China View: Guizhou’s debt crisis is forcing a quiet rollback of local government power
Guizhou, located in southwest China, spans an area of 176,200 square kilometers. Situated in the eastern part of the Yungui Plateau, Guizhou serves as the provincial capital of central and southwestern China, connecting with the Chengdu-Chongqing Economic Zone, the Pearl River Delta Economic Zone, and the Beibu Gulf Economic Zone, and forming part of China's Yangtze River Economic Belt. However, this culturally and economically advanced provincial capital went bankrupt in 2023 because of revelations of local government debt totalling 8.703 trillion USD. Consequently, Guizhou became the first province to seek assistance from China's central government.
China's Local Governments on the Brink of Financial Crisis
This article examines the lending mechanisms created by the People's Republic of China's central and local governments to fund urban development, followed by an analysis of local government finances. It presents a case study of urban investment in Guizhou to illustrate the financial entanglement between central and local governments.
Local Government Financing Vehicles (LGFVs) are state-owned enterprises established by the Chinese government to expedite loans and investment by local governments. However, the debts incurred through these LGFVs have become an invisible financial burden for China's local governments.
A recent report from the IMF reveals that Chinese banks bear the largest share of local city borrowing, accounting for 75%. This analysis indicates Guizhou's LGFV bond yields stand at approximately 7.5%, while local bank subordinated debt yields are at 3.7%, with a relatively weaker local financial situation.
In comparison, Guangdong's LGFV bond yields are at 3%, and local bank subordinated debt yields are at 2%. Shanghai's local bank subordinated debt yields were 2%, while the yields on the city's LGFV bonds were 2.5%. This highlights the economic development gap between China's first-tier coastal cities and inland cities. Guizhou is not an isolated case, but it is the first province to publicly seek assistance from the People's Republic of China central government.
When a Policy Intended to Aid Local Urban Development Becomes the Hidden Culprit Behind Municipal Bankruptcy
Over the years, Guizhou has consistently ranked among the top provinces in China for interest payments within local government budgets. Guizhou’s development strategy heavily relies on financing through Local Government Financing Vehicles (LGFVs). This approach transfers the responsibility of debt servicing to the local level, necessitating that interest payments be met through municipal fiscal revenues, especially within the government fund budget.
According to the latest data reports, in 2025, Guiyang, the largest city in the province, allocated 12.19% of its land sale/fund revenues to interest payments. This amounts to nearly $545.7 million USD in annual interest alone, representing a 9.35% increase from 2024. A city paying $545.7 million USD in interest within a single year clearly demonstrates that the provincial capital's debt burden has become the primary cause of Guizhou's impending government bankruptcy. Furthermore, data from the Guizhou Provincial Department of Finance (2025) indicates that the provincial government's debt ceiling surged from $17.96 billion USD in 2022 to $252.52 billion USD by 2024. This statistic demonstrates the relentless annual growth of local government debt in Guizhou.
If Interest Rates Continue to Rise, Local Economies May Stagnate: What Actions Should Local Governments Take?
According to Document No. 35 issued by the General Office of the State Council of the People's Republic of China, China's central government has expressed support for key provinces to resolve existing debt stockpiles from financing platforms this year and next. The government will impose strict controls on the scale of new debt across all financing platforms, preventing local governments from engaging in reckless borrowing. Local government debt levels must align with local economic development and fiscal capacity.
Guizhou's economic development fails to meet the standards outlined in the nationally issued Document No. 35. Comparing Guizhou GDP in 2024 with its debt scale reveals that the provincial government's outstanding debt balance reached $245.5 billion USD, while Guizhou's GDP in 2024 stood at $317.3 billion USD. Consequently, Guizhou's 2024 debt-to-GDP ratio was approximately 77%. Consequently, the Chinese central government has designated Guizhou as one of 12 high-risk provincial capitals and initiated measures to mitigate debt risk. These include debt restructuring and debt swaps to resolve the crisis. However, will these measures effectively alleviate the local fiscal crisis?
According to the news, leading tech giants from mainland China, Taiwan, and the United States have all set up data centers in Guizhou. This trend indicates that both the Chinese and Guizhou governments have high expectations for the province's development over the past decade.
However, why did the Guizhou government declare bankruptcy?
The central government often closely links its development initiatives for local governments with financial expenditures. Guizhou, a province in China with relatively low per capita income, has sought to enhance its economic growth. Recently, provincial capitals across China have attracted foreign investment, engaged in large-scale borrowing, and designated Guizhou as a major big data hub in 2012. This initiative, known as “Cloud Guizhou,” aims to construct various exchanges and transform the province into a digital city.
The Chinese government became the largest shareholder of the exchange, holding a 35% stake, while private shareholders owned 65%. At the launch of the exchange, businessman Wang Sanshou projected that trading volume would reach approximately $1.4 billion USD within five years. Yet, data up to 2021 reveals that trading volume plummeted from $1.15 million USD in 2019 to just under $700,000 USD in 2020. Confronted with this scenario of high investments yielding low returns, the Guizhou government now faces the challenge of an investment that has not succeeded in boosting the local economy. This situation is common among cities in China.
The shortcomings of the Guizhou government's investments are evident not only in technological development but also in the construction of many luxurious yet economically unviable facilities, leading to various issues.
In December 2019, Pan Zhili, the former Party Secretary of Dushan County, was dismissed from his post on suspicion of bribery and abuse of power. During his tenure as the Party Secretary of Dushan County, Pan Zhili accrued substantial debts for the construction of unaffordable vanity projects. These include the “World's Largest Water Bureau Tower,” built at a cost of nearly $28 million USD in debt, an illegally constructed 108-hole golf course, and a planned university town with a footprint capable of accommodating almost 14 Forbidden Cities. Five years prior, Dushan County's debt had reached $5.6 billion USD, while its annual revenue fell short of about $140 million USD. Moreover, the county's financing costs exceeded 10%.
As of 2025, no improvement is in sight. According to the 2025 Guizhou Provincial Government Work Report, significant achievements have been made in large-scale investment in major projects, with plans to establish “six major industrial bases” and bring 260 industrial projects worth approximately $14 million USD each into operation. Evidently, since the eve of the pandemic outbreak amid China's economic downturn, Chinese local governments facing financial insolvency have persisted in large-scale investments to project an illusion of robust local economic health. This issue has persisted for nearly six years.
The management of financial systems and communication between central and local authorities often closely relate to financial issues between central and local governments. The market widely anticipates that the central government will ultimately bail out local debt, creating an ‘unquantifiable risk’ that impacts how local governments assess debt issuance and how financial institutions evaluate risks related to that debt. Economic growth is the foundation for resolving debt burdens, yet achieving profitable economic growth fundamentally requires strengthening fiscal discipline.”
The Minister of Finance of the People's Republic of China, Lan Fo’an, previously proposed establishing a unified long-term mechanism for local debt by reducing hidden liabilities and reforming local government financing vehicles. This would help track all debts owed by the government, citizens, and the outside world. Centralized debt management would enhance prudence and transparency in borrowing applications and debt administration between central and local governments, unlike the current practice in which Chinese local governments independently manage their debts, creating regional risks. Additionally, although China's central government proposed in 2024 to clean up local government financing vehicles (LGFVs) and eliminate hidden debt, this policy remains imperfect. As of 2023, China had approximately 18,000 LGFVs, acting as agents for local government investment projects.
Although China's finance minister proposed establishing a unified department to manage central, local, and external debt, some Chinese commentators point out several concerns. First, if the central government directly assumes the debts of all provincial capitals, the combined debt amount would be enormous, potentially triggering severe inflation and renminbi depreciation. Second, the rampant construction of vanity projects and cultural facilities by local governments has become a shortcut for economic development. Officials' obsession with grandiosity and rampant corruption have become entrenched problems. If the central government provides guarantees for one locality, other local governments will intensify their construction sprees. While such a solution might address immediate issues, it fails to resolve the underlying problems over the long term. Overall, the Chinese government must confront head-on how it communicates with local governments to persuade them to relinquish the LGFV financing platform and narrow the fiscal gap between local and central governments.
China provinces boast diverse natural landscapes and cultural heritages. The abundance of natural resources and geographical location also play an important role in shaping a province's economic development. Could Guizhou's appeal for central government assistance trigger a spillover effect in other provinces like Yunnan or Gansu?
Yunnan and Guizhou, both in southwest China, border southern China and Southeast Asia, making them key cities in China's Belt and Road Initiative. Compared to Guizhou's scarcity of natural resources, Yunnan ranks among the top ten nationally in water resources and coal energy reserves. Despite this, Yunnan's local government also faces severe debt issues. According to the 2023 Local Government and Urban Investment Enterprise Debt Risk Research Report, Yunnan's local government debt-to-revenue ratio reached 198%, ranking 30th nationally, while Guizhou's stood at 200%. Yunnan's local government asset-liability ratio was 48.1%, placing 23rd nationally, compared to Guizhou's 77%. Thus, based on 2023 local government debt ratios, Guizhou faces greater economic pressure than Yunnan. Conversely, Yunnan's fiscal self-sufficiency rate stood at 32% in 2023, indicating tighter cash availability for its local government compared to Guizhou. In conclusion, the financial crisis erupting in Guizhou's local government will become an issue the Chinese central government cannot ignore. Key questions warranting deep consideration include how the central government will prevent future financial risks from successive provincial financial crises, how to establish an effective mechanism to constrain local governments' borrowing behavior and strengthen fiscal discipline, and whether the central government will alter its approach to economic development, thereby changing local governments' tendency toward large-scale investment in economic planning.
