Audit Finds Chinese Provinces Raiding Pensions as Local Debt Swells Toward GDP Size

Chinese auditors say provinces siphoned billions from pensions, school and farm aid, highlighting a local debt crisis that now rivals half of China’s economy.

Hu Axiang, 88, receives her first pension at her home in Shanghai, China, on Sept. 28, 2006.

China’s auditors say local officials have been raiding pension accounts, school budgets, and farm aid funds to keep the lights on and service a mountain of local debt. Borrowing is now estimated at more than half the size of the national economy, according to research by global banking group BBVA.

In a June 24 report to the National People’s Congress, the National Audit Office (NAO) said 25 provinces had misused at least 60.16 billion yuan (about $8.4 billion) from residents’ pension plans. Of that total, 41.408 billion yuan (about $5.8 billion) was siphoned away or obtained through fraud, the auditors said.

Analysts say the findings are a window into a far larger fiscal crisis. Beijing keeps most tax revenue, yet orders provinces and counties to meet ambitious growth targets. To bridge the gap, local officials raid almost any pot of money they can reach.

Auditors found that 13 provinces diverted 40.62 billion yuan (about $8.45 billion) in pension contributions to cover routine government expenditures such as payroll, operational expenses, and interest on outstanding loans.

In 110 counties across 11 provinces, 4.09 billion yuan (about $570 million) set aside for school construction or maintenance was reassigned or falsely booked, in part to repay debts.

Farmers were no safer. In 175 counties in 16 provinces, officials re-routed 4.16 billion yuan (about $580 million) in agricultural subsidies, forcing some recipients to wait a year or more—nine years in the worst case—for money they had been promised.

Nine provinces went a step further, repurposing more than 132.5 billion yuan (about $18.5 billion) in special-purpose bonds—debt that, by law, should finance long-lived roads, railways, waterworks, or digital networks. Instead, the proceeds went to cover civil service wages, office expenses, and liabilities at state-owned firms.

In one coastal city, Jinjiang, a financing arm, borrowed 15.02 billion yuan (about $2.09 billion) from charities and public-interest groups, turning philanthropy into hidden debt, according to the report.

The NAO stated that the findings only cover the places it examined.

It also flagged the Ministry of Finance’s monitoring systems that allowed one official to “self-fill, self-approve, self-report” spending data without challenge, highlighting that the problem is not just local profligacy but weak central oversight.

The auditors recommended faster fiscal and tax reform—such as rebalancing tax revenue between Beijing and the provinces—and tougher supervision of bond proceeds.

Rise of Hidden Debt

The scramble for cash accelerated when China’s real-estate boom buckled in late 2021. As land sales and home purchases dried up, local governments lost their richest income stream.

For years, they had bankrolled subways, airports, and industrial parks through local government financing vehicles (LGFVs), shell companies that borrow off the public books

Those shell companies are now struggling to roll over what analysts estimate is about 78 trillion yuan (roughly $10 trillion) in liabilities, more than half the size of China’s entire economy.

Each quarter, at least 1 trillion yuan (about $137 billion) in LGFV bonds are due, forcing officials into a nonstop scramble for fresh cash.

Beijing’s stop-gap solution—a one-time 10 trillion yuan (about $1.4 trillion) debt-swap program that lets provinces refinance some of this hidden borrowing with longer-dated, state-backed bonds—covers only a fraction of what is outstanding and merely pushes repayment further into the future.

“Every new loan just piles onto an already growing mountain of debt,” China analyst Wang He told The Epoch Times.

The few projects that do get built, he said, often bleed cash.

Fiscal Iceberg the Audit Barely Touches

Wang called the misuse of pension and welfare money “routine in China’s fiscal system.”

Last year, the NAO caught 66 counties plugging budget gaps with nearly 2 billion yuan (about $278 million) in student-meal subsidies to settle local debt.

China’s local people’s congresses rubber-stamp budgets, unlike the U.S. state legislatures, which can shut down the state government by rejecting a spending bill, he added.

Beijing keeps the lion’s share of tax revenue, Wang said, so many cities and counties would close their doors if off-book loans suddenly vanished. The central government tolerates the borrowing—up to a point—because the alternative is local collapse.

Since March 2023, nine of the provinces flagged in the report have added another 59.09 billion yuan (about $8.24 billion) in new hidden debt, often by ordering state-owned builders to front construction costs in exchange for vague promises of future payment, the NAO report said.

Six jurisdictions simply altered their ledgers, erasing 23.2 billion yuan (about $3.24 billion) in liabilities with the stroke of a pen, the investigations found.

Debt Bigger Than GDP

Speaking at Beijing’s Financial Street Forum on Oct. 18, 2024, Li Jianjun, vice-president of the Central University of Finance and Economics, said China’s debt-to-GDP ratio had reached about 103 percent by the end of June 2024, Asia Times reported.

That ratio is well above the globally recognized 60-percent threshold for high debt levels, he noted.

Li put the country’s total debt at 129 trillion yuan (about $18 trillion)—30 trillion yuan owed by the central government, 42.23 trillion yuan in legally issued local loans, and an estimated 57.16 trillion yuan of LGFV loans—surpassing China’s 2023 GDP of 126 trillion yuan.

The tally excludes shadow loans backed by local governments, he said.

He added that more than 60 percent of provinces and municipalities, including Tianjin, Chongqing, Guizhou, and Gansu, now carry debt equal to at least three times their annual economic output.

Chinese financial analyst Xu Zhen likened the situation to a company raiding its workers’ retirement plan.

“When the company’s cash flow is gone, the firm is essentially bankrupt,” he told The Epoch Times. “Tapping citizens’ pension accounts means the regime is already at the edge.”

Xu noted that the audit emerged as tax receipts were shrinking and public anger was rising over a rash of new fees and fines designed to refill empty local coffers.

To revive growth, Beijing has ordered a fresh wave of ultra-long-term special treasury bonds and higher quotas for local special-purpose bonds.

Xu calls the strategy “drinking poison to quench thirst.” Many of these securities are sold through state banks to ordinary savers, people who may not realize they are funding projects that will never earn enough to pay the money back.

“Clamp your wallet tight,” he advised. “Steer clear of 30- or 50-year special bonds.”

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