China’s Local Governments Hold Back Wages in Desperate Scrape for Cash

While labor disputes aren’t uncommon in China, a recent increase in such incidents emerging on social media suggests many of the country’s local governments are strapped for cash. Cities across the country are struggling with trillions in debt—much borrowed off the books—as traditional sources of revenue such as land sales have waned.

An attempt this month by Beijing to address the problem of local governments’ enormous debt has only scratched the surface, as authorities grasp for ways—such as cutting medical benefits and searching for unpaid taxes—to plug holes in their budgets.

The cash crunch threatens China’s economic growth, since local governments carry out much of China’s investments and indirectly impact household finances as employers of civil servants and contractors of private businesses. The stakes for China’s stagnating economy are even higher with President-elect Donald Trump promising to slap China with punitive tariffs on its exports to the U.S.  

About 1,200 worker protests over unpaid wages or other compensation-related grievances have occurred nationwide so far this year, following more than 1,600 such incidents last year, according to videos and posts on social media that are tracked by Hong Kong-based nonprofit China Labour Bulletin. That is up from about 700 in 2022 and around 900 in 2021.

For years, local governments used complex state-owned funding vehicles that borrowed on their behalf, often to finance projects with little economic benefit. Across China, there are railroads with too few commuters, industrial parks with no tenants and even a ski resort in an area with little snow. Meanwhile, the trillions of yuan in revenue that local governments collect from selling land has shrunk sharply since the collapse of China’s epic property boom.

Beijing has said local governments’ “hidden debt that needs digesting”—without elaborating on how they define that—stood at the equivalent of $2 trillion at the end of last year, but economists have put the total hidden debt at between $7 trillion and $11 trillion. As much as $800 billion of that debt is at a high risk of default, economists estimate.

Monthly debt repayment across provinces reached 125% of monthly revenue at some points last year, according to an analysis by Victor Shih, a professor at the University of California, San Diego, who researches China’s politics and financial system.

China this month attempted to address the problem with a $1.4 trillion package to swap local governments’ off-balance-sheet debt with new bonds aimed at easing their financial burden. The debt swaps push maturity dates into the future, but don’t pay down the money owed.

“It will alleviate the cash-flow pressure of some local governments,” said Shih. “But overall, the impact is going to be pretty marginal.”

Local governments bear the brunt of kick-starting economic growth and providing services such as public education and healthcare, but Beijing has been controlling the national purse strings by taking over a large chunk of the local governments’ tax income.

Covid-era costs have added to local authorities’ expenses, while the property market downturn has led to a sharp drop in land sales, one of the very few sources of income local governments get to completely keep for themselves.

“Local governments have a lot of fiscal burden, but not a lot of fiscal income,” said Zhiguo He, a financial economist at Stanford University’s business school.

The budget crunch has caused disruptions to public services in some places. In cities such as Wuhan, Dalian and Guangzhou, public healthcare systems have cut medical benefits. Last year, a bus company in Shangqiu nearly suspended operations due to lack of funds.

Over the summer, a white banner was strung across the gate of a local government office in Datong, a northern city, emblazoned with a hand-painted statement: “The wages of migrant workers are in arrears. Give me back my hard-earned money.”

Local governments are seeking revenue by asking companies to check for unpaid taxes that sometimes date back years. So far this year, publicly traded companies listed in mainland China have reported about 463 million yuan, equivalent to around $64 million, paid in previously owed taxes—mostly corporate income taxes and property taxes—compared with around 178 million yuan last year and almost nothing before 2023, according to a Wall Street Journal analysis of filings. 

One company, an alcohol producer in Hubei province, was told it needed to pay 85 million yuan for consumption taxes owed between 1994 to 2009.

Law enforcement has also ramped up fines, fees and asset seizures in a bid for cash, a practice Beijing has denounced. And a district government in Chongqing city drew attention after setting up a task force to “smash iron pots and sell the steel”—a metaphor for disposing of its assets at all costs—to pay down debt.

Local authorities in Shanwei, Yichun, Wuhan, Guangzhou, Shangqiu, Datong, Hubei and Chongqing didn’t respond to requests for comment.

In an email response, Dalian’s Foreign Affairs Office forwarded the link to a February 2023 story published in the People’s Daily, the Communist Party’s mouthpiece. The story said changes made to the national medical insurance program, which included cuts to some citizens’ medical benefits and triggered disruptions in the city, benefited those who needed it the most. 

The recently announced debt-swap program may help local governments save money on interest payments, which could help them pay back owed wages and reduce unnecessary fines, according to economists. That could boost some households’ income and potentially stimulate much-needed consumer spending, though the direct effects are hard to measure.

Macquarie estimates the plan could save 600 billion yuan in interest payments over the next five years, or less than 0.1% of gross-domestic product each year. Economists at Goldman Sachs estimate that the debt-swap program could boost China’s real GDP by 0.55 percentage points.  

The fact that the package covers a fraction of estimated hidden debt suggests that Beijing isn’t letting local governments and the funding vehicles they use completely off the hook. Authorities are likely concerned with moral hazard, the idea that rescuing an entity could lead to even more risk-taking.

“The central government has this very complicated feeling about if they should bail them out or not bail them out,” said Wei Xiong, a finance and economics professor at Princeton University.

Bailing out local governments by, say, wiping out a portion of debt, runs the risk of encouraging more unsound borrowing. But letting the debt snowball could badly weigh on an already fragile Chinese economy.

China’s Ministry of Finance didn’t respond to a request for comment.

Chinese officials have signaled that more stimulus is coming, including moves to recapitalize Chinese banks. But so far, the gradual policy approach has been oriented at fending off immediate financial risks.

“At this point, they’re still doing a medium-range solution,” said He, the Stanford economist.

Grace Zhu contributed to this article.

Write to Hannah Miao at hannah.miao@wsj.com