China’s Local Governments: Can they pull the weight of the country’s economy?

Executive Summary

China’s economy has been undergoing a structural slowdown after witnessing four decades of near double-digit growth rates. For the third time in a row, China has set an annual growth target of around 5 per cent for 2025. And to a great extent, whether it achieves the target will be contingent on the performance of its local governments, which are responsible for around 88 per cent of the national expenditure.

However, their fiscal situation continues to worsen. Not only has their general budgetary revenue as a percentage of GDP dropped, revenue from sale of land use rights has also sharply declined. To further compound their misery, local government debt, including hidden debt, has soared to over 50 percent of GDP.

With the central leadership’s crackdown on illegal debt, coupled with falling revenues, the fiscal space for the local governments has drastically reduced. However, their expenditure mandates continue to expand, thereby creating a structural fiscal imbalance. This has, in turn, severely limited the local governments’ ability to keep the economy running.

Acknowledgement: The author would like to express his sincere gratitude to Pranay Kotasthane for ideating on the topic and for his valuable guidance during the research process.

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