China’s local government debt once again has captured public attention. At the end of May 2019, according to official information, the balance of China’s local government debt hit 19.89 trillion yuan, a net increase of 1.5 trillion yuan over the end of 2018, or up 8% in five months. In December 2018, the Central Economic Work Conference decided on policy arrangements for “significantly increasing the size of special debt for local governments.”

China’s local government debt is rooted in its fiscal system. Local governments play a pivotal role in propelling China’s economic growth, but their spending responsibilities are not matched by sufficient fiscal power. This institutional conundrum gives rise to China’s local debt, presenting a major financial risk. Despite its vital importance to the economy, the problem of local government debt is often discussed in negative ways whenever it arises without a careful analysis of its institutional root cause.

Based on China’s reality and international practice, we should recognize the status of local government debt in the fiscal and financial systems, and keep local government debt in check. Managing local government debt is key to mitigating financial risks in China.

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