Chinese Regime Orders Underfunded City-Established Investment Companies to File for Bankruptcy

Laborers renovate the roof of a house in Shanghai on Aug. 21, 2014. JOHANNES EISELE/AFP/Getty Images

Financing platforms created by local governments in China should file for bankruptcy if they don’t have the funds to repay their debts, according to a guideline jointly issued by the Chinese Communist Party’s (CCP) general office and state council general office on Sep. 13.

These so-called local financing platforms refer to financial products offered in the form of land deals, equity shares, and government bonds—or local investment firms set up by municipal governments that focus on the construction and property development sector—that allow investment by ordinary citizens and private companies.

History of City Investment Companies

These firms became a popular option for local governments to borrow money from the public after the financial crisis in 2008. That year, the CCP launched the “4 trillion ($58o million) investment plan” to stimulate economic development, of which about 2.8 trillion yuan ($410 million) had to be raised by local governments. Around this time, city investment companies began popping up to attract investment, from just a few dozen in 2008 to more than 10,000 by 2010.