China's Debt Crisis and Local Governments

China's recent debt rescue package of 10 trillion yuan aims to address the overwhelming debts faced by its local governments, which have sharply increased due to inadequate tax revenue sharing and economic pressures. The local governments, which historically relied on land leasing for revenue, have seen this income diminish significantly following the 2008 financial crisis and the Evergrande crisis in the real estate market. As local governments struggle to manage their finances, Local Government Financing Vehicles (LGFVs) have been utilized to mask debt, enabling them to borrow heavily without stringent regulations, creating a loop of increasing debt. The government's move to convert much of this hidden debt into official bonds does provide more transparency, but it fails to resolve the underlying issue of how local governments will generate enough revenue to repay these debts once they are recognized on the books.