Broke But Not (Yet) Bankrupt: Local Government Finance in the Age of Economic Stagnation

Minxin Pei CLM Issue 84 June 2025.pdf

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The combination of the real estate crash that started in 2021 and the Covid-19 lockdowns in 2022 has contributed to a dramatic fall in local revenues during the past three years, in particular income from land sales. In response, local governments have cut spending and raised new sources of revenue through mostly one-off measures (such as selling state-owned assets). Although these short-term solutions have apparently kept local governments barely afloat, long-term reforms are needed to address a well-known flaw in China’s fiscal system. In light of China’s overall large structural deficit and growing level of public debt, the policy of muddling through will most likely produce even worse outcomes, such as a further deterioration in local services and a continuing waste of scarce resources on unnecessary or inefficient local investment projects.

Most analysts outside of China seem to associate the country’s stability with elite politics in Beijing and, as a result, pay an inordinate amount of attention to purported factional jockeying for power or to economic policies made in the capital. Although what happens in Zhongnanhai has an undeniable first-order effect on politics and policy, the foundation of rule by the Chinese Communist Party (CCP) is the local party-state. Policies conceived by General Secretary Xi Jinping and his colleagues on the Politburo Standing Committee amount to little if they are not implemented by the millions of officials in the provinces, municipalities, and counties. It is difficult to imagine that the party would be able to stay in power if local officials were to fail to collect taxes, provide essential services, and enforce social control. As the performance of the local state critically affects China’s overall stability, we should look at how the local state is coping with the fiscal fallout from the economic slump that was initially triggered by the collapse of the real estate bubble in late 2021 and was further exacerbated by Xi’s costly zero-Covid lockdowns in 2022. Obviously, if the fiscal outlook of local governments does not improve in the future, the diminishing fiscal resources will handicap the ability of local governments to perform their routine functions and will result in a gradual degradation of local state capacity.

As a preliminary investigation into local government finances after the outbreak of the Covid-19 pandemic in 2020, this essay first examines China’s overall fiscal picture and then focuses on the sources of revenue and the main expenditure items of local governments. It then analyzes the deterioration of local government finances since the outbreak of the pandemic in general, and the impact of the real estate crash and Xi’s zero-Covid lockdowns in 2022 in particular. It also surveys the wide range of short-term measures adopted by local governments to plug in the fiscal hole created by the real estate crash. It concludes with an examination of a narrow range of options for placing local government finances on a more stable footing.

The Structure of the Fiscal System

Based on official accounts, the Chinese government relies on three categories of revenue streams—fiscal revenue including taxes and fees (一般公共预算收入), “government funds” (政府性基金) raised for specific uses, and operating income from state-owned assets (国有资本经营收入)—to fund its spending in each corresponding category.  Official data reveal a structural deficit that averaged 6.67 percent of GDP between 2019 and 2024 (Table 1). Official Chinese statistics slightly understate the structural deficit. In its report on China released in February 2024, the IMF data show that the average structural deficit for the 2019–2024 period was 6.9 percent of GDP.[1] This deficit is financed by central government and local government borrowing. As local governments are known to underreport their borrowing, the real structural deficit is likely larger than what is shown in the IMF data. Finance Minister Lan Fo’an disclosed that, as of the end of 2023, the amount of outstanding local government “hidden debt” (隐性债务) was 14.3 trillion yuan, about 11 percent of GDP. When added to the reported amount, total local debt was 67.5 percent of GDP.[2] On the whole, the data in Table 1 indicate that China has a large structural fiscal deficit that is partly financed by local government borrowing. For example, the central government’s deficit in 2023 was 3.87 percent of GDP.[3] But the real deficit for the year, as indicated by Table 1, was 6.58 percent of GDP. The difference—2.71 percent of GDP—is the amount of borrowing by local governments.

Table 1: Central and Local Government Income and Spending, 2019–2024 (trillion yuan)

Year		Central Govt. Fiscal Revenue	Central Govt. Funds	Central Govt. Assets	Local Govt. Fiscal Revenue	Local Govt. Funds	Local Govt. Assets	Total	Deficit	As % of GDP
2019	Income	8.93	0.4	0.16	10.1	8.05	0.23	27.87
	Spending	3.51	0.31	0.09	20.37	8.83	0.13	33.24	(5.37)	5.3
2020	Income	8.28	0.36	0.18	10.01	8.99	0.3	28.12
	Spending	3.51	0.27	0.09	21.05	11.53	0.17	36.62	(8.5)	8.38
2021	Income	9.15	0.41	0.2	11.11	9.4	0.32	30.59
	Spending	3.51	0.32	0.09	21.23	11.1	0.17	36.42	(5.83)	5.07
2022	Income	9.49	0.41	0.23	10.88	7.38	0.33	28.72
	Spending	3.56	0.55	0.17	22.5	10.5	0.17	37.45	(8.73)	7.25
2023	Income	9.96	0.44	0.23	11.72	6.63	0.45	29.43
	Spending	3.82	0.49	0.15	23.64	9.65	0.19	37.94	(8.51)	6.58
2024	Income	10.04	0.47	0.23	11.93	5.74	0.45	28.86
	Spending	4.07	0.47	0.15	24.39	9.68	0.16	38.92	(10.07)	7.46
Average										6.67

Sources: Statistical Yearbook of China, various years; 财政部, “2024年财政收支情况,” https://gks.mof.gov.cn/tongjishuju/202501/t20250124_3955083.htm

A closer look at Table 1 shows that the central government actually runs a surplus because its income is consistently higher than its spending (roughly 6 trillion yuan in 2024). But the opposite is true of local governments (they ran an aggregate deficit of 16.11 trillion yuan in 2024). Of the three categories of income and spending, local government revenue from taxes and non-tax income typically covers only one-half of local government spending in the same category. Government funds generated by local governments also do not cover the spending in the same category, albeit by a smaller margin than before the pandemic. As this category includes income from land sales, the deficit grew progressively larger after the pandemic, in particular after the crash of the real estate sector that began in late 2021, even though spending in this category declined by 16 percent between 2019 and 2024.

In nominal terms, China’s formal fiscal system (tax and non-tax revenues, excluding government funds and income from state-owned assets) favors the central government at the expense of the local governments. Before the Xi Jinping era, the central government received roughly the same amount of revenue as the local governments, but the bulk of the spending (70–78 percent) was borne by the local governments. In the Xi era, although the local governments’ fiscal revenue has exceeded that of the central government, their share of public spending has also risen sharply. During the Jiang Zemin era, central government spending averaged 30 percent of total spending. Under Xi, the share is only 14 percent (Table 2).

Table 2: Average Share of Central‑Local Government Fiscal Income and Spending (%)

	Central Govt. Income	Local Govt. Income	Central Govt. Spending	Local Govt. Spending
Jiang Era (1994–­2002)	51.8	48.2	30	70
Hu Era (2003–2012)	52.3	47.7	22	78
Xi Era (2013–2024)	46	54	14	86

Sources: Statistical Yearbook of China, various years; “2024年财政收支情况.”

However, the data in Table 2 likely give an incomplete, if not misleading, picture of the resources available to local governments because the central government makes transfer payments in trillions of yuan each year to local governments to help fund their expenses. Such transfers increased during the pandemic (Table 3). Once central government transfer payments are factored in, total local government fiscal income rises significantly. On average, the data in Table 4 show that central government transfer payments amounted to about 80 percent of total local government fiscal revenues during 2008–2012 and 2018–2024.

Table 3: Adjusted Local Government Income and Spending After Including Central Transfers (2019–2024)

Year	Local Fiscal Income in billion yuan (a)	Central Transfer Payments in billion yuan	Total Local Income in billion yuan	Total National Fiscal Spending in billion yuan (b)	Total Local Income as a Share of Total National Spending (%)
2019	10,107.6	7,441.5	17,549.1	23,887	73.5
2020	10,012.4	8,331.5	18,343.9	24,559	74.7
2021	11,107.7	8,221.5	19,329.2	24,632	78.5
2022	10,881.8	9,714.4	20,596.2	26,061	79
2023	11,721.8	10,294.5	22,016.3	27,457	80.2
2024	11,926.6	10,039.7	21,966.3	28,461	77.2
Average					77.2

Note: Excluding income and spending related to government funds and state-owned assets.

Sources: 财政部预算司, “中央对地方转移支付预算表,”various years, https://gks.mof.gov.cn/tongjishuju/202501/t20250124_3955083.htm; “关于2024年中央和地方预算执行情况与2025年中央和地方预算草案的报告,” https://npcobserver.com/wp-content/uploads/2025/03/2025-MOF-Report_NON-FINAL_ZH.pdf 

Table 4: Central Government Transfer Payments

Period	Central Transfer Payments as a Share of Local Fiscal Income (Average %)
2008–2012	79.5
2018–2024	80.4

Sources: 财政部, 中央政府预决算, http://www.mof.gov.cn/zyyjsgkpt/zyzfyjs/

Further examination of central government transfer payments and the restrictions placed on their spending by Beijing reveals two important datapoints. First, even with these transfer payments, total local government income covers on average only about 77.2 percent of China’s total fiscal spending (Table 3). As local governments account for an average of 86 percent of national fiscal spending under Xi, this implies that local governments must rely on other resources to fund roughly 9 percent of total fiscal spending.

Second, the central government places strict limits on the spending of its transfer payments to local governments by designating their specific use. For example, the two largest expenditure items funded by central government transfer payments are subsidies for local pensions and healthcare insurance.[4] Local governments could spend, at their discretion, 38 percent of the transfer payments they received from the central government between 2020–2024 (Table 5). Such restrictions suggest that the central government does not want local governments to divert resources to spending on projects it deems wasteful or unimportant.[5] 

Table 5: Restricted Use of Central Transfer Payments

Year	Share of Central Transfer Payments That Local Governments Can Use at Their Own Discretion
2020	35.5
2021	39.6
2022	36.7
2023	37.7
2024	40.4
Average	38.0

Source: 财政部预算司, “中央对地方转移支付预算表,” various years, http://yss.mof.gov.cn

Local Governments’ Fiscal Structure

Of the three income categories, local governments received about 75 percent of their total revenue from taxes, non-tax revenues, and central government transfer payments in 2024 (Table 6). Their total spending exceeded their income by 8.93 trillion yuan. Judging by the spending in each of the three categories, local governments ran a surplus of 292 billion yuan in “state-owned assets,” but they incurred large deficits in the other two categories—5.27 trillion yuan in “fiscal revenue” (taxes and fees) and 4.768 trillion yuan in “government funds.” These two datapoints indicate, besides the evidence of a large fiscal gap (more than 5 trillion yuan in 2024), income from various government funds (which includes land sales) could cover only 60 percent of the spending in the same category in 2024. Based on the data in Table 1, the ratio between income and spending in this category averaged 75 percent between 2019 and 2024. The ratio began to fall after the pandemic, and it has deteriorated dramatically since 2022, reflecting the effects of the economic slowdown and the real estate crash (most likely because spending on fixed investment projects in this category could not be reduced at the same rate of decline of income in the same category, much of it generated by land sales, as we will analyze later).

Table 6: Total Income and Spending of Local Governments, 2024 (billion yuan)

Category	Income	%	Spending	%
Fiscal (tax and non-tax)	19,119 (1)	75.6	24,389	71.3
Government Funds	5,736	22.7	9,680	28.2
State-Owned Assets	453	1.7	161	0.5
Total	25,300	100	34,230	100
Deficit			(8,930)

Note:

(1) Including central government transfer payments.

Source: 财政部, “关于2024年中央和地方预算执行情况与2025年中央和地方预算草案的报告,” https://www.gov.cn/yaowen/liebiao/202503/content_7013431.htm 

Table 7 below presents the structure of the formal fiscal system of local governments. Taxes generate roughly three-quarters of their total revenue, and non-tax revenue (such as administrative fees, income from “use of state resources,” and fines) accounts for the rest. We can make two observations from the data in Table 7. First, as taxes are more sensitive to economic growth, the changes in local tax-based revenue suggest that the economy began to slow down dramatically in 2019. In 2020 the pandemic had a small negative impact. But in 2022 Xi’s zero-Covid policy dealt a blow worse than the pandemic in terms of local tax revenue (even after taking into account the effects of tax rebates that reduced local revenues).[6] Second, non-tax revenues began to rise in 2022, indicating that governments have been aggressively seeking new sources of income in a low-growth environment. 

Table 7: Local Government Fiscal Revenue (excluding land sales), 2013 taxes and 2024 non-tax income (trillion yuan)

Year	Taxes	Change	Non-Taxes	Change	Total	Change	Non-Tax Revenue as a Share of Taxes
2013	5.39	n.a.	1.51	n.a.	6.9	n.a.	22
2014	5.91	9.6	1.67	10.6	7.59	9.4	22
2015	6.27	6.1	2.03	21.6	8.3	5.1	24
2016	6.47	3.2	2.25	10.8	8.72	5	26
2017	6.87	6.2	2.28	1.3	9.15	7	25
2018	7.6	10.6	2.19	-3.9	9.79	7	22
2019	7.7	1.3	2.41	10	10.11	3.3	24
2020	7.47	-3	2.55	5.8	10.02	-0.9	25
2021	8.38	12.2	2.73	7.1	11.11	10.9	25
2022	7.66	-8.6	3.21	17.6	10.87	-2.2	30
2023	8.53	11.4	3.19	-0.6	11.72	7.8	27
2024	n.a.	n.a.	n.a.	n.a.	11.93	1.8	n.a.

Sources: Statistical Yearbook of China, various years; 财政部, “关于2024年中央和地方预算执行情况与2025年中央 和地方预算草案的报告,” https://www.gov.cn/yaowen/liebiao/202503/content_7013431.htm 

Land Sales and Land-Related Taxes

In the Xi era, as shown by Table 8, income from land sales, which goes exclusively into the coffers of local governments, has been growing rapidly. In nominal terms, land sales generated 8.5 trillion yuan in their peak year (2021), more than twice the amount in 2013. Indeed, prior to the real estate crash in 2021, land sales regularly registered high double-digit growth. Judging by the double-digit increases in budgeted income from land sales for most of the Xi era, local governments have consistently counted on land sales to yield higher revenues (they drastically cut anticipated income for 2016 because of Beijing’s policy of deleveraging). For the most part, their optimism was rewarded because the continuing real estate bubble generated more income from land sales than that which was budgeted prior to 2022. Notably, local governments appeared not to be cognizant of the pending real estate crisis even in 2021 as they anticipated a slight increase in income from land sales for 2022. However, income from land sales plunged in 2022, and it continued to fall in 2023 and 2024. The magnitude and rapidity of the decline of income from land sales are stunning. Revenue from land sales in 2024 was only 57 percent of that in 2021. The cumulative loss of revenue from land sales during 2022–2024 from the peak year of 2021 was about 8.5 trillion yuan if we assume that the level of sales in 2021 could be maintained in the following three years.

Table 8: Local Governments’ Income from Land Sales, 2013–2024 (trillion yuan)

Year	Budgeted (trillion yuan)	Change (%)	Actual (trillion yuan)	Change (%)
2013	2.56	n.a.	3.91	n.a.
2014	3.44	34.3	4.05	32
2015	3.74	8.7	3.07	16
2016	2.67	-28.6	3.56	40
2017	3.72	39.3	5	26
2018	5.25	41	6.29	26
2019	6.48	23	7.07	12
2020	6.86	6	8.22	16
2021	8.22	20	8.5	3
2022	8.5	3	6.53	-23
2023	6.53	-23	5.66	-13
2024	n.a.		4.87	-14

Sources: Statistical Yearbook of China, various years; “2024年财政收入同比增长1.3% 土地出让收入下降16%,” https://economy.caixin.com/2025-01-25/102283360.html 

On paper, the amount of revenue generated by land sales is large, accounting for about 37 percent of the combined local government revenues from two principal sources (taxes and non-taxes, and land sales) (Table 9). However, as the proceeds from land sales must be used to cover the costs of acquiring the land, the net amount available for local governments to spend is significantly less. Typically, the costs of acquiring the land are equal to about 80 percent of the realized proceeds, implying that the net profits for local governments are only about 20 percent of the gross amount of land sales.[7] In reality, the amount of net profits is likely much higher because local governments can inflate the costs of the acquisition of land in order to generate higher actual profits, which they can then spend at their discretion. Local governments can also rely on land sales as an indirect means to raise debt. Besides generating more income, higher land values allow local governments to use land as collateral to take out more loans. For example, official data show that in 2015 28 “key cities” (重点城市) used land collateral to increase their net borrowing by 1.8 trillion yuan, which accounted for 25 percent of the net increase in loans to enterprises nationwide in that year.[8]

Table 9: Land Sales as a Share of Local Government Income, 2013–2024 (trillion yuan)

Year	Land Sales	Tax and non-tax revenues	Total (1)	Land Sales as % of total
2013	3.91	6.9	10.81	36.2
2014	4.05	7.59	11.64	34.8
2015	3.07	8.3	11.37	27
2016	3.56	8.72	12.28	40.8
2017	5	9.15	14.15	35.3
2018	6.29	9.79	16.08	39.1
2019	7.07	10.11	17.18	41.2
2020	8.22	10.02	18.24	45.1
2021	8.5	11.11	19.61	43.3
2022	6.53	10.87	17.4	37.5
2023	5.66	11.72	17.38	32.6
2024	4.87	11.93	16.8	29
Average				36.8

Note:

(1) Total amount excludes income from other “government funds” and “state assets.”

Sources: Statistical Yearbook of China, various years; 财政部, “2024年财政收支情况.”

According to government policy, net proceeds from land sales are supposed to fund local infrastructure projects. In reality, only about one-half of these proceeds have been invested in infrastructure projects in recent years. In poorer localities, most proceeds have been used to fund the general budget. In 2020, for example, in a sample of third-tier cities it is found that only 13 percent of the proceeds was spent on infrastructure projects.[9]

In addition to their reliance on land sales to fund their budgets, local governments also derive substantial tax revenue from the real estate sector. Data in Table 10 show that, on average, land sales and land-related taxes together contributed 43 percent of total local government revenue (excluding non-land government funds and operating income from state assets) between 2013 and 2023. The crash of the real estate sector since 2021 has considerably reduced not only the proceeds from land sales but also has caused a measurable decline in land-related taxes.

Given the oversized contribution of land sales and land-related taxes to the budgets of local governments, it is reasonable to conclude that the real estate crash since 2021 has significantly increased the fiscal strains on the local state. The fiscal challenges facing local governments will likely persist because another boom in the real estate sector is extremely unlikely. Even if the sector stabilizes, local governments will generate far less revenue from land sales than was the case in the past.

Table 10: Income from Land Sales and Land-Related Taxes as a Share of Total Local Government Revenue, 2013–2023 (trillion yuan)

Year	Sales	Change	Taxes (1)	Change	Subtotal	Total Local Govt Revenue (2)	Land as % of Total Local
2013	3.91	n.a.	0.659	n.a.	4.569	10.81	42.3
2014	4.05	32	0.775	17.6	4.825	11.64	41.5
2015	3.07	16	0.802	3.5	3.872	11.37	34.1
2016	3.56	40	0.869	8.4	4.429	12.28	36.1
2017	5	26	0.987	13.6	5.987	14.15	42.3
2018	6.29	26	1.092	10.6	7.382	16.08	45.9
2019	7.07	12	1.166	6.8	8.236	17.18	47.9
2020	8.22	16	1.137	-2.5	9.357	18.24	51.3
2021	8.5	3	1.231	8.3	9.731	19.61	49.6
2022	6.53	-23	1.217	-1.1	7.747	17.4	44.5
2023	5.66	-13	1.149	-5.6	6.809	17.38	39.2
Average							43.2

Notes:

(1) Land-related taxes here refer to the real estate tax (房产税), the land value appreciation tax (土地增值税), and the urban land-use tax (城镇土地使用税);

(2) The total amount excludes income from other “government funds” and “state assets.”

Source: Statistical Yearbook of China, various years.

The Impact of Declining Fiscal Resources

The fall in the aggregate revenue of local governments, as described in the preceding sections, has forced them to cut spending or to slow down spending increases. The data in Table 11 show the adverse impact of diminishing fiscal resources on local spending in major categories, such as domestic security, education, social security, health, and community services: after 2020 local spending either began to fall in absolute terms, or it grew more slowly after the pandemic. Social security outlays were better protected than other spending mostly because the central government lists the “protection of people’s basic livelihoods” (保基本民生) at the top of the three spending priorities (the other two are “protection of salaries” [保工资] and protection of government operating expenses [保运转支出]). The impact on healthcare spending is more difficult to gauge because of the huge increases in 2020 and 2022, necessitated first by the outbreak of the pandemic and later by the enforcement measures of zero-Covid. Spending on education grew less than before the pandemic (although a likely partial explanation is the dwindling school-age population due to the demographic decline). Surprisingly, domestic security spending was more negatively affected than spending on education because it was cut in 2020 and 2021, and it grew only marginally in 2023. Spending on community services, which includes maintenance of public infrastructure, sanitation, and neighborhood administration, fell dramatically. The fact that local governments had to cut back on domestic security in three of the four years during 2020–2023 and had to significantly curtail services, such as sanitation, administration, and maintenance of infrastructure, reveals the severity of their fiscal strains during the period.

Table 11: Local Government Spending (Major Categories), 2014–2023 (trillion yuan)

Year	Domestic Security	Change	Education	Change	Social Security	Change	Health	Change	Community Services	Change
2014	0.688	n.a.	2.179		1.527		1.009		1.294	n.a.
2015	0.78	13.4	2.491	14.3	1.83	19.8	1.187	17.6	1.588	22.8
2016	0.929	19.1	2.663	6.9	2.07	13.1	1.307	10.1	1.837	15.7
2017	1.061	14.2	2.86	7.4	2.361	14	1.434	9.7	2.056	11.9
2018	1.174	10.7	3.044	6.4	2.583	8.6	1.541	7.5	2.204	7.2
2019	1.206	2.7	3.296	8.1	2.815	9	1.642	6.6	2.48	12.5
2020	1.203	-0.2	3.469	5.2	3.145	11.7	1.887	14.9	1.987	-19.9
2021	1.189	-1.2	3.578	3.1	3.29	4.6	1.892	0.3	1.937	-2.5
2022	1.246	4.8	3.792	6	3.577	8.7	2.232	15.2	1.942	0.3
2023	1.262	1.3	3.968	4.6	3.883	8.6	2.21	-1	2.053	5.7

Source: Statistical Yearbook of China, various years.

Official spending data do not fully capture the scope of belt-tightening at the grassroots level. Despite censorship, the Chinese press has revealed the following cost-cutting measures, some of which apparently rely on dubious accounting methods:

(1)   Delaying or refusing to pay private firms that provide services to local governments. For example, publicly traded environmental service companies have reported growing “accounts receivable” from local governments. As of the first half of 2023, these firms disclosed that their accounts receivable had ballooned to 178.8 billion yuan, 10 percent higher than that at the end of 2022.[10]  Audits conducted by the National Audit Office (审计署) in 2023 also uncovered fraudulent practices by local governments designed to conceal funds owed to contractors.[11]

(2)  Laying off temporary and part-time workers and freezing hiring.[12] In 2021 Liaoning and Xinjiang unveiled a policy of reducing government employees supported by on-budget expenditures.[13] 

(3)  Cutting administrative expenses for meetings, travel, and entertainment. For example, Tianjin instituted a 10 percent reduction in administrative expenses that reportedly saved 8.8 billion yuan in “unnecessary expenses.”[14]

(4)  Reducing or suspending essential services, such as public transportation, as reported in Henan, Guangdong, and Hunan.[15]

(5)  Cutting or delaying the payment of salaries for civil servants as well as eliminating some fringe cash benefits.[16]

Judging by the amount of coverage in the Chinese press devoted to local governments’ efforts to raise new sources of revenue during the last several years, it appears that the local governments are placing far greater emphasis on filling the fiscal gap with novel methods of generating income than they are cutting expenses. As indicated by Table 7, non-tax revenues collected by local governments as a share of total local fiscal revenues began to increase starting in 2020. In 2019, non-tax revenues totaled 2.41 trillion yuan. During 2020–2023, they averaged 2.92 trillion yuan—an increase of 21 percent.

Table 12: Comparison of the Non-Tax Fiscal Income of Local Governments, 2019 vs. 2023 (billion yuan)

Category	Designated Items	Administrative Fees	Fines	Operating State Assets	Use of State Resources & Assets	Other
2019	685	348	293	106	734	243
Percentage	28.4	14.4	12.2	4.3	30.5	10.1
2023	785	345	363	99	1,338	262
Percentage	24.6	10.8	11.4	3.1	41.9	8.2

Source: Statistical Yearbook of China, various years.

Based on a comparison of the main sources of non-tax fiscal revenues between 2019 and 2023, it is clear that most of the new revenues were generated by “paid use of state resources and assets” (国有资源资产有偿使用), which accounted for 41.9 percent of the total non-tax fiscal income of local governments in 2023, 11 percentage points higher than that in 2019.

According to the Ministry of Finance, this category of income includes income from leases of natural resources (mines and oil wells), government-owned venues, exclusive rights for operating businesses (such as taxis and parking lots), pollution rights, and advertising in public spaces.[17] As Table 13 shows, local governments began to generate a growing share of their non-tax income from this category in 2016, and they became even more dependent on this type of income after the pandemic. A comparison of Table 7 and Table 13 reveals a noteworthy pattern: income from this category fell when tax revenue was higher or healthy, but it rose if tax revenue was lower. This evidence indicates that the resources and assets controlled by local governments may perform the function of serving as a rainy-day fund that they can draw down during times of fiscal stress.

Chinese officials refer to the practice of squeezing more income from such resources and assets as “optimizing asset productivity” (盘活资产). Authorities in some localities prefer a more colloquial expression, “smashing cooking pots and selling the scrap iron” (砸锅卖铁), which better captures the fiscal desperation they confront. In 2024, a district government in Chongqing reportedly set up a “Smashing Cooking Pot and Selling the Scrap Iron” task force headed by the executive deputy district magistrate and the director of the district’s finance bureau. According to Caixin, at least three other localities have touted their income from “smashing cooking pots.” The publication also reported that the central government had demanded that twelve heavily indebted provinces “smash cooking pots” to generate income and mitigate the risks of default.[18]

The metaphorical “cooking pots” disposed of by local governments include a wide variety of assets. A city in Sichuan reportedly “sold” the rights to provide food and other materials to the cafeterias of government-owned institutions and businesses for thirty years. Xinjiang and Fujian sold off unoccupied government-owned housing. Xinjiang leased oil and natural gas wells. Several counties in the central and western regions sold off their rights to operate parking lots.[19] Although so far local governments appear to be able to increase their income by selling off assets, it is doubtful whether they can rely on such one-off measures on a sustainable basis. At some point, they will run out of metaphorical “cooking pots” that can be smashed.

Table 13: Local Government Income from the Paid Use of State-Owned Resources and Assets, 2013–2023 (trillion yuan)

Year	Income from Paid Use of State-Owned Resources and Assets	Change (%)	Total Non-Tax Income	Income from Paid Use of State Resources and Assets as % of Total Non-Tax Income
2013	0.342	n.a.	1.51	22.6
2014	0.419	22.5	1.67	25.1
2015	0.522	19.7	2.03	25.7
2016	0.665	27.4	2.25	29.6
2017	0.692	4.1	2.28	30.1
2018	0.629	-9.1	2.19	28.7
2019	0.734	16.7	2.41	30.5
2020	0.865	17.8	2.55	33.9
2021	0.921	6.5	2.73	33.7
2022	1.255	36.3	3.21	39.1
2023	1.338	9.2	3.19	41.9
Average		15.1		31.0

Source: Statistical Yearbook of China, various years.

As another source of non-tax income, local governments have tried to increase fines levied by courts, police, and other government regulatory agencies. Chinese press and social media stories on the brazen and arbitrary fines local authorities have levied in recent years easily give the impression that fines have become a major source of revenue. Politically, public outcries over such practices prompted Xi Jinping and Premier Li Qiang to issue instructions to curtail this type of abuse of power by local authorities.[20] 

Data on income from fines collected by local governments show that this category of revenue generates a relatively small share of non-tax revenue (averaging 10.7 percent between 2013 and 2023). Judging by the magnitude of the increases, income from fines actually grew faster during 2017–2019 than it did during 2020–2024. It is highly likely that official data on income from fines underreport the actual amount because local officials probably will stash away fines collected in violation of laws and rules. At the same time, it is doubtful that such predatory activities can generate income that is sufficiently large to meet the fiscal needs of local governments. In all likelihood, fines illegally extracted by law enforcement and regulatory agencies are used to fund their own perks and benefits instead of being channeled into public coffers and paying for the expenses of other departments.

Table 14: Income from Fines (billion yuan)

Year	Total Non-Tax Revenues	Change	Fines	Change	Fines as % of Total Non-Tax Revenues
2013	1,510	n.a.	161	n.a.	10.7
2014	1,670	10.6	163	1.2	9.8
2015	2,030	21.6	176	8	8.7
2016	2,250	10.8	185	5.1	8.2
2017	2,280	1.3	216	16.8	9.5
2018	2,190	-3.9	249	15.3	11.4
2019	2,410	10	293	17.7	12.1
2020	2,550	5.8	297	1.3	11.6
2021	2,730	7.1	343	15.5	12.6
2022	3,210	17.6	369	7.6	11.5
2023	3,190	-0.6	363	-1.6	11.4
2024	n.a.	n.a.	417	14.9	n.a.
Average					10.7

Source: Statistical Yearbook of China, various years.

Conclusion

As indicated by data on local finance in recent years, China’s local state is facing increasingly difficult challenges to generate sufficient revenues to meet its obligations. Before the pandemic and the collapse of the real estate sector, its structural deficit was already large (about 10 trillion yuan in 2019, Table 1). The implosion of the real estate sector that began in 2021 and Xi’s zero-Covid lockdowns in 2022 delivered a one-two punch that caused a sustained and dramatic deterioration in local public finance. In particular, the loss of trillions of yuan in revenue from land sales left a gaping fiscal hole in provinces, cities, and counties. In the last several years, this hole has been filled mainly by high government borrowing. But the structural deficit, averaging nearly 7 percent of GDP (Table 1), will be difficult to sustain. Although short-term measures, such as spending cuts and raising revenues through sales or the leasing of state-owned assets, have helped to keep local governments afloat, they do not provide long-term solutions to a well-known structural problem.

To be sure, some measures adopted by the central government in late 2024, particularly the issuance of trillions of yuan in special bonds to replace off-books higher-interest local debt with lower-interest and longer-term new loans, will help reduce local governments’ expenses to service their debt.[21] Local governments may also be able to extract more revenue by disposing of the resources and assets under their control.  Finally, the real estate sector may be bottoming out, thus helping to put a floor beneath local public finance. Data on land sales for the period from January to April of this year show that although income from land sales declined 11.4 percent compared with the previous year, land sales for the month of April registered an increase of 4.3 percent, the first increase in 2025.[22] It may be too soon to announce the end of China’s epic real estate crash, but any easing of the real estate crisis will alleviate local fiscal stresses.

However, long-term solutions will require two politically difficult reforms. On the revenue side, it is unrealistic for local governments to expect a return to the good old days of reaping trillions of yuan from land sales even if the real estate sector were to stabilize. Other sources of fiscal income will have to be found. One option is to tweak the revenue-sharing formula so as to allocate a higher percentage of the value-added tax (the largest source of revenue) to local governments. Another solution is to levy a property tax. But this option is economically unattractive in the context of an imploding real estate sector. Politically, a tax on the most valuable asset held by most Chinese citizens will be extremely unpopular.

An alternative long-term solution is to cut local government expenditures. Local governments spend heavily on fixed asset investments, especially on municipal infrastructure and state-owned enterprises (SOEs).[23] Privatization of local SOEs can both generate short-term revenue and reduce long-term outlays. Replacing the current model of local government financing vehicles (LGFVs), a notoriously inefficient and corrupt fund-raising platform for funding local infrastructure, will almost certainly cut spending. Direct financing of municipal infrastructure by the central government may also be an option.

Unfortunately, it is unlikely that even a strongman such as Xi Jinping will embrace radical fiscal reforms, as shown by his record on this issue during his 12 years of rule. What is certain is that even though China’s local governments are broke but not yet bankrupt, their continuing fiscal woes will be a serious drag on the economy in the short term, and they will severely constrain the capacity of local governments to provide essential services in the long term.

About the Contributor

Minxin Pei, editor of China Leadership Monitor, is Tom and Margot Pritzker ’72 Professor of Government and George R. Roberts Fellow at Claremont McKenna College. He is also a non-resident senior fellow of the U.S. German Marshall Fund. His books include China’s Trapped Transition: The Limits of Developmental Autocracy (2006), China’s Crony Capitalism: The Dynamics of Regime Decay (2016), The Sentinel State: Surveillance and the Survival of Dictatorship in China (2024), and The Broken China Dream: How Reform Revived Totalitarianism (2025).

Notes

[1] IMF Country Report No.24/38 (February 2024): 4.

[2] 蓝佛安， “关于提请审议增加地方政府债务限额置换存量隐性债务的议案的说明,” November 8, 2024, https://www.gov.cn/yaowen/liebiao/202411/content_6985598.htm 

[3] “2023年中央财政收入总量逾10万亿元,” June 25, 2024, http://www.npc.gov.cn/npc//////c2/c30834/202406/t20240625_437698.html

[4] 财政部预算司，“2024年中央对地方转移支付预算表,” http://yss.mof.gov.cn/2024zyczys/ 

[5] Local governments can spend two categories of transfer payments.  The first category is “equalization transfers,” designed to fund public services in the poorer provinces.  The second category is “tax rebates” and subsidies, which mostly represent local governments’ share of taxes collected by the central government.

[6] 罗志恒， “透视地方财政负增长,” May 23, 2022, https://opinion.caixin.com/m/2022-05-23/101888760.html 

[7] 赵伟 侯倩楠， “地方财政土地依赖困局待解,” 中国改革， No. 6 (November 1, 2022), https://cnreform.caixin.com/2022-11-03/101959785.html 

[8] 赵伟 侯倩楠， “地方财政土地依赖困局待解.”

[9] 赵伟 侯倩楠， “地方财政土地依赖困局待解.”

[10] “地方财政压力大 环保企业应收账款上升,” September 7, 2023, https://science.caixin.com/2023-09-07/102101357.html 

[11] “审计查出地方新增企业欠款近80亿元,” December 23, 2024, https://economy.caixin.com/2024-12-23/102271178.html  

[12] “地方财政慢修复,” February 13, 2023,  https://weekly.caixin.com/m/2023-02-11/101996869.html 

[13] “地方财政紧平衡,” February 17, 2025, https://weekly.caixin.com/2025-02-15/102288495.html 

[14] “地方财政慢修复.”

[15] “地方财政的困难与自救,” February 17, 2025,  https://opinion.caixin.com/2022-09-20/101942206.html 

[16] “地方财政的困难与自救.”

[17] 财政部, “2021年政府收支分类科目,” August 13, 2020, https://yss.mof.gov.cn/xiazaizhongxin/202011/P020201106334200025771.pdf 

[18] “多地提出砸锅卖铁,” August 28, 2024, https://economy.caixin.com/2024-08-28/102230747.html 

[19] “地方财政有多困难,” September 26, 2022, https://weekly.caixin.com/2022-09-24/101944099.html;

“地方财政的困难与自救,” September 20, 2022, https://opinion.caixin.com/2022-09-20/101942206.html 

[20] “罚没收入异常增长背后,” January 17, 2025, https://www.mycaijing.com/article/detail/538949?source_id=40; “习近平总书记出席民营企业座谈会并发表重要讲话,” February 20, 2025, https://www.gov.cn/yaowen/liebiao/202502/content_7004472.htm 

[21] “12万亿元地方化债“组合拳”怎么看,” December 6, 2024, https://www.gov.cn/yaowen/liebiao/202412/content_6991352.htm 

[22] “4月财政收入同比增长1.9%,” May 20, 2025, https://economy.caixin.com/2025-05-20/102321555.html 

[23] “探路新一轮财税改革,” March 10, 2025,  https://weekly.caixin.com/2025-03-07/102295528.html 

Photo credit: 虹色分子, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0>, via Wikimedia Commons