Ma yijiayi was incarcerated in November, not for political activism or embezzlement, but for attempting to reclaim a substantial debt owed to her by the local government of Liupanshui, Guizhou province. As a contractor, Ma built schools and was owed 220 million yuan ($30 million) by the government, which only offered her 12 million yuan—a fraction of the full amount.
The plight of Chinese citizens and entrepreneurs like Ma is growing more common as local governments increasingly resort to unethical practices to bolster their finances. An investigation in January revealed that most traffic fines issued in Hebei province last year were based on false accusations. In nearby areas, truck drivers claim that officials unfairly penalize them for overweight loads, while inflated parking fees and rigorous restaurant inspections serve as additional revenue sources for municipalities.
These creative fundraising efforts highlight the dire financial straits local governments find themselves in. From 2021 to 2023, provincial non-tax revenues increased by 20%, outpacing tax revenue growth threefold. The Ministry of Finance attributes this to the monetization of state assets, such as bridge tolls. However, Beijing is increasingly concerned that these practices are eroding public trust.
Local finances are under severe pressure due to slower economic growth, decreased public land sales, and real estate market issues. Nearly all Chinese provinces are expecting lower tax revenue growth this year compared to last, with Fitch downgrading China’s credit outlook to negative in April due to substantial budget deficits.
Estimates by Victor Shih and Jonathan Elkobi from the University of California, San Diego suggest that local government debt ranges between 90 trillion and 110 trillion yuan, representing 75-91% of China’s GDP. Over half the provinces have debt-to-GDP ratios exceeding 50%, and the incidence of defaults has significantly increased since last March.
While the central government, which benefits from lighter debt loads and substantial revenue from taxes and state enterprises, has pledged 1 trillion yuan in bonds to aid local authorities, it has also encouraged local governments to cut spending. In March, Premier Li Qiang denounced unnecessary “vanity projects” and instructed officials in various provinces to halt non-essential infrastructure investments.
The fiscal relationship between China’s central and local governments has been contentious for decades, dating back to the 1990s reforms by Zhu Rongji, which reallocated revenues away from local jurisdictions. Local governments, tasked with funding education, health care, and investment, receive less than half of tax revenues, retaining only the funds from imposed fines.
In response to the ongoing issue of overzealous local officials, the central government intensified its campaign against such practices in February, implementing stricter regulations and penalties. Despite previous efforts in 2021, the prevalence of arbitrary fines has only increased, reflecting the financial desperation of local governments. Although central authorities are investigating Ma yijiayi’s case, other business owners may face similar challenges under the current fiscal system.
