December 7, 2023
2 mins read

China Faces $11 Trillion Hidden Debt Crisis

Chinese authorities recognise the severe risks to financial stability and overall growth, prompting a systematic approach to address the problem…reports Asian Lite News

China is facing a looming financial crisis as it endeavours to address a colossal hidden debt problem within its banking system, The Wall Street Journal reported.

Cities and provinces across the nation have amassed a staggering amount of undisclosed debt through years of unchecked borrowing and spending, with estimates ranging from USD 7 trillion to USD 11 trillion in off-balance-sheet government debt, including corporate bonds issued by local government financing vehicles.

The extent of the issue remains uncertain, but it has become evident that local governments’ debt levels are unsustainable amid slowing economic growth and deflationary pressures. Economists warn that a significant portion of the hidden debt, estimated between USD 400 billion and over USD 800 billion, is at high risk of default, as reported by The Wall Street Journal.

Chinese authorities recognise the severe risks to financial stability and overall growth, prompting a systematic approach to address the problem. They are initiating efforts to replace some hidden debt with new, explicit government debt, aiming to avert a wave of defaults that could lead to a nationwide financial crisis.

Yao Yu, founder of YY Rating, emphasises the potential consequences: “Once a local-government financing vehicle defaults, the situation can easily get out of hand.” These financing vehicles represent a significant portion of China’s domestic corporate bond market, and defaults could disrupt funding for other borrowers.

China’s central government has expressed the importance of preventing and resolving the risk of hidden debts. In November, authorities warned that bankers and local government officials would be held accountable for life if they engaged in new hidden debt issuance. The People’s Bank of China governor, Pan Gongsheng, pledged emergency liquidity support to regions burdened with high debt.

Moody’s Investors Service recently lowered its outlook on China’s credit rating to negative, citing increased support for financially stressed local governments and state-owned enterprises, along with risks to economic growth, according to The Wall Street Journal.

China has grappled with hidden debt risks for over a decade, with previous efforts between 2015 and 2018 attempting to address the issue. However, local governments, under pressure to stimulate growth, embarked on another borrowing spree. UBS reports that domestic banks’ exposure to local government financing vehicles was around USD 6.9 trillion at the end of last year, representing about 13 per cent of the banking sector’s total assets.

Financial strains are emerging as some cities and provinces face challenges due to a property downturn and extensive spending to combat the COVID-19 pandemic. Urgent measures include the issuance of special refinancing bonds to replace off-balance-sheet debt, with around USD 200 billion raised in such bonds by nearly 30 Chinese provinces and cities since October.

While these efforts aim to alleviate immediate liquidity problems, sceptics argue that they represent more of a refinancing plan than a restructuring plan. The potential long-term impact on China’s economic growth is a concern, as fiscal resources may increasingly be allocated to debt repayment. A fundamental solution involves restructuring local government financing vehicles’ debt to make them commercially viable entities, a challenging task in itself, The Wall Street Journal reported. (ANI)

ALSO READ: Italy formally exits China’s BRI

Previous Story

Italy formally exits China’s BRI

Next Story

Imran Khan’s Plea Denied in Toshakhana Case

Latest from -Top News

Ould Tah to head AfDB

Tah, a seasoned economist and development financier, will formally assume office on 1 September 2025, taking over from Nigeria’s Dr. Akinwumi Adesina Sidi Ould Tah of Mauritania has been elected as the

Big pay bump for SA workers

The landmark move, which follows months of intense negotiations with trade unions, is expected to benefit millions of civil servants across national and provincial departments. South Africa’s government has confirmed a sweeping

Deadly floods ravage Nigeria

Triggered by torrential rains and the collapse of a nearby dam on May 28, 2025, the floods have submerged vast areas, destroyed infrastructure, and displaced thousands of residents. The death toll from

Piyush Goyal Begins Europe Visit

As part of the visit, the minister will meet top leadership of major French companies such as Vicat, Total Energies, L’Oreal, Renault, Valeo, EDF and ATR….reports Asian Lite News Union Minister of

Call to Greylist Pakistan Over Terror Links

Freddy Svane, the former Danish Ambassador to India, said that it is high time for the world to acknowledge that Pakistan remains the epicentre of terrorism in the region….reports Asian Lite News
Go toTop

Don't Miss

Chinese Fentanyl fueling US’ drug problem

A Toronto-based think tank highlighted China’s role in the trade

Pelosi reaffirms Congress’ commitment to human rights in China

Pelosi made these remarks after meeting several rights activists including