMEs,” Zeng said.
Jay Feng, a subcontractor for a state-owned power grid and property developers in Guangdong province, said the central authorities’ policies were always good, but they could never be enforced on the ground, “at least in solving deep and crippling local debts”.
“I hope that this time, the scale of the bonds might be large enough to hold local departments accountable to repay SMEs like us,” Feng said.


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Government adviser describes local governments’ arrears in accounts payable to enterprises as ‘shocking’


Government adviser describes local governments’ arrears in accounts payable to enterprises as ‘shocking’.


China's economic recovery

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China economy