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China’s LGFV Crisis 2011: The Conflict between Local Autonomy, National Interest and Financial Reforms

2011 saw China overtaken by alarming financial fallout from the 2008 economic stimulus package to counter the global financial crisis. This paper shows how the decision to rely on local governments to fund the bulk of the package imposed serious strains on the banking system and reversed a decade of reform initiatives. The analysis indicates that this costly outcome was predictable and caused by a long-standing failure to deal with the extraordinary fiscal and financial autonomy exercised by local officials at the expense of sound banking and stable property markets.

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