Chapter 6: The logic (or illogic) of China’s local government debts out of control
After the Greek sovereign debt crisis, Detroit grabbed market headlines for its decision to file for bankruptcy in 2013 regarding its long-term debt obligations of at least US$18 billion. A possible local government debt crisis in China, at the same time, has been looming in the Chinese and global press. Local governments’ huge and opaque debt, totalling US$3.8 trillion by the end of 2014, has been seen as one of the significant risks threatening China’s overall economy. Unfortunately, the phenomenon has yet to be understood adequately both in terms of its magnitude and its origins. This chapter is primarily concerned with the deep causes of and potential solutions to local government debts in China. An attempt is made to understand the causes of local government debts through various dynamic elements of China’s public and fiscal finance, including revenue collection, allocation of government responsibility, fiscal expenditure and fiscal transfer within the central and local governments. Local governments’ spending patterns reveal a deep and fundamental flaw in the overall governance structure, which necessitates a more comprehensive reform tackling the root problems underlying the local government debt crisis in China.
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