Mounting hidden local government debt is one of China’s pressing challenges. Held by local government financing vehicles (LGFVs) and estimated between US$8-10 trillion, this off-the-books debt originates from a long-running tug-of-war over tax revenue between China’s central government and the localities. In the years before COVID-19, LGFVs controlled their debt by drawing on steady non-tax revenues. In summer 2020, however, approximately six months after the pandemic broke out in Wuhan, the hidden debt held by LGFVs began rising dramatically. Today, many of them are nearing default, and local governments are increasingly going broke.

​​Why did hidden LGFV debt rise so much during COVID?

A recent study, published in The China Journal, sheds light on this question. The study’s co-authors – including Jean Oi, the William Haas Professor of Chinese Politics, a senior fellow at the Freeman Spogli Institute for International Studies, and director of the China Program at APARC – use quantitative data to show how China’s central government’s regulatory crackdowns on income tied to the real estate sector during the pandemic disrupted the revenue sources LGFVs and their local governments relied on to service their debts. These policy changes “interacted with the zero-COVID policy to create a perfect storm, pushing hidden local government debt to new highs,” they write. 

Their study draws on a wide array of quantitative data, tracking information on factors ranging from COVID shocks (including confirmed cases and deaths) to, among others, government medical responses, special treasury bonds and their allocation, local debt, land purchases, and business activities. Using these sources, the co-authors built a province-level dataset covering all 31 of China’s provincial units from 2018 to 2022, allowing comparative analyses before and after China’s COVID shocks. They organized the data into three categories: (1) the impact of COVID on small and medium enterprises; (2) government fiscal responses and COVID expenditures during the pandemic; and (3) local government finances and debts.

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The Pre-COVID Era: The Grand Bargain That Failed

China’s local debt problem traces back to the 1994 fiscal reforms, which recentralized tax revenues in Beijing and left local governments with chronic budget shortfalls. To bridge the gap, the central government struck a “grand bargain”: while claiming a larger share of tax income, localities could generate new non-tax revenues through special-purpose vehicles, namely, local government financing vehicles. These LGFVs were set up as state-owned enterprises to incur and hold debt off-the-books, yet not illegally, on behalf of local governments.

The workaround fueled rapid development for years but laid the groundwork for today’s mounting hidden debt crisis.

“The success of LGFVs hinged largely on revenue generated through land finance,” explain Oi and her co-authors. “Local governments provided LGFVs with cheap land as collateral for bank loans and bonds. Further revenue was generated from preparing and selling land to real estate developers.”

Thus, LGFVs powered over a decade of rapid growth in China, driving infrastructure booms and urbanization that made the real estate sector a cornerstone of the economy. The model appeared mutually beneficial: the central government gained more tax revenue as the economy grew, while local governments used land sales and debt to fund development. But this growth depended on a continuous flow of non-tax income, making the system increasingly fragile.

After the 2008 global financial crisis, Beijing launched a sustained push to rein in local government hidden debt, focusing heavily on LGFVs. By 2017, officials labeled the risk a “gray rhino.” Yet this drive for fiscal discipline ground to a halt with the onset of COVID.

A Perfect Storm of Policy and Pandemic

The pandemic’s impact was swift and severe. Small and medium-sized businesses, especially in the hardest-hit regions like Hubei Province, saw their incomes collapse by up to 90%. In response, Beijing provided a massive fiscal support package to localities, including one trillion yuan in special COVID bonds to offset the costs from the initial onslaught of the pandemic. Crucial for LGFVs, these bonds cushioned the impact of the pandemic on land sales.

By summer 2020, however, as China was still locked away from the rest of the world and COVID was under control, Beijing resumed its policy agenda to enforce fiscal discipline and curb local government debt. The central government’s most consequential measure was the “three red lines” policy, which dealt a major blow to China’s real estate sector by sharply restricting developers’ ability to borrow once debt thresholds were crossed. The policy, expanded from 12 pilot firms in 2020 to cover the entire sector by 2021, disrupted the “borrow-to-grow” model and triggered a liquidity crisis. Evergrande, China’s second-biggest property developer, was among the first groups affected.

As borrowing dried up, firms struggled to repay debt, halted construction, and stopped buying land, slashing local government revenues. Land sales plummeted across provinces, with national revenue growth from land transfers plunging into negative territory by 2022. The crisis deepened when unfinished housing projects led to mortgage boycotts by frustrated home buyers, prompting more state intervention.

For local governments, the shift came at a steep cost. They were ordered to step in, using LGFVs to purchase land and inject cash into public budgets. As a result, even wealthier provinces like Shanghai and Guangdong saw sharp increases in LGFV debt.

“The call for LGFVs to buy land to create revenue for local governments made matters worse, turning land from a key source of revenue into a source of new debt and forcing LGFVs further to increase borrowing, all of which caused soaring increases in LGFV debt, without any alternative revenue source to service or pay that debt,” explain Oi and her co-authors.

A Fiscal Reform Imperative

The study shows how China’s shifts in central government policies during the pandemic – especially the three red lines and the directive for LGFVs to buy up unwanted land — exacerbated long-standing vulnerabilities in local public finance. What had been a delicate balancing act quickly became unsustainable.

“At the root of China’s continuing crisis of LGFVs' debt is China’s flawed fiscal system,” the co-authors emphasize. Before the pandemic, the system masked deficits by relying on LGFVs to generate off-the-books revenues, primarily through land sales fueled by a booming real estate market. This arrangement allowed Beijing to capture the bulk of tax revenue while localities chased growth. But when COVID struck and the property sector collapsed, the facade crumbled.

The fallout exposed how deeply local governments had come to depend on land finance – an unstable, non-institutionalized revenue stream. With the real estate sector once accounting for over 20 percent of GDP, its collapse left localities and their financing vehicles adrift. “In the context of a crisis such as COVID, the weakness of the fiscal system and LGFVs was exposed as policy instability added to the volatility of the economic situation,” Oi and her co-authors note.

The local government debt problem might not trigger a financial crisis in China, “but LGFVs and their local governments remain in dire straits,” they write. More worrying, the economy has not rebounded in the post-COVID years as hoped, and “as long as the real estate sector remains depressed, land finance will not be able to make local government budgets whole as it once did. The grand bargain can’t work.”

Rather than assume the debt, Beijing is extending lifelines: urging banks to offer LGFVs 25-year loans with temporary interest relief, approving debt swaps into longer maturity municipal bonds, and allowing new issuances of special-purpose bonds. But these are stopgaps, not solutions.

Hidden debt will keep resurfacing unless China overhauls the fiscal system born out of the 1994 reforms, Oi and her co-authors conclude. Institutionalized, dependable, alternative revenue streams for local governments are needed, or the crisis will persist. “It may be time for Chinese leadership to stop kicking the can down the road and undertake institutional reforms of the fiscal system. This may be painful, but there is no other sustainable solution.”

China’s rise as a global power has ushered in a period of strategic flux marked by renewed great power competition, heightened geopolitical uncertainty, and intensifying U.S.-China rivalry. As China's economic and military capabilities have grown, so too have concerns about its long-term intentions, raising the stakes for states attempting to interpret and respond to its foreign policy behavior. In this volatile environment, the ability of states to credibly signal peaceful or aggressive intentions has become a central concern for policymakers and scholars alike. Misunderstandings can escalate into costly miscalculations, especially amid shifting power dynamics, unstable preferences, and growing competition for influence.

Understanding states’ signaling behavior is the research focus of Brandon Yoder, a 2024–25 Stanford Next Asia Policy Fellow at the Walter H. Shorenstein Asia-Pacific Research Center (APARC). Yoder is a senior lecturer at the Australian National University’s School of Politics and International Relations and the Australian Centre on China in the World. He is also a non-resident research fellow at the National University of Singapore’s Lee Kuan Yew School of Public Policy, Centre on Asia and Globalisation.

While at APARC, Yoder is working with the Stanford Next Asia Policy Lab (SNAPL) on projects as part of its research track on shared and varying perceptions in U.S. relations with regional actors in Asia. His research investigates how states communicate their intentions under uncertainty and how these signaling processes shape the prospects for peace or conflict. Combining formal modeling with historical and empirical analysis, Yoder seeks to illuminate how credibility is constructed, interpreted, and contested in strategic interaction, focusing on Chinese foreign policy and U.S.-China dynamics.

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When Theory Meets Practice: Modeling Signaling and Testing It Empirically

Much of Yoder’s research aims to bridge the gap between abstract theory and pressing policy questions. One focus is the ongoing evolution of great power competition and how China's behavior can be better understood through the lens of signaling theory. Yoder applies theoretical findings to Chinese foreign policy to examine “how China can credibly signal its intentions and how others can figure out China's intentions, with an eye toward managing great power competition.”

Yoder’s academic journey began with a long-standing curiosity about China. “I always had an interest in China dating back to high school. It was obviously important but not covered much, so I was curious about it,” he reflects. After college, a few years spent teaching English in China deepened that curiosity and helped build the language skills that would become instrumental in his research. Graduate school provided the theoretical structure for his inquiry, and the challenges of understanding credibility in international politics led him to formal modeling. “In grad school, I became interested in how China could credibly signal its intentions, which led me to game theory,” he recalls. “I essentially taught myself the method over a long period of trial and (tons of) error.”

Now, his work weaves together a rigorous theoretical approach to general questions with applications to specific, policy-relevant problems in U.S.-China relations. Despite the appeal of elegant theoretical models, the empirical realities of signaling are anything but simple. Yoder identifies three key challenges in studying the phenomenon.

“One is that you have to formalize your theories, or else you can't possibly keep straight the complexities of rational belief formation mechanisms,” he explains. This realization led him toward game theory.

A second issue is the gap between rationalist models and human behavior. “Actors are not fully rational in their beliefs, so real-world signaling deviates systematically from rationalist predictions. These psychological and rational mechanisms interact in complex ways,” he adds, noting that some of his work tries to integrate both perspectives.

The third challenge lies in measurement. “Beliefs are hard to measure, which makes empirical work very difficult. You can't just use a large-N dataset,” he explains. In response, his empirical approach blends historical case studies with experiments to evaluate how signaling works in specific instances and at the population level.

At SNAPL, Yoder has continued developing several key projects. One model examines how alliance politics are shaped by fears of abandonment or entrapment, concerns that can inhibit alliance formation altogether. Another investigates how rising powers, facing multiple international audiences, can credibly signal peaceful intentions through diplomatic statements, offering insight into the triangular dynamics between the United States, China, and Russia since World War II.

Yoder’s recent work broadens his empirical scope. One survey experiment explores how Australian national identity shapes public attitudes toward China. Another paper argues that war between the United States and China over Taiwan may be less likely than often assumed. A third project develops a model of how smaller Asian states can help moderate U.S.-China competition by avoiding firm alignment with either power. Across these diverse topics, the through line remains the same: understanding how intentions are communicated or miscommunicated between states.

Academic Community and Next Steps

Yoder describes his time at APARC as both intellectually stimulating and refreshingly collaborative. “Mostly just being around really good people, having engaging discussions, and getting feedback” has been a major boost to his research, he says. Conversations with scholars like Jim Fearon and Ken Schultz have sharpened his theoretical thinking, while connections with Center Fellow Oriana Skylar Mastro have deepened his understanding of cross-strait dynamics. He’s also enjoyed working closely with fellow SNAPL postdocs and visiting scholars, and credits their informal discussions as particularly energizing.

SNAPL, directed by Professor Gi-Wook Shin, is an interdisciplinary research initiative housed within APARC addressing pressing social, cultural, economic, and political challenges in Asia through comparative, policy-relevant studies. The lab cultivates the next generation of researchers and policy leaders by offering mentorships and fellowship opportunities for students and emerging scholars. These include two-year postdoctoral fellowships and one-year visiting fellowships, including for scholars from the Asia-Pacific region. Fellows collaborate with Stanford faculty, students, and other researchers to produce interdisciplinary, problem-oriented, and policy-relevant publications. The lab also offers research assistantships and a research workshop to foster academic exchange and mentorship. 

Yoder has been pleasantly surprised by the vibrancy of the intellectual community at APARC and FSI. “There are so many fantastic talks and events, it’s legitimately difficult to go to everything I want to,” he notes. The intersection of APARC, the Political Science Department, and the Center for International Security and Cooperation (CISAC) has created what he describes as a deeply interdisciplinary space, one that encourages both breadth and depth in academic inquiry and policy-relevant discussion.

Reflecting on academia, Yoder offers unflinching but thoughtful advice to early-career scholars. “It’s gonna get rough out there; hedge your bets,” he says. Success, in his view, depends on three things: genuine passion, persistence, and luck. “Plenty of talented, hard-working people don't get the breaks they need and their careers flounder,” he explains. For this reason, he encourages young scholars to pursue work they truly enjoy rather than trying to reverse-engineer success. “The process is the payoff, or it’s not worth doing. But be ready to shift to a different career path if it doesn’t work out.”

As he prepares to return to his position at the Australian National University in July, Yoder is eager to continue his work on signaling, great power politics, and Chinese foreign relations. A book project is a possibility, but not a priority — at least not yet. “I keep thinking of too many new articles I want to write,” he says, “so I’d rather do new stuff than expand my old stuff into a book.”

Through rigorous modeling, empirical grounding, and a deep engagement with contemporary strategic challenges, Brandon Yoder’s work offers essential insights into how states interpret signals, manage risks, and shape the evolving landscape of global power.

China is at the center of global dynamics today. What does its new superpower status mean for the world? For China? How will the worsening U.S.–China tariffs affect world trade? Is China’s clean energy leadership the key to the world’s climate crisis or will China remain the world’s top emitter of greenhouse gases? Would China go to war over Taiwan? Would the U.S.? What are China’s internal challenges? Is this China’s century?  

U.S. high school students wondering about these questions and more, who want to explore the nuance and history behind the headlines, in conversation with diverse experts and classmates, are invited to apply for SPICE’s China Scholars Program.

Fall 2025 China Scholars Program: Introduction to Contemporary China
Application period: April 22 to June 15, 2025
Tuition: $2500

Program dates: August 28 – December 20, 2025

This online, college-level course for advanced 10th through 12th graders provides an overview of China’s internal dynamics and recent history, as well as its complicated relationship with the United States, with critical, timely insights into this superpower of the 21st century.

Kristina Danilenko (Huntersville, NC, Fall 2024 CSP alum) observes, “[W]ith all the generalizations and inaccuracies I hear about China (whether it be its government or people as a whole) due to the volatile political environment right now, taking your class was especially valuable in that I’m able to navigate through these swirling narratives and think critically about the information I’m consuming.”

Each week, CSP students engage with leading scholars and experts on Zoom, read deeply on that week’s topic, and engage in analytical discussion with classmates. In addition to weekly written assignments, students conduct independent research, which culminates in an academic paper. Students will also have an opportunity to meet online with Chinese students enrolled in the Stanford e-China Program.

The program’s interdisciplinary nature encourages wide-ranging student research topics. Recent papers have addressed education (“Gaokao: How Effective Is the Gateway to Chinese Meritocracy?”); economics (“Impacts of Taiwan’s Microchip Monopoly on U.S.–China Economic Relations”); environmental issues (“Till the Well Runs Dry: Water Shortages in Northern China”); cultural politics (“Children and Politics: How Children’s Cinema Shapes China’s Youth”; “Mao’s Playlist: Music of the Cultural Revolution”); as well as language, demographics, literature, and beyond.

“[My son is] getting to watch his research topic on tariffs and China play out in real time (for better or worse),” comments Jaime Zollars, parent of Griffin Zollars (Newbury Park, CA, Fall 2024 CSP alum). “The course has inspired many conversations since, and it really gave him a working base knowledge, strengthened his skills, and solidified his interest in continuing to explore Chinese studies and language alongside economics in college!”

CSP’s rigor helps students build a strong foundation for college and future careers. “This course only solidified my desire to pursue studies pertaining to Chinese politics and history, particularly within the realm of international relations,” reports one Fall 2024 alum. “Yet, even for those whose primary academic aspirations lie elsewhere, the abilities you develop during CSP—whether it involves a deeper understanding of China or building cross-cultural skills—are ones that can be applied across a wide range of fields and pursuits both within and beyond academia.” 

As China’s influence expands, the U.S. is heading towards a shortage in China expertise. CSP alums may ultimately find themselves in high demand.

For more information, please see http://chinascholars.org. Or contact Tanya Lee with questions.

The China Scholars Program is one of several online courses offered by SPICE.

To stay updated on SPICE news, join our email list and follow us on Facebook, X, and Instagram.

The talk culminated in a preview of Maggiori’s new research using large language models (LLMs) to analyze earnings calls and analyst reports at scale. His team leveraged AI to detect when companies reacted to government pressure—offering real-time visibility into geoeconomic tensions. Maggiori goes on to explain how tools like these allow us to capture threats that never appear in policy, in fact, “some of the most powerful threats never occur because the target complies.”

Maggiori’s talk emphasizes the need for economists and policymakers to develop and use better tools to measure power, model interdependence, and design policy that balances trade gains with national security; Because this is not just theory, these dynamics are shaping the world we live in today.

Watch the Full Talk Here

This interview first appeared in the Brazilian newspaper Folha de S.Paolo, on April 6. The following English version was generated using machine translation and subsequently edited for accuracy and clarity.

WASHINGTON — The tariff hike against all countries announced last week by President Donald Trump may bolster China's image, but that doesn't mean China or any other country is poised to replace the United States, says Thomas Fingar, Shorenstein APARC Fellow at the Freeman Spogli Institute at Stanford University.

Fingar, a former chief of the State Department's China Division, among other roles in the U.S. Foreign Service and national intelligence, believes that Trump's tariffs will be bad for all nations.

"I hesitate to predict how other countries will react, except that this has more or less given everyone an incentive to bypass the U.S.," he tells Folha.

Donald Trump announced tariffs this week against virtually every country. China has already announced retaliation, imposing a 34% tariff on American products. Are we facing a trade war?

I don't think the war metaphor works for me. I don't know what Trump is trying to do. One could say that this is a game of imposing an outrageous tariff in the hope that specific targets, which are basically all countries, might give in to what they say are their demands. In doing so, they would reduce barriers to trade with the United States. To me, it doesn't make sense with the vast majority of targets of the 10% tariffs.

Why?

I hesitate to predict how other countries will react, except that this has more or less given everyone an incentive to bypass the U.S., to make the U.S. a supplier of last resort, to hold the line, to have a kind of united front to compete with each other.

If the assessment is that the Dutch or the French or the Germans or the Brazilians or somebody else is talking about doing something to eliminate a 10% tariff to gain a comparative advantage in accessing the U.S. market, if that's the logic, then fine. Maybe there's something rational about that, but I think it's more likely that the targets of those low tariffs are just getting together.

My main trade competitor has the same or higher tariffs levied against them. Why should I give in if we are competing on a level playing field?

I think Trump is going to make the U.S. pay a huge geopolitical price. But what he thinks he will gain from this, I don't know. Is it likely that he will achieve anything really significant from it? I doubt it.

You mentioned a geopolitical price tag for the United States. What would it be?

The tendency of much of the world, most of the time, was to try to work with the United States, to the extent that they couldn't automatically do what Washington wanted, but they were inclined to cooperate because they saw it as benign, if not beneficial, to their interests. I think Trump has reversed that. This is going to lead to a disinclination to work with us, an incentive to try to bypass us. I think the inclination now is going to be: I'm not going to vote with the Americans, I'm going to look elsewhere first, for my investment, for my capital, for the market, for what I'm doing, for partners.

But I don't think that these measures are necessarily going to play in favor of any particular country. Maybe China in some places, the European Union in some places, Japan in some places. It's going to be a very different environment for the United States, for American companies and diplomats to operate in. It's going to be much more difficult.

This tariff strategy that you say is hard to understand is seen by some analysts as part of Trump's isolationist policy.

As my kids would say, this is so last century. This is really 19th century, the idea of bringing industries, manufacturing back to the United States. Very little manufacturing, I think, is going to come back to the United States. We have 4% unemployment. We can't fill the jobs that we have now, imagine bringing back manufacturing of basic commodities like shoes, toys, that kind of thing.

That left the United States a long time ago and went to Japan, moved from Japan to Taiwan, moved from Taiwan to South Korea, moved from South Korea to somewhere else, and then moved to China and then to Vietnam. Those things are not coming back here because there's not enough profitability to justify investing in robots and mechanizing those things to bring them back to the United States. Our workforce is small relative to the size of the economy. It's not coming back.

It's already moving from China because labor costs are so high. The fallacy in Trump's logic is that things like furniture, construction, textiles, clothing, and manufacturing would come back. And the people who would actually do the work are the people he's persecuting with his ridiculous immigration policies.

Trump has argued that he imposed the tariffs to curb alleged abuses against the United States that would benefit China. Is he containing Beijing with this move?

I don't think he really cares about containing China. But the answer is no. These moves boost China's image. Beijing has seized on the rhetoric of defending the open, globalized international trading order that the United States has attacked. They will take advantage of that as much as they can. I don't think the tariffs are part of the U.S. rivalry with China. China's rise has not disadvantaged the United States economically — it has done so to Japan, and, to some extent, South Korea and Taiwan, but not the United States. So Trump is using this argument with false, exaggerated, and distorted statements.

Could we witness a change in the world order, the end of the American era and the beginning of a Chinese era?

No.

Not even as a consequence of tariffs?

Absolutely not. Part of the problem is that China's economy is closed. One of the reasons is that it doesn't have a consumer society because people don't have enough income. That's because of the amount of wealth that the state extracts to pay for high-speed rail, military structures, and energy development. Some of that is good, some of it is excess.

U.S. tariffs won’t create a market that can rival the size and influence of the United States. It would have to be somewhere else that is very rich, and China is not very rich. China is barely in the middle-income category, it has a per capita income at a level that Mexico has been at for decades. It's not binary. So, the U.S. retreat from its leadership position in the world order, which I don't necessarily see as a bad thing, doesn't automatically hand that role over to China, Russia, the European Union, Japan, Brazil, the BRICS, or any other set of players.

Can China gain ground by investing more in countries that are affected by tariffs?

China has invested more in countries that are affected by tariffs, like Indonesia and Vietnam. These countries are very wary of Chinese investment for various historical reasons, and to some extent for ethnic reasons. But China is actually cutting back on its overseas investments because its own population is asking: Why are we giving money to countries that are richer than us? That is a reasonable question.

They have real problems meeting the expectations, demands, and needs of their own population, which is now largely urban. The cities have to function, you can't say, "Go back to the farm and do sustainable agriculture." That phase is long gone in China. So they have to spend more. Half of the population still has rural identity cards. That means they don't get free education beyond primary school. That means 50% of the future workforce won't have more than a primary school education. This is a country with enormous challenges. Can they manage them? Probably yes, but there is not much room for maneuver. Their own slowing economy will be hurt by these tariffs. I don't think that's Trump's intention, but it will hurt them.

What impact might the tariffs have on Brazil and Latin America? Do you think China will become more attractive?

I don't know specific commodities from specific places, but my general starting point is that a 10% distribution across Latin America won't have much of an impact on the price for consumers in those countries. You'll export the same amount; we'll pay more for whatever the commodity is, flowers from Colombia, grapes, wine from Argentina or Chile. Since the tariff is general, it doesn't give Chile an advantage on wine over Argentina, because they both have the same amount. Most of what Latin America exports to the United States doesn't go to China.

In short, what are the main consequences of tariffs in terms of the geopolitical landscape and the domestic landscape?

It destabilizes the international trading system that has benefited most countries for a long time. It will force adjustments, that is number one. And number two is that it undermines the image of the United States, and therefore its influence as a stabilizing, predictable, and broadly beneficial member of the international community. It disrupts economies and undermines American influence and attractiveness.

In the end, does anyone benefit from Trump's tariff policies?

No one. This is not a policy that works to anyone's obvious benefit. It upsets everyone. And there is no alternative to the United States, in the sense that the Soviet Union was during the Cold War. China is not that, and China does not want to be that.