China's Local Government Debt

RAND Corporation | Howard J. Shatz, Robin Wang, Linda Zhang, Timothy R. Heath, Anthony D'Arrigo

Chinese local government debt reached at least $12 trillion in 2024, representing 64 percent of national gross domestic product, as off-balance-sheet borrowing through special financing vehicles accumulated over $5 trillion in liabilities. That total drove China’s aggregate credit-to-GDP ratio to 315 percent by June 2025. This fiscal strain stems from structural reliance on debt-financed expansion inaugurated during the 2008 global financial crisis.

Local authorities manage roughly 85 percent of public expenditure but face severe revenue deficits following a persistent collapse in municipal land sales. Commercial banks have absorbed much of this debt, with government bonds accounting for 22 percent of new bank assets over five years. Beijing's refinancing bonds provide only temporary relief. While local governments cut public services and increase non-tax fees, Beijing maintains prioritized state funding for technological competition and strategic military expenditure. Consequently, internal fiscal pressures will not significantly diminish Chinese military capabilities in Great Power competition.

Comment

Centralised defense allocations by the Central Military Commission operate largely insulated from the sub-national debt liabilities tied to local government financing vehicles. While municipal administrations absorb shortfalls through service cuts and nontax fees, central fiscal priority shields defense spending and strategic industrial subsidies from local balance-sheet contraction. This bifurcated revenue structure ensures that regional insolvency does not automatically constrain high-priority military procurement, such as naval expansion or advanced missile production.

This structural insulation mirrors the late Cold War dynamic of the Soviet Union, where central authorities preserved heavy defense spending despite widespread regional economic stagnation and domestic supply strains. Centralised fiscal control allows sovereign priority projects to command dedicated capital allocations even when provincial financial systems face severe systemic distress. Consequently, total national credit-to-GDP metrics alone fail to reflect the Central Military Commission's sustained capacity to fund long-term defense modernization.

Strategic Question for Discussion

If regional debt forces Beijing to assume provincial financial liabilities, will central fiscal allocations prioritize Central Military Commission procurement budgets or industrial subsidies for domestic commercial sectors?

The available evidence suggests Beijing will maintain priority funding for high-end defense programs and strategic dual-use technologies, even if sovereign debt absorption reduces discretionary domestic subsidies. Historically, centralized state systems faced with resource limits narrow their focus to core regime security assets while transferring broader social and municipal welfare costs onto local populations. My assessment is that naval recapitalisation and strategic deterrent modernization will remain insulated from domestic debt restructuring efforts.

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