In Depth: Chinese Local Governments Risk Replicating Mistakes of LGFVs

Chinese local governments have significantly increased the number of culture-and-tourism investment companies (CTICs) in recent years. These companies are sometimes used to pivot from traditional local government financing vehicles (LGFVs), helping local governments bypass central authorities' strict borrowing limits by adopting a more market-oriented approach [para. 1]. However, this move brings concerns as some CTICs risk mirroring the high debt and mismanagement issues faced by LGFVs—funds are regularly diverted to support local government budgets instead of sustainable business development, heightening the companies’ debt exposure [para. 2].

Despite the favorable environment for domestic tourism—evidenced by about 3.3 billion domestic trips and 3.2 trillion yuan ($450 billion) in spending in the first half of 2025, up 20.6% and 15.2% respectively—many CTICs are still struggling with underperforming projects [para. 3]. Their difficulties persist in spite of strong government policy support and the broader tourism boom, according to data from the Ministry of Culture and Tourism [para. 3]. One key issue is the lack of distinctiveness among projects and the rapid expansion without establishing sustainable, market-driven business models. These tourism projects often require significant upfront investments, long payback periods, and rarely become profitable quickly [para. 4][para. 10].

The sector’s growth is driven by policies promoting the “culture plus tourism” model to aid rural revitalization and urban renewal, utilizing local cultural and natural resources. Such projects are attractive due to low barriers to launch and the potential to generate local employment, according to Professor Mao Jie [para. 5]. As a result, as of October 2024, there were an estimated 1,500 to 3,000 CTICs under local government control [para. 6].

Nevertheless, profitability remains a significant challenge. Nearly 38% of 77 major state-owned culture and tourism firms posted a net loss in the first half of the year, up from about 35% a year earlier [para. 7]. Some well-known projects illustrate the risks: Zhang Jia Jie Tourism Group, for example, reported losses for five consecutive years, with its flagship Dayong Ancient City project accumulating over 1 billion yuan in losses since 2021, despite an initial investment of more than 2 billion yuan [para. 8].

Analysts identify several root causes for these challenges: undifferentiated projects, insufficient market-driven operations, and weak oversight over fund usage. Many project returns are unrealistically estimated, sometimes even inflated in loan proposals, leading to a large gap between actual revenues and projections. In reality, most revenues come from modest rental income and limited local government subsidies—insufficient to cover high costs [para. 9][para. 13]. Fiscal support has also dwindled as local land sales revenue declines and the national government enforces debt reduction campaigns, especially in heavily indebted regions [para. 14].

CTICs thus risk repeating LGFVs’ errors: company funds are often redirected to plug local government budget deficits, raising doubts over CTICs’ sustainability [para. 16][para. 17]. Financing difficulties now plague many CTICs due to high debt, weak operations, lack of quality collateral, and a general liability-to-asset ratio often exceeding 60% [para. 18][para. 20]. The legacy LGFV model—focusing on delivery per government orders and neglecting market responsiveness—perpetuates problems [para. 21][para. 22].

To enable a true market-oriented transition, experts recommend cooperating more with private capital, adopting “asset-light” business models such as cultural intellectual property licensing with revenue sharing, and integrating existing public assets into projects to reduce upfront costs and limit debt risk [para. 28][para. 29]. Without such reforms, CTICs remain unlikely to deliver sustainable growth for local governments [para. 27].