China's property downturn has exposed deep vulnerabilities in a local government financing model reliant on land sales and off-budget borrowing, an East Asia Forum report finds. The fiscal strain is weighing on businesses, workers and growth.
The 1994 tax-sharing reform left localities with heavy spending duties but limited revenue powers, driving dependence on land-use rights sales and financing vehicles backed by land collateral. Land-related revenue peaked at nearly half of local consolidated revenue, ~10% of GDP in 2021, but fell to ~25% of local revenue, under 5% of GDP by 2025. Financing vehicles bought large land parcels, inflating reported sales.
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Debt servicing on official local debt rose from ~8% to ~18% of pre-transfer revenue between 2019-2023. Off-budget borrowing burdens also intensified, with debt collateralised against land. Heavily indebted provinces such as Guizhou have sought greater central support.
