China’s Debt-Relief Strategy Is Fueling a Larger Fiscal Crisis

By Jing Ye

The Debt Relief Plan Failed Almost Immediately

When Beijing rolled out its $1.68 trillion debt-relief package in late 2024, officials promoted it as a decisive fix for local government finances. The plan promised large transfers from the central government and a structured timetable for bringing hidden debt onto the books.

But the program unravelled quickly. Within months, it became clear that the rescue plan did not slow borrowing—it accelerated it. Instead of stabilizing fiscal conditions, the initiative exposed how deeply structural China’s debt problems have become, and how little control Beijing actually has over local spending behavior.

Rather than stabilizing local finances, the plan simply exposed how fragile the system already was.

China’s Political System Encourages Local Officials to Borrow More

China’s administrative structure creates powerful incentives for local leaders to prioritize short-term gains over long-term stability. Most mayors and provincial officials rotate out after three to five years. Their promotions depend on highly visible economic results—new projects, new spending, bigger payrolls—not on whether their governments can afford them.

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The debt rescue plan removed the last meaningful brake on this behavior. Beijing’s promise of new transfers, relaxed borrowing limits, and a formal restructuring process was widely interpreted by local officials as permission to expand spending, not cut it.

Construction restarted. Dormant infrastructure plans reappeared. Civil-service payrolls grew. And in some regions, old patterns of rent-seeking resurfaced.

Local officials get the benefits today and they leave office before the risks surface. Unfortunately, the system rewards borrowing and punishes restraint.

Bond Issuance Exploded After the Rescue Plan Was Introduced

The clearest evidence of this dynamic is in bond issuance data. Figures from the China Central Depository & Clearing Co. show that both national and local governments dramatically accelerated borrowing once the rescue plan was announced.

Average monthly bond issuance 

Monthly issuance of Chinese government bonds since 2018, including both central and local government bonds. (Data source: China Central Depository & Clearing Co.)

By 2025, China was issuing more than $32 billion in government bonds per month—more than triple the 2019 level. National bond issuance jumped nearly 26 percent year-over-year; local issuance rose almost 18 percent.

Rather than curbing borrowing, the rescue plan signaled to local leaders that Beijing would absorb more risk. And they responded exactly as the incentives encouraged: by borrowing more, faster.

The Central Bank Had to Print Money to Prevent a Financial Breakdown

By mid-2024, China’s financial system was showing signs of acute stress. Liquidity dried up, the bond market became clogged, and stock prices sagged.

The People’s Bank of China (PBOC) intervened with a rarely acknowledged tactic: by printing money to buy government bonds.

Between July and December 2024, the PBOC’s reported bond holdings nearly doubled—from around $213 billion to $410 billion. Historically, these kinds of interventions have preceded episodes of monetary instability, including the collapse of the Gold Yuan in the 1940s and inflation spikes in the 1990s.

By early 2025, markets appeared to stabilize: liquidity improved and equities recovered. But that calm didn’t emerge on its own—it depended heavily on continued central-bank intervention.

China Used Off-the-Books Operations to Absorb Government Debt

Behind the scenes, the PBOC began using a mechanism that allowed it to accumulate government bonds without showing them on its balance sheet.

State-owned banks would “purchase” newly issued government bonds, then immediately transfer them to the PBOC through short-term repo agreements. A few months later, the banks would buy back the bonds—only to repeat the cycle with new issuances.

Because these repos were labeled as temporary liquidity operations, they did not appear as long-term assets on the central bank’s books.

This allowed the PBOC to engage in large-scale, hidden money creation. By August 2025, it held roughly $785 billion in these off-balance-sheet bonds, in addition to $321 billion already disclosed. Total exposure approached $1.1 trillion—five times higher than the year before.

This level of masked money expansion is normally seen only in economies under severe financial strain.

Banks Exploited the Central Bank’s Market Support

Once commercial banks realized the PBOC had effectively become the market’s guaranteed buyer, they began to exploit the situation.

At first, banks bought aggressively, confident the PBOC would step in if prices fell.
Later, when Beijing tried to push stock prices higher, banks dumped their bonds onto the central bank, poured the cash into equities, and repurchased bonds at lower prices after markets cooled.

They were using the central bank’s intervention as a profit engine—trading against the very institution meant to stabilize the system.

Such behavior is unusual in well-functioning monetary systems and typically appears only when markets begin to doubt the central bank’s ability to guide conditions.

Local Governments Are Still Defaulting and Running Out of Cash

Defaults across local financing vehicles illustrate how strained municipal finances have become. From January to July 2025, 376 commercial-bill failures occurred across 60 local government financing platforms, with concentrations in Shandong, Yunnan, Henan, and Guizhou. These cases are modest in scale, but they show a consistent pattern: many localities can no longer meet even routine obligations.

The city of Rizhao offers one example. Faced with overwhelming payroll commitments, it redirected most available revenue toward civil-service salaries, leaving its financing arm unable to repay roughly $14.7 million in outstanding commercial bills. Situations like this suggest that fiscal stress is deepening, not easing, despite the government’s rescue efforts.

The Rescue Plan Intensified the Crisis Instead of Solving It

The 12 trillion–yuan rescue initiative was promoted as a structural answer to China’s local-debt problem. In practice, it provided a new channel for the central bank to absorb liabilities while leaving the underlying incentives untouched. Local governments continue to borrow heavily, defaults still appear across regional financing platforms, and the PBOC’s off-balance-sheet exposure has grown substantially.

Rather than slowing the buildup of risk, the program has accelerated it. Beijing’s decision to intervene early encouraged local officials to rely even more heavily on central support, and the gap between political priorities and fiscal reality has widened as a result. The financial trajectory is becoming increasingly difficult to manage, and the eventual burden is likely to fall on citizens who have little influence over the system that produced these imbalances.