China is bailing out over $1 trillion in unpaid local government debts to private firms

China is preparing a major bailout to clear over $1 trillion in unpaid bills local governments owe to private companies, according to Bloomberg.

The plan involves getting China Development Bank and other state-backed lenders to fund local authorities so they can finally repay massive backlogs tied to contractors, suppliers, and state-linked firms. This will push debt risk deeper into the banking sector, while Beijing tries to ease pressure on the private economy.

Officials plan to roll out the first phase of this cleanup with 1 trillion yuan, around $140 billion, with everything meant to be settled by 2027.

The delayed payments became a central issue after President Xi Jinping raised alarm in a February speech, which was later released to the public.

Xi said the long-overdue arrears were hurting businesses and society, adding that these debts could “cripple” companies and weaken trust in local authorities. That warning triggered urgency across key ministries and banks to find a fix, fast.

Banks told to lend despite rising bad loans

Over the past few months, China’s top regulators have told major banks to help fund the repayments, even if the loans come with risk. The banks have been directed to provide short-term cash to local governments, not directly, but to the government-backed firms under them that owe money to private companies.

Even though those debts aren’t officially on the books of the local governments, they’re still responsible for covering them, since they guarantee the firms behind the debt.

That’s creating problems for bankers who are already struggling to protect their margins. These lenders, especially the top five commercial banks, have been dealing with rising defaults for years.

In just the first half of this year, they put aside 3.51 trillion yuan to cover expected loan losses. That’s nearly a 6% jump from the end of last year. At the same time, their profits have been crushed by years of state pressure to issue low-interest loans to keep the economy moving.

A person familiar with the banks’ internal discussions said that bankers are uneasy about the new orders. They’re asking for protection from regulators, in case the bailout loans go bad. Without a safety net, some fear they’ll be held responsible for future defaults.

Debt levels hit 10 trillion yuan as bond sales begin

David Li Daokui, an economist, estimates that local government-related entities now owe 10 trillion yuan, or about $1.4 trillion, to both companies and civil servants. 

That debt equals 7% of China’s GDP from last year. This shows how far the financial rot has spread, not just between governments and banks, but into payrolls and the country’s core services.

To ease the load, Caitong Securities Co. reported that the government might issue 200 billion yuan in special bonds this year. These funds will help cover overdue payments through land reserve and construction projects.

But bond sales alone won’t solve the problem. The government is relying mostly on banks to step in, even if they don’t want to. The real burden, once again, is shifting from broken local governments onto national lenders.

And this time, the bill is being paid with even more debt. Whether it works or not is still unclear, but China is running out of time, and patience.

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