How China’s smaller private firms may be paying the price for huge local government debts

Recent trials have compounded concerns about unduly harsh legal action targeting businesses in other regions to ease the local debt situation

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Local authorities increasingly tend to treat civil fraud as criminal fraud, a much more serious offence, to “extract money”, according to one legal expert. Photo: AP

Published: 8:00pm, 3 Nov 2024

Private firms in China are in a “precarious” situation as debt-ridden local governments increasingly seek to boost earnings through harsh criminal law enforcement, lawyers and observers have warned.

The latest such case, involving a businessman based in eastern Shandong province, has sparked fresh worries despite Beijing’s repeated pledges to foster a supportive legal environment for small- and medium-sized enterprises (SMEs).

The businessman was owed 230 million yuan (US$32.3 million) for a government-backed construction project in southern Guizhou province. However, a Guizhou court in September charged him with criminal contract fraud and other unlawful acts and sentenced him to 19 years in prison.

The ruling compounded concerns that local authorities were using unduly harsh legal action targeting businesses elsewhere to ease the debt situation, pressuring firms to write-off government debts or imposing stiff fines to boost coffers.

The tendency for such cross-regional prosecutions has “been intensifying”, according to a Beijing-based legal expert who did not wish to be identified because of the sensitivity of the matter.

“Entrepreneurs in China now find themselves in an extremely precarious situation”, which has triggered “a sense of despair and fear”, the expert said.