China is preparing to address a massive backlog of unpaid bills owed by local governments to the private sector, estimated by some sources to exceed $1 trillion, according to people familiar with the matter.
The government is reportedly considering directing state lenders and policy banks, including China Development Bank, to provide loans to local authorities so they can settle these arrears. The plan aims to cover at least 1 trillion yuan ($140 billion) in the first phase, with officials targeting completion by 2027.
President Xi Jinping has warned that delayed payments risk undermining trust in the authorities and could “cripple” affected businesses in the private sector, damaging the broader economy. Officials see clearing the arrears as critical to restoring confidence among companies and workers.
While the move would relieve private-sector contractors, it would shift significant risk onto state-owned banks already grappling with rising loan losses. Local government-related entities are estimated to owe about 10 trillion yuan ($1.4 trillion) to corporates and civil servants, equivalent to roughly 7% of China’s GDP last year, according to economist David Li Daokui.
Authorities have instructed major banks to provide short-term liquidity loans to regional governments to settle overdue payments linked to local-government-affiliated entities. However, bankers remain concerned about potential risks and have sought assurances that they will not be held responsible if these advances turn bad.
Chinese banks are already under strain after years of providing cheap loans to support economic growth, driving margins to record lows. In the first half of 2025, the country’s five largest commercial banks set aside 3.51 trillion yuan in loan-loss allowances, up nearly 6% from the end of last year.
Caitong Securities Co. noted in a recent report that China may allocate around 200 billion yuan in special bonds this year to help settle overdue payments, based on projections for land-reserve and project-construction bonds.
The National Development and Reform Commission, the National Financial Regulatory Administration, and China Development Bank did not respond to requests for comment.
