China's housing market is in recession, but local government bills are piling up. In the past, the development model used land as a cash machine, but now it has reached the checkout time. If Taiwan still expects China's economic recovery to drive exports, it may ignore another danger. As China's domestic demand becomes weaker and weaker, excess production capacity is more likely to be transferred overseas, and Taiwan's industries will face more intense low-price competition.
The Rand Corporation, an American think tank, recently released a study on "The Impact of China's Local Government Debt on U.S.-China Competition", which estimates that China's local government debt will be at least US$12 trillion in 2024, accounting for 64% of GDP, of which more than US$5 trillion will be off-balance sheet borrowings such as local financing vehicles. Local governments bear about 85% of the country's government expenditures, but land transfer revenue has shrunk from RMB 8.7 trillion in 2021 to RMB 4.15 trillion in 2025. The financial resources have been almost cut in half, but the expenditure responsibilities for education, medical care, social security and infrastructure have not been reduced.
Two days later, the economic program of the European think tank Brueghel Institute also asked "After the Boom Ends: How Chinese local governments pay their fiscal bills." Researchers point out that no single financial source is sufficient to fill the gap left by land revenue. Although Beijing has used debt swaps, extended maturities, and lowered interest rates to ease the pressure, it has only pushed back the repayment date, and the problem of imbalance between local government's financial and executive powers still exists. Public service expenditures are restricted, and people lack confidence in income, medical care and pensions, which makes them even more afraid to consume. Weak domestic demand also makes companies increasingly dependent on exports.
However, Taiwan's troubles lie in this economic development model. The slowdown in China's economic growth does not mean a simultaneous decline in the international competitiveness of Chinese products. Beijing is still investing resources in advanced manufacturing. Companies that cannot absorb domestic production capacity may turn to the international market to compete for orders. Steel, petrochemicals, machine tools and mechanical equipment are the first to be affected. According to data from the Taiwan Machine Tool Association, exports of machine tools still decreased by 1.9% in the first three quarters of this year (2026), but exports of key components increased by 13.1%. The divergence in performance between complete machines and components shows that Taiwan still has room to break through with precision technology and differentiated products. However, for Taiwanese businessmen still operating in China, tight local finances may also bring operational risks such as project payment arrears, failed subsidy commitments, and increased local charges. Rather than chasing book revenue, whether accounts receivable can be recovered and whether funds can be deployed smoothly are issues that business operators must face squarely.
The government should incorporate China's local debt, production capacity expansion and export price changes into industrial warnings, provide transformation financing and market development assistance to affected industries; use trade remedies in accordance with the law for abnormally low-price imports, and strictly check the origin to prevent Taiwan from becoming a springboard for China to launder production. Companies must strengthen research and development, lean management and customized services to get rid of price-cutting competition.
The competition between the United States and China will not stop because of China's local financial difficulties. The RAND report pointed out that local government debt may drag down people's livelihood expenditures and economic growth, but it is unlikely to immediately slow down military expansion; debt pressure itself will not necessarily lead to military aggression. Taiwan cannot hope that China's economic slowdown will bring security across the Taiwan Strait. Instead, it should accelerate market diversification, reduce dependence on key raw materials, maintain technological advantages, and strengthen independent defense.
The debt owed by China's local governments will ultimately be repaid by China's reform of its fiscal system. But when China transfers its internal economic pressure to the international market, Taiwan cannot passively bear it. What we should be wary of may not be when China's economy collapses, but that even if China's economy is in a long-term downturn, it still has the ability to make Taiwan's industries pay the price.
