Since the fiscal reforms of the 1990s, China’s provinces, prefectures, cities, and counties have taken on massive amounts of debt. With localities on the hook for their liabilities but paying at least half of their tax revenue to the central government, and with bureaucrats promoted partially on the basis of their contributions to GDP growth, localities have collectively borrowed trillions for massive infrastructure and other projects to boost their GDP numbers. 

Land owned by the localities but leased to real estate developers was often used as collateral for loans. Once incomes from the deflating property sector collapsed in the early 2020s, China’s localities found themselves in a debt crisis. Subnational debt alone was close to 80% of China’s GDP in 2023. 

But China is not the only country where localities have taken on substantial amounts of debt.

When Mikie Sherrill was sworn in as New Jersey’s 57th governor in January, she took the helm of the state with the highest debt-to-budget ratio in the Union. New Jersey’s problem may be particularly severe, but it is hardly unique: among U.S. states, the governments of Illinois, New York, California, Texas, and Connecticut are among the nation’s most indebted, but a recent reporting by Stateline suggested that up to half of the states ran unbalanced budgets in 2024-25. 

Reason Foundation, a libertarian think tank, found that U.S. state and local governments collectively owed $6.1 trillion in debt in 2025, equivalent to around 20% of U.S. GDP. While states hold around $2.7 trillion, U.S. municipalities and counties — as in China — have accumulated substantial amounts of debt, to the tune of $1.4 trillion and $757 billion, respectively.

The scale of America’s subnational debt problem is far smaller than China’s. Even the most indebted U.S. states have debt-to-GDP ratios of around 20%, compared to many Chinese provinces with debt-to-GDP ratios of 80% or higher. The origins of this debt are also different. In China, subnational debt has been fueled by infrastructure spending, while in U.S. states generous pension programs, educational investments, social programs, and post-COVID tax cuts are the primary expenses. Despite this, in some cases U.S. subnational debt is no less “structural” than in China.

Similarly, subnational debt is politically difficult to remedy in both countries. 

As other sources of income (such as leasing land to real estate developers) have dried up, Chinese provincial and municipal governments have continued to funnel money into often needless debt-driven infrastructure-building to meet Beijing’s GDP growth targets. 

In states like New Jersey and Illinois, cutting pension funds and other social programs is politically unpopular, with dissent from large parts of the state legislature for significant cuts virtually assured. The resulting political incentives have prevented serious reforms, even as governors in the U.S. and China both recognize that subnational debt is a serious and growing problem.

A long-term consequence of rising subnational debt in both countries is that an ever-increasing share of state and provincial budgets will be eaten up by debt servicing. In FY2026, 5.3% of New Jersey’s budget will be allocated to debt servicing, while the state has a roughly 20% debt-to-GDP ratio (by contrast, the U.S. federal government has a debt-to-GDP ratio of over 110%). In China, the central government has stepped in to broker debt swaps and other measures to alleviate local debt, but the scale of the problem has left localities with rising servicing costs anyway.

Eventually, officials will be forced to cut services. The most negatively affected will be those citizens who rely most heavily on locally-provided public goods. 

In China, cutbacks began in 2023, if not earlier, with municipalities including Wuhan and Shangqiu cutting public transportation and health insurance subsidies. In New Jersey, Governor Sherrill’s predecessor cut spending in FY2025, but with millions of dollars in federal funding now under threat from a hostile Trump administration, Sherrill could face much harder fiscal choices. 

Now, the question for Chinese and American subnational officials facing down debt crises and budget shortfalls is what services are first on the chopping block, and who will suffer the most as a result.