By Abdikarim Haji Abdi Buh

By the time the streetlights went dark, the illusion was already over.

Let’s begin with a question that sounds like the setup to a bad joke: how does a city go bankrupt in a communist country? After all, China is supposed to have a firm grip on everything—from banks to buses, from land to labor. Bankruptcy, surely, is a capitalist problem.

And yet, across China today, cities are quietly running out of cash. Bus drivers wait months for salaries. Teachers are asked to return bonuses they spent years ago. Entire municipalities are “restructuring”—a polite euphemism for insolvency. What went wrong?

The answer lies not in chaos, but in design.

The System’s Original Sin

China’s fiscal system works like a household where the parent collects almost all the income and then tells the children they’re on their own when it comes to expenses. Beijing takes roughly 80 percent of tax revenues. Local governments, meanwhile, are responsible for most public spending—healthcare, education, infrastructure, pensions.

This mismatch created a permanent hole in local budgets. Cities had obligations, but no money. For years, this gap was papered over with a workaround so ingenious—and so reckless—that it powered China’s growth miracle while quietly planting the seeds of its undoing.

The Great Financial Illusion

Local governments were officially forbidden from borrowing directly. So they invented something else: Local Government Financing Vehicles, or LGFVs.

On paper, these were companies. In reality, they were cities wearing fake mustaches.

The scheme was simple. A city would transfer public land to an LGFV. The LGFV would then take that land to a bank and borrow billions, using it as collateral. Banks knew the government stood behind these entities, so the money flowed freely. The cash was poured into highways, subways, exhibition centers, and gleaming districts that looked impressive from satellite photos—and disastrous on balance sheets.

The infrastructure boosted GDP. GDP boosted promotions. Everyone won. Until they didn’t.

When the Music Stopped

LGFVs didn’t generate real income. A six-lane highway in a ghost city doesn’t collect tolls. A vast museum without visitors doesn’t sell tickets. The only thing keeping the system alive was rising land prices.

Then came the property crash. Land sales—once accounting for up to 40 percent of local government revenue—collapsed. The collateral evaporated. Banks stopped lending. Suddenly, the trick that had funded China’s cities for two decades was exposed as a rolling debt machine.

Today, estimates of LGFV debt range from $9 trillion to $13 trillion. At the high end, that’s roughly the size of the entire eurozone economy—hidden off the books, accumulated in silence, and backed by projects that don’t pay for themselves.

The Breakdown Becomes Visible

This is no longer an abstract financial story.  In Hegang, a city in China’s northeast, the government formally entered fiscal restructuring. Streetlights were turned off to save electricity. Hiring froze. In Tianjin—one of China’s richest cities—bus drivers reportedly went unpaid for months. In Guizhou province, officials publicly admitted they could not repay their debts and appealed to Beijing for help.

In wealthy coastal provinces, civil servants have been asked to return bonuses paid years earlier. Imagine being told to refund your 2021 Christmas bonus—because the city is broke.

For the Communist Party, this is a nightmare scenario. Its legitimacy rests on competence and control. When garbage goes uncollected and salaries go unpaid, that control begins to fray.

The Shell Game in Beijing

Beijing’s response has been technical, cautious—and revealing. It has allowed local governments to swap high-interest shadow debt for lower-interest official bonds. This moves liabilities from one pocket to another but doesn’t change the underlying reality: the money is gone, poured into concrete that generates no cash.

The result is paralysis. Local governments can’t stimulate the economy. They can’t strengthen social safety nets. They exist largely to service interest payments. Zombie governments, walking but not living.

And that leads to China’s next surprise.

The Consumer Who Never Came

For years, economists promised that China’s salvation would be its consumers. As exports slowed, domestic spending would rise. A billion shoppers would replace the factories.

It sounded logical. It didn’t happen.

Chinese households consume just 38 to 40 percent of GDP—shockingly low by global standards. Why? Because the system teaches fear.

Housing requires decades of savings. Education demands endless tutoring. Healthcare offers minimal protection against catastrophe. With a weak safety net, families save obsessively. Economists call it “precautionary savings.” Ordinary people call it survival.

After COVID lockdowns ended, Western analysts predicted “revenge spending.” Instead, China got revenge saving. In 2023 alone, household deposits surged by $2.5 trillion.

The Deflation Trap

This behavior feeds deflation—a slow, grinding economic poison. When people expect prices to fall, they delay purchases. Businesses respond by cutting prices, wages, and jobs. Demand shrinks further. The spiral tightens.

China is already there. Luxury spending is collapsing. Consumers are trading Starbucks for $1.40 coffees. High-end malls are losing to discount apps. The fastest-growing retailers are, effectively, dollar stores.  This is not an economy upgrading. It is downgrading.

Control Over Growth

Just when innovation might have offered an escape, the state chose control. The crackdown on tech—symbolized by Jack Ma’s silencing and the destruction of entire industries—sent a clear message: success is tolerated only until it becomes influential.

Golden shares, regulatory storms, vanished billionaires—together they froze entrepreneurial risk-taking. In today’s China, failing is dangerous. Succeeding too much is worse.

A Reckoning Deferred

China’s crisis is not sudden. It is the slow reveal of a system that worked spectacularly—until it didn’t. Debt hid weakness. Growth masked fragility. Control substituted for confidence.

The surprise is not that cities are going bankrupt. The surprise is how long the illusion lasted—and how difficult the ending will be.

Abdikarim Haji Abdi Buh
Email: abdikarimbuh@yahoo.com