Recent Chinese judicial information revealed that Mengyin County Urban Construction Company has been filed for court enforcement for the first time. The company was added to the list of enforcement targets by the Mengyin County People’s Court, with the subject matter of enforcement totaling approximately RMB 38.33 million. Under the pressure of resolving implicit debt, defaults by local government’s urban investment companies have become increasingly common, but it remains rare for such entities to be formally listed for court enforcement. Judging from the situation of Mengyin Urban Construction, the debt risk is no longer a short-term default, but rather a process of continuous deterioration. According to the Shanghai Commercial Paper Exchange’s website, Mengyin Urban Construction has repeatedly experienced persistent bill defaults. Currently, its outstanding balance of bill acceptance is RMB 0, yet the cumulative overdue amount has reached as high as RMB 305 million. Additionally, on January 30 this year, Mengyin Urban Construction was cited in several new tax arrears notices. Although the amounts are not large, they indicate that the company’s current cash flow is extremely strained.

Looking at the overall local situation, Mengyin County's 2025 regional GDP reached RMB 26 billion, a year-on-year increase of 5.6%, maintaining a steady growth trend in economic performance. In 2025, general public budget revenue was RMB 1.501 billion against expenditures of RMB 4.15 billion. However, by accounting for subsidies from higher-level governments and transferred funds, the county achieved a balanced public budget for the year. Within government fund income, land transfer revenue accounted for RMB 486 million and special bond revenue for RMB 1.43 billion, which supported debt principal and interest payments. At the start of 2024, the implicit debt balance stood at RMB 439 million, with RMB 68 million resolved during the year, bringing the year-end balance down to RMB 371 million—a resolution rate of 15.49%. By the end of 2025, the actual debt balance was approximately RMB 7.363 billion. Yet, the debt balance is expected to increase significantly to approximately RMB 8.63 billion in 2026, primarily due to new special bond issuances and refinancing arrangements. Although the overall leverage ratio is not considered high, the low level of fiscal revenue limits the capacity and potential for debt repayment. This awkward situation Mengyin Urban Construction is likely a relatively common occurrence among regions facing high debt risks.

In Shandong, even urban investment enterprises with AAA ratings are not immune to defaults on non-standard debt. Recently, reports emerged that Qingdao Shanghe Holding Development Group has defaulted on a RMB 100 million trust financing product. The collateral under this trust turned out to be the Jiaozhou municipal government office building. The company stated that its cash flow is under strain, and interest payments on other financing have also become overdue. As a result, even though this trust default will negatively affect its credit record, it is still unable to repay. At the same time, the use of a government office building as collateral suggests that these debts are closely tied to the local government, and are highly likely to constitute hidden local government debt.

Meanwhile, data from the Shanghai Commercial Paper Exchange shows that as of January 31, 2026, Qingdao Shanghe Holding Development Group had an outstanding balance of overdue bill acceptances as high as RMB 399 million, with cumulative overdue occurrences reaching RMB 1.335 billion. The latest update is that on March 12, the company announced that all such bills had been fully settled. However, the repeated emergence of non-standard debt defaults likewise reflects that this newly established municipal-level urban investment platform is facing a liquidity crisis. Even more concerning is that the company has just completed a restructuring, bringing its asset size to RMB 200 billion. Despite holding massive assets, it still defaults, indicating that this kind of transition, driven by expanding asset scale, has not generated cash flow and therefore cannot effectively resolve debt. Although it has transited into an industrial platform operator, it still faces the burden of hidden debt and cannot easily achieve deleveraging simply by changing its identity or swapping assets.

Researchers at ANBOUND previously noted that although no urban investment enterprises in China have formally defaulted in the bond market so far, non-standard defaults, including overdue commercial bills, have been occurring one after another. This indicates that many local governments are, in reality, finding it difficult to continue backstopping the debts of their affiliated urban investment companies. According to a research report released by Lianhe Credit, from January to July 2025, both the number of bond-issuing urban investment entities with continuously overdue bills and the frequency of such overdue incidents increased year-on-year. The risks are mainly concentrated in county- and district-level platforms in provinces such as Shandong, Yunnan, Henan, and Guizhou. Among them, Shandong Province has the largest number of bond-issuing urban investment enterprises with overdue bills, reaching 23, making it a region affected the most by non-standard defaults among such entities. In the context of local governments working to resolve hidden debt, the frequent occurrence of bill defaults among these urban investment enterprises is likely largely due to operational debts that have not been included in debt resolution plans. Of course, these debts are still closely linked to local governments.

Although ongoing efforts to resolve local government debt have enabled urban investment companies to transfer roughly RMB 12 trillion of hidden local government debt to local governments, these companies still face significant debt management challenges during the transition period. On one hand, aside from the portion of hidden debt that has been addressed, urban investment enterprises still carry about RMB 60 trillion in debt without a clear solution. Much of the underlying assets tied to this debt are linked to local government investments and have failed to generate meaningful returns. Without the backing of government credit, it is difficult for these enterprises to repay on their own. On the other hand, under the policy red line of “strictly prohibiting new debt,” urban investment companies are unable to rely on practices such as debt rollover, which further increases their financial burden.

In fact, some situations indicate that certain urban investment companies are still using new operational debt to replace older hidden government debt. Many localities are currently promoting assetization, securitization, and leveraging, in hopes of achieving the transformation of these urban investment entities. However, such companies should really engage in deleveraging, rather than increasing leverage to help local governments deleverage. A previous report by Renmin University pointed out that, in efforts to revitalize existing assets, 70% of government assets were taken over and purchased by local urban investment companies. These companies cooperate with banks and, through increased leverage, meet the requirements of resolving local government debt and revitalizing assets. Yet, at the same time, the risks and burdens are transferred to the urban investment companies. Hence, the liabilities still remaining within the state-owned sector. However, for the urban investment companies, they remain bound within the balance sheet framework; not only are they unable to develop sustainable capabilities to digest debt, but they are instead further leveraged and effectively become scapegoats for local governments.

At the end of last year, the Central Economic Work Conference, as well as this year’s Two Sessions. i.e., the annual plenary meeting of National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC), both emphasized the need to “adopt multiple measures to mitigate the risks associated with the operational debt of local government financing platforms”. This indicates that, as efforts to address local governments’ hidden debt have entered a normalized phase, the issue of operational debt among urban investment companies has drawn the attention of the country’s central authorities. Some analyses note that this year’s fiscal budget outlines three key approaches to debt resolution. First, debt management is entering a new stage of centralized management. Second, reducing existing debt, curbing new debt accumulation, and promoting the transformation of financing platforms have been identified as major priorities. Third, there is a strong emphasis on genuine transformation, with a clear directive to “strictly prohibit the establishment of new financing platforms or the disguised proliferation of such entities.” This suggests that, at the central level, there is now a deeper understanding of the risks associated with the operational debt of urban investment companies.

However, under current conditions, the transformation of urban investment companies faces a dilemma. On the one hand, there is the policy red line that strictly prohibits new additions. On the other, local governments are required to take responsibility for their own obligations, meaning debts cannot be transferred or restructured. Against this backdrop, efforts to resolve existing debt through transformation are hard to generate real cash flow or substantive support for the companies’ core operations. As a result, even though policy has set a timeline for completing the transformation of these entities by mid-2027, the reality is that, without policy relief channels or systemic solutions, demand for debt disposal will continue to grow. This could potentially lead to a wave of defaults among urban investment companies.

The greatest challenge in transforming urban investment companies lies in the fact that most of them lack genuine business operations and capabilities. They function primarily as government financing vehicles, without real investment capacity. Under such conditions, transformation offers little viable path forward: these entities cannot fully detach from local government influence. At the same time, as the real estate market continues to contract and local governments’ land-sale revenues decline sharply, many local urban investment companies, whose operations are closely tied to the “land economy”, are themselves under significant pressure. With the focus of urbanization shifting toward urban renewal, the associated business activities of these companies are even less likely to sustain the high-leverage, high-return model seen in the past. As a result, resolving debt under the current model becomes even more challenging.

Researchers at ANBOUND noted that the transformation of urban investment companies and the resolution of local government debt are mutually reinforcing, and that the handling of local government debt and the operational debt of these companies cannot be completely separated. Against this backdrop, any consideration of urban investment company transformation must be linked to local government debt resolution. For local governments, this means that debt resolution and the transformation of financing platforms need to be advanced in tandem. The core lies in coordination across fiscal authorities, the financial sector, and state-owned assets management, in order to establish effective pathways connecting resources, assets, and capital. On the one hand, restructuring urban investment companies is not limited to asset reorganization. In this regard, debt itself must also be restructured, including lowering financing costs and extending maturities, which requires close coordination with financial institutions. On the other hand, these companies need to be brought under state-owned assets supervision and genuinely “decoupled” from local fiscal systems, leveraging the integration of state-owned resources to strengthen their operational and managerial capabilities, and ultimately move toward greater independence and commercialization. At the same time, both fiscal authorities and state-owned assets regulators need to establish a comprehensive asset–liability management framework within the local government system, enhance the efficiency of fiscal spending, and improve returns on state-owned capital. If a true closed loop for the development of urban investment businesses can be established, then both debt resolution and transformation challenges could be effectively addressed. In this sense, the key to successful transformation ultimately lies in a fundamental shift in the development logic and model of local governments themselves.

Final analysis conclusion:

The occurrence of non-standard debt defaults among China’s urban investment companies in multiple regions indicates that, under the broader push to resolve local governments’ hidden debt, these entities are constrained by policy red lines. As a result, their debt burdens have not been significantly reduced and may, in fact, have worsened. This further underscores that the transformation of urban investment companies cannot proceed independently of local debt resolution efforts. Addressing the operational debt of these companies and advancing their transformation requires close coordination and cooperation among fiscal authorities, the financial sector, and state-owned assets management bodies.

______________

Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.