GOVERNING OR MANIPULATING LEVERAGE TO BUILD MORE CITIES? Borrowing in the Shadows by Local Governments and Real Estate Developers in China

Abstract Amid growing interest in how states manage urban development through public finance, this article examines the institutional logics of leverage manipulation as a mode of contemporary urban governance. Focusing on China's evolving political economy, it investigates how local governments and real estate developers co‐produce a shadow financial architecture that enables continued investment and (hidden) debt‐driven urbanization. Mechanisms such as off‐balance‐sheet borrowing through Local Government Financing Vehicles (LGFVs), on‐balance‐sheet hidden debt structures like fake equity used by developers, and informal regulatory signaling (e.g. window guidance) are not peripheral irregularities, but routinized tools embedded within a broader regime of state entrepreneurialism. This article asks how China sustains urban development through hidden and quasi‐fiscal borrowing despite formal regulatory constraints. It argues that urban financial governance operates through pragmatic, state‐led discretion, with regulations and financial instruments deployed flexibly to accommodate shifting policy priorities. Financial innovation becomes a routine instrument of governance, allowing the state to move between public and private roles while managing urban development across blurred lines of formal and informal authority. These findings show that hidden borrowing has become part of urban governance as state‐led development increasingly relies on blurred boundaries between public authority and financial practice.