A Tale of Two Debt Burdens:  A Day of Reckoning for China’s Debt-Fueled Infrastructure Development at Home and Abroad

By Steven T. Kargman (Kargman Associates)

In recent years, China has undertaken large-scale infrastructure development both at home and abroad. Overseas, China has undertaken massive infrastructure development around the globe under the umbrella of its widely heralded Belt and Road Initiative (BRI), a signature initiative of Xi Jinping’s tenure as the leader of China. Within China itself, a significant amount of infrastructure development has been carried out at the level of local governments, principally through entities known as Local Government Financing Vehicles (LGFVs).

This infrastructure development has involved the incurrence of huge amounts of debt by LGFVs and sovereign borrowers under the BRI. Specifically, LGFVs are estimated to have incurred approximately nine trillion dollars of debt according to an estimate by the International Monetary Fund (IMF), and approximately a trillion dollars of debt or more has been loaned to sovereign borrowers under the BRI. This enormous overhang of debt has created serious debt sustainability challenges for both BRI sovereign borrowers and LGFVs.

Nonetheless, the debt distress facing both BRI sovereign borrowers and LGFVs should not come as a complete surprise given the weak underlying economics of many of the BRI projects and LGFV-financed projects. Simply stated, a large number of the infrastructure projects financed by the BRI and LGFV debt have suffered from a lack of fundamental financial and/or economic viability and have therefore been unable to generate the level of revenues or investment returns necessary to service the debt that financed the respective projects.

Many BRI projects were originally projected to generate relatively high levels of demand for the services or outputs produced by the projects. However, the BRI projects have often not generated anywhere near the level of demand that was originally expected, with the result that the revenues generated by the projects have come in far below the projected levels.

With BRI projects generating lower-than-expected levels of revenues, a number of sovereigns that borrowed money under BRI have found themselves without the funds necessary to repay the outstanding debt. Thus, several BRI borrower countries have sought to restructure their outstanding sovereign debt, while other BRI borrower countries, although not yet in default or not yet undergoing sovereign debt restructurings, have nonetheless already turned to the IMF for financial rescue packages.

For their part, LGFVs have issued bonds and borrowed from banks in order to finance their local infrastructure projects. The problem, however, has been that the LGFV-financed infrastructure projects generally generate fairly meager investment returns, and yet the debt incurred by the LGFVs tends to be relatively expensive. Indeed, the cost of the LGFV debt is often much higher than the level of investment returns generated by the LGFV-financed projects.

The Chinese government has recognized the severity of the LGFV debt situation, but so far the steps taken by the central government have been somewhat piecemeal and/or limited in scope. Yet, in light of the scale and breadth of the problem affecting LGFVs and localities all across China, a more comprehensive, structural response is sorely needed.

The foregoing issues are discussed in a new article entitled “A Tale of Two Debt Burdens: A Day of Reckoning for China’s Debt-Fueled Infrastructure Development at Home and Abroad” that first appeared in International Insolvency & Restructuring Report 2024/25. A newer version of the article, which can be found here, appeared recently in AIRA Journal (the publication of the Association of Insolvency & Restructuring Advisors (AIRA)), Vol. 37, No. 3, and is reprinted with permission of AIRA. The article was previously featured in posts on Columbia Law School’s CLS Blue Sky Blog on June 14, 2024 and on the Oxford Business Law Blog (OBLB) on September 17, 2024.