Previous Quarterly Editions
Expropriation Risk: 70 71 71 70 ►Political Violence Risk:48 48 48 48 ►Terrorism Risk:24 22 22 22 ►Exchange Transfer and Trade Sanction Risk: 44 44 44 44 ►Sovereign Default Risk:37 46 46 46 ►
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Protest intensity to date* 2022 2023 Low LowUnrest risk in 2024**Cost of living: HighAnti-austerity: Low
China's local governments have been heavily indebted since 2009, when they paid for the bulk of a 4-trillion-yuan (CNY) (US$548 billion) fiscal stimulus package that successfully carried China through the then global financial crisis. Central government rules restricted their ability to borrow directly, so they used local government financing vehicles (LGFVs), shell companies that borrowed and spent on their behalf with the local government effectively guaranteeing their debt.
Much of this debt was effectively invisible, since it was not technically public debt. Successive policies between 2015 and 2020 sought to improve the transparency of local government finances and put them on a more sustainable footing.
However, local governments raised expenditure to deal with the consequences of the country's two waves of COVID-19 lockdowns in 2020 and 2022, while the policy-induced deflation of a property bubble since 2020 simultaneously squeezed their ability to raise funds through land sales — a mainstay of their revenue up until then.
The International Monetary Fund has estimated that LGFV debts nearly doubled over the past five years to CNY66 trillion. Total local government debt (including LGFVs) reached an estimated CNY94 trillion by the end of 2022, when COVID-19 lockdowns ended, Goldman Sachs estimates.
The near default of Zunyi city in Guizhou province last December raised fears that local government debts pose a threat to the stability of the financial system, as Premier Li Keqiang admitted in March, and in August this year the central government began sending working groups to the 10 provinces under the greatest fiscal stress.
Local governments are resisting pressure from the central government to sell public assets in order to repay debt, pushing instead for central government bailouts, arguing that they spent in response to central government directives.
Reports indicate that some local authorities have been unable to pay their employees or pay for public services. This could lead to localized protests but is unlikely to do so to the extent that it puts law and order and political stability in jeopardy on the national level.
TREND ►Foreign firms in general face an increasingly difficult environment, given the national policy priority on self-reliance and promoting domestic firms, the possibility of being caught up in U.S.-China tension and increasingly abrupt policymaking in various areas.
Authorities are focusing on foreign high-technology providers in priority sectors. Such firms are still generally protected by China’s need for their technological contributions and for their assistance in lobbying against the trend in their home jurisdictions toward restricting exchanges with China.
China’s government has not expropriated foreign property overtly since the early Maoist period and shows no inclination to do so now. It is possible, however, that on the local level authorities might force a foreign firm to divest at a low price or on unfavorable terms — or effectively force it to remain when it would rather leave.
The government could conceivably pressure large foreign firms to make philanthropic donations of money or resources — that is, extort them — as the domestic internet giants did during the short-lived “Common Prosperity” push in 2021.
The Anti-Foreign Sanctions Law explicitly authorizes the government, among other things, to seize real estate and other assets of individuals and organizations that “directly or indirectly participate in the drafting, decision-making, or implementation” of sanctions against China. The government has not used this capability yet.
The Communist Party’s political control apparatus is sophisticated and well resourced: It is virtually impossible to mobilize any political opposition. Outbreaks of localized violence targeting local officials over specific grievances occur, but the system can crush them before they develop. Authorities are practiced at combining forceful repression with half measures to defuse discontent.
The “White Paper” protests across the country against the government's draconian COVID-19 regime in late 2022 demonstrated that the potential for mass protests is never completely extinguished. The conditions that led to these protests were extreme and exceptional, and they were short-lived. But future episodes cannot be ruled out, particularly since they achieved their aim of forcing the government to reverse its policy, and because they revealed significant discontent with President Xi Jinping's leadership in general, beyond the immediate issue of the “zero-COVID” policy.
An elite-level coup is conceivable, and recent developments might indicate unrest within the top echelons — namely Xi's decision not to attend the G20 summit in India in September 2023 and the sudden and unscheduled replacement of the foreign minister and two of the military top brass in July 2023. Any coup would likely remain “within the system,” and perhaps even remain concealed for some time afterward, rather than spilling over into large-scale violence.
The most direct risk to foreign firms is that they will be targeted in politicized “counterespionage” operations. A revised counterespionage law took effect in June 2023 through which the state gives itself permission to detain foreigners and Chinese nationals alike for spying on extremely flimsy grounds.
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In a country of China’s size, isolated acts of violence by individuals with grudges inevitably sometimes occur and can include bombings; however, the only significant potential for organized terrorism in pursuit of a political agenda comes from Xinjiang.
The government claims terrorists in or from this region have caused more than 400 deaths since 1990. All but a couple of these incidents have been very small and unsophisticated, and none has occurred since 2017, when the government rolled out comprehensive surveillance and social control systems in Xinjiang.
However, significant weakening of state capacity for any reason could lift the lid on extreme discontent among Uyghurs, with potential for widespread violence.
Beijing has a record of selectively applying regulations to hurt firms from countries whose governments say or do things it objects to. Such “de facto sanctions” have been used against South Korea, Australia and Lithuania recently. Restrictions can affect both imports and exports. The industries targeted vary but are typically those that hold minimal strategic importance to China and significant (if not necessarily overwhelming) importance to the target country.
A series of laws and regulations introduced in recent years — for example, the Anti-Foreign Sanctions Law and the “Unreliable Entity List” — give Beijing means of imposing sanctions directly and overtly, with associated deterrent effects. The range of such tools continues to expand.
The Anti-Foreign Sanctions Law authorizes the government to apply sanctions in a tit-for-tat manner to foreign individuals and organizations that “directly or indirectly participate in the drafting, decision-making, or implementation” of sanctions against China, as noted. Countermeasures may include prohibiting transactions and cooperation with Chinese individuals and entities, and “other necessary measures.” The law potentially puts foreign firms in a position of having to choose between violating foreign sanctions and risking Chinese countersanctions.
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
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The central government’s fiscal position is sufficiently strong that there is negligible risk of it being unable to meet debt obligations. It is possible, however, that a state organ might, without making it explicit, decide to withhold or block payment to a foreign creditor, as a means of putting pressure on that firm or its home government for political reasons, most likely as part of a broader suite of measures.
