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David Tingxuan Zhang

Across China, idle construction sites, delayed civil servant salaries and back-tax demands on businesses all point to a lingering fiscal crisis. Now entering its fourth year, the property market slump has crippled land sales – the primary revenue source for local governments, especially those in the hinterland regions and underdeveloped areas.
With shrinking revenues, local governments are struggling to repay mounting debt while still trying to meet economic growth targets.
Policymakers have acknowledged the severity of the problem, signalling fiscal reforms to give local governments greater revenue-raising power and to ease austerity measures. At the same time, Beijing hopes to boost household consumption to reduce reliance on government-led investment.
Yet until these efforts take effect – which could take years – China must still lean on debt-funded infrastructure investment to achieve its target economic growth, widely expected to be 5 per cent this year.
Indeed, policymakers have signalled their intent to further ramp up borrowing to stimulate the economy. At last December’s central economic work conference, officials pledged to expand the issuance of the central government’s ultra-long special bonds and local government special-purpose bonds this year – both key to sustaining local infrastructure investment amid economic headwinds.
But the strategy risks backfiring. Once dominated by state-owned enterprises (SOEs), local infrastructure development is increasingly controlled by local government financing vehicles (LGFVs) – shadowy entities that blur the line between public finance and commercial lending. Instead of efficiently funding projects, these vehicles are fuelling a dangerous debt cycle that threatens to destabilise China’s economy.

To balance infrastructure expansion with fiscal discipline, China introduced the “agent construction model” in the early 2000s, a system similar to the public-private partnership seen in many Western countries.
Instead of managing construction projects directly, local governments outsourced them to designated third-party entities – historically SOEs or government-backed companies. These agents were responsible for overseeing everything from project planning to final delivery, theoretically ensuring better cost control and efficiency while limiting financial risks for the government.
But as the fiscal health of local governments deteriorated, the model evolved in a troubling direction. Before the pandemic, infrastructure projects were primarily led by central or provincial-level SOEs. These enterprises had the financial strength to absorb capital burdens, negotiate on a relatively equal footing with local governments and ensure project quality.
But local governments frequently delayed payments, a problem that worsened when pandemic-driven fiscal declines reduced government revenues. As local governments’ arrears grew, SOEs also faced mounting financial pressures. With capital tied up in unpaid projects and diminishing confidence in future payments, these companies began withdrawing from financially stressed lower-tier cities. This opened the door for LGFVs to enter and take over.

Unlike SOEs, which operate with some financial autonomy due to their ties to higher-level authorities, LGFVs are fully controlled by local governments and exist primarily to circumvent borrowing limits. These entities allow local officials to approve projects, issue debt and oversee construction – creating a self-reinforcing cycle with little external oversight. LGFVs also often lack the technical expertise and construction capacity of SOEs. The result is increased quality concerns and project delays.
Additionally, the withdrawal of SOEs from local projects removed a critical financial check, as these enterprises would leverage their size and political standing to ensure local governments met payment obligations. Now, with LGFVs fully dependent on local government funding, financial discipline has deteriorated. When local governments face fiscal stress, the entire debt structure risks collapse, potentially triggering broader economic instability.
An even greater concern is how LGFVs, through their entrenched role in local finance, have distorted fiscal priorities. Instead of using government bond proceeds to fund projects, LGFVs prioritise repaying their debts – leaving contractors unpaid and pushing them towards financial distress.
This leaves private companies – many of them small and medium-sized enterprises – trapped in a liquidity crunch, forcing them to rely on bank loans or self-raised funds to stay afloat. As financial strain cascades through the industry, the broader economic risks escalate.


China cannot afford to let this trend continue unchecked. The role of LGFVs in local government financing must be fundamentally restructured, with investment responsibilities shifting towards independent, market-driven entities. Local governments must reinstate fiscal accountability, reduce reliance on off-the-books financing and ensure infrastructure projects are subject to competitive bidding.
Public-private partnerships and other market-based financing models should replace government-controlled mechanisms to restore financial sustainability. Equally crucial is the establishment of an independent oversight body to monitor local debt issuance, enforce transparency and integrate all liabilities under central regulatory scrutiny.
China’s local fiscal system is nearing breaking point. Without urgent reforms to rein in LGFVs, Beijing’s infrastructure drive risks triggering another debt-fuelled bust – and potentially setting off a broader financial crisis. The window for reform is closing fast.


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Construction of the Huajiang grand canyon bridge on November 30, 2024 in Guizhou, China. In 2023, the province’s Zunyi Road and Bridge Construction Group became China’s first LGFV to be forced to restructure its bank loans. Photo: VCG via Getty Images

President Xi Jinping (centre) speaks at the annual Central Economic Work Conference in Beijing on December 11, 2024. At this meeting, officials pledged to expand the issuance of the central government’s ultra-long special bonds and local government special-purpose bonds to help sustain local infrastructure investment amid economic headwinds. Photo: Xinhua

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Amid infrastructure drive, shadowy LGFVs, which let local governments circumvent borrowing limits, risk triggering a debt-fuelled bust


Amid infrastructure drive, shadowy LGFVs, which let local governments circumvent borrowing limits, risk triggering a debt-fuelled bust.


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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


China’s local government financing vehicles are a ticking debt bomb

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Amid infrastructure drive, shadowy LGFVs, which let local governments circumvent borrowing limits, risk triggering a debt-fuelled bust

Amid infrastructure drive, shadowy LGFVs, which let local governments circumvent borrowing limits, risk triggering a debt-fuelled bust