China is preparing a massive, multiyear bailout to resolve more than $1 trillion in unpaid bills tied to local governments, a Bloomberg exclusive revealed.
The plan centers on state-backed lenders including the China Development Bank, providing short-term liquidity loans so local governments and their affiliated entities can finally settle arrears owed to private companies, contractors, and civil servants.
The initiative aims to clear about 1 trillion yuan ($140 billion) in unpaid bills in an initial phase, with total resolution targeted by 2027.
This intervention responds to President Xi Jinping’s February warning that escalating arrears risk “crippling” businesses and undermining public trust in local authorities.
It signals Beijing’s urgent focus on stabilizing a fragile private sector and repairing deep financial fissures at the local government level.
Impact on local governments and debt markets
Local government arrears have surged as officials struggled to make payments amid weakening revenues, particularly from land sales, the main funding source.
These unpaid debts, estimated at around 10 trillion yuan ($1.4 trillion), amount to roughly 7% of China’s GDP last year, highlighting the scale of the systemic stress.
While not always formally recorded on balance sheets, they guarantee loans taken by government-linked entities, meaning local governments remain ultimate creditors.
The cleanup plan likely increases the banking sector’s risk exposure, as state-owned banks have been directed to lend despite rising defaults and falling profits.
In the first half of 2025 alone, top lenders provisioned 3.51 trillion yuan for expected loan losses, complicating their ability to absorb new credit risk without regulatory protections.
Special bonds issuance, estimated at 200 billion yuan this year, will complement lending efforts, but banks are the main backstops in this delicate debt restructuring.
Economic implications for growth and stability
This bailout is as much a social and economic necessity as a financial maneuver.
By settling overdue payments to private contractors and civil servants, China hopes to rebuild confidence in local governments and mitigate the ripple effects of insolvencies on the broader economy.
Failure to address these debts risks further damaging the property sector, slowing consumer spending, and stalling critical infrastructure projects.
However, the plan also shifts the debt burden onto national banks, increasing financial sector fragility.
Economists like David Li Daokui warn that greater transparency and more aggressive debt relief, potentially involving at least 20 trillion yuan are needed to prevent long-term economic drag.
Beijing’s strategy balances between providing relief, maintaining fiscal discipline amid limited stimulus appetite, and avoiding a wider financial crisis.
Investor reactions and global market perspective
Global markets reacted cautiously to the plan, with some disappointment that the stimulus measures fell short of what many had expected given the scale of the problem.
Equity futures in China and Hong Kong dipped slightly, while commodity prices like copper eased as investors weighed the challenges ahead.
The heavy reliance on large state banks also raised questions about credit quality, fueling concerns over lending margins and provisioning in an already difficult environment for Chinese lenders.
Still, the government’s firm signal to regulators and banks underscores strong political will to push through the debt cleanup without causing market shocks.
Over time, this approach could help restore investor confidence by addressing the hidden risks tied to local government debt, a persistent drag on China’s credit markets for years.
Tightrope of China’s local debt resolution
While the trillion-dollar bailout offers a credible path to resolve a pressing debt backlog, risks persist. Implementation depends on banks’ willingness to extend credit amid rising defaults and their need for regulatory safeguards.
Clearing China’s local government arrears will require political will that stretches well beyond 2027.
Relying on short-term fixes won’t be enough. There’s also the lingering fear that defaults at the local level could ripple through the broader financial system.
Growth is facing additional pressure from a slow-moving property market and weak consumer demand.
For investors and policymakers, the cleanup plan is a real litmus test: handling the immediate financial strains without jeopardizing China’s long-term economic stability.
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