Just several years ago, China was considered the main economic rival to the United States. The country’s economic results were really impressive, and it was reporting one record after another. The situation was so favorable that the yuan entered the list of the major currencies, including the US dollar, the euro, the pound sterling, and the yen. However, the current state of affairs in China is not that rosy. The country is experiencing an economic downturn.
Recent data unveiled that China’s local government debt reached $12.8 trillion, or 76% of economic output, in 2022. This poses a considerable risk to the country’s economy. It is not the magnitude of the collapse that frightens analysts. They are much more preoccupied with the negative trend, which confirms a crisis in the state-controlled economy. Part of the municipal debt is issued by local government finance vehicles (LGFVs), which cities use to raise money for infrastructure projects. Until recently, official statistical data did not include such debts. However, analysts managed to reveal the truth. The International Monetary Fund expects LGFV debt to reach $9 trillion this year.
Notably, the central Chinese government is not the only body responsible for the repayment of municipal debts. The regional authorities, who were to blame for the sharp accumulation of debt obligations, should also do their bit. However, the debt fighters may just start issuing new bonds to repay the "hidden" debt and sell existing assets to pay off regional obligations. A large-scale restructuring of the municipal debt could seriously damage the already weakened Chinese economy.