Local government-related entities in China are estimated to owe 10 trillion yuan, or about $1.4 trillion, to corporates and civil servants, equivalent to 7% of the country’s gross domestic product last year, according to economist David Li Daokui’s estimate. Hilariously, China’s GDP continues to grow at a fixed 5% every single year. Which means that the government is now directly funding all of the growth with even more debt!

Caitong Securities said in a report last week that China may allocate about 200 billion yuan in special bonds this year to settle overdue payments to companies, based on projections for land-reserve and project-construction special bonds.

The nudging has already begun and in recent months, authorities have instructed the nation’s major banks to provide support for the initiative, including asking them to give short-term liquidity loans to regional governments to settle overdue bills tied to their affiliated entities. While such debts are typically not owed by the local governments, they are responsible for repayment because they are backing the entities in debt. The policy may need further backing from regulators, as bankers are concerned about potential risks and need some form of assurance they won’t be held responsible if the advances turn bad, one of the people said.

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