Delayed wages and budget cuts.
HONG KONG — Unpaid wages, delayed pensions and service cuts are revealing the full extent of a deepening financial crisis facing local governments across China. Protests by medical staff, retirees and workers in cities such as Shanwei, Yichun and Datong have underlined the growing pressure on local administrations saddled with trillions of dollars in debt.
In Shanwei, medical workers demonstrated inside a hospital last month, seeking salaries they said were owed. Others held banners that read, "We need to eat." Elsewhere, in Yichun, retired civil servants assembled to protest the delays in pension payouts that many local governments are struggling to resolve.
Debt Crisis Deepens
China's local governments owe an estimated $7 trillion to $11 trillion in "hidden debt," according to economists, with as much as $800 billion at high risk of default. These debts were accumulated through state-owned funding vehicles often used to finance low-return projects such as underutilized railroads, empty industrial parks, and ski resorts in regions with little snow.
Beijing has unveiled a $1.4 trillion debt-swap program in an attempt to relieve the financial burden on local governments. The program allows local governments to exchange off-balance-sheet debt for new bonds, thus extending their repayment schedules. However, the move is considered by analysts to be a temporary alleviating measure. According to Victor Shih, a professor at the University of California, San Diego, "It will alleviate cash-flow pressure, but the impact is marginal."
Revenue Shortfalls and Public Services Disrupted
The financial crisis has been further compounded by declining revenues from land sales, long a major source of income for local governments. A downturn in the property market has sharply reduced proceeds from land sales, leaving cities with fewer resources to cover basic expenditures like public healthcare and education.
In response, many cities have cut medical benefits, delayed infrastructure projects, and even struggled to maintain basic services. For example:
- Public healthcare systems in Wuhan, Dalian, and Guangzhou have cut medical benefits.
- A public bus company in Shangqiu almost suspended business due to lack of funds.
- Workers in Datong protested against unpaid wages with banners that read, "Give me back my hard-earned money."
Local governments have also stepped up efforts to collect taxes owed and issue more fines in pursuit of revenue. One recent example was the charging of an alcohol producer in Hubei province 85 million yuan ($11.6 million) in back taxes owed as far back as 1994.
Impact on China's Economy
The fiscal difficulties of local governments have larger implications for China's economic growth. Local administrations account for much of the country's investment in infrastructure and act as major employers through civil service and contractor roles. Budget constraints are now threatening household incomes and consumer spending, further slowing an already stagnating economy.
As Zhiguo He, a financial economist at Stanford University, put it, "Local governments have a lot of fiscal burden, but not a lot of fiscal income."
Beijing's Balancing Act
China’s central government faces a dilemma in addressing the debt crisis. A full bailout could encourage reckless borrowing by local governments, while ignoring the issue risks further economic instability. Economists at Goldman Sachs estimate that the recent debt-swap program could boost China’s GDP by 0.55 percentage points, though its overall impact is limited given the scale of hidden debt.
Wei Xiong, a finance professor at Princeton University, explained, "The central government has this very complicated feeling about if they should bail them out or not."
Beijing has indicated that further stimulus steps are on the way, including the recapitalization of Chinese banks. But for now, those policies are incremental, geared toward containing near-term financial risks rather than offering a holistic solution.
The Road Ahead
As local governments continue to struggle, protests over unpaid wages and reduced services are likely to increase, adding pressure on Beijing to take decisive action. For now, the debt crisis underscores the challenges of balancing local fiscal autonomy with centralized control in the world's second-largest economy.