China’s local governments have long been the engines of its economic miracle, and their ailing finances have been a drag on growth and the delivery of fiscal policy in the past few years. Under China’s decentralized system, local governments drive 85% of public spending and over 80% of infrastructure investment. A decade-long fiscal erosion, the recent collapse in land revenues, and soaring debt have left them struggling to meet spending needs. These challenges stem from deep structural issues—a tax structure that lags behind economic changes, an overreliance on land sales to fund infrastructure and debt repayment, and a misalignment between spending responsibilities and fiscal capacity. While recent debt relief measures have…
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