2024.11.04

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Introduction: New debt resolution measures will be unveiled at the upcoming National People's Congress Standing Committee meeting.

Since the Ministry of Finance recently announced the introduction of the most significant measures in recent years to resolve local government debt risks, the market has been closely watching the details of this policy. On the day of the month, the first plenary meeting of the 12th session of the 14th National People's Congress Standing Committee was held in the Great Hall of the People in Beijing. The meeting reviewed the State Council's proposal to increase local government debt limits to replace existing hidden debts. The Minister of Finance, Lan Fuan, made an explanation on behalf of the State Council. Xu Hongcai, Deputy Director of the Financial and Economic Affairs Committee of the National People's Congress, delivered a report on the review results of the proposal.

This means that the new debt restructuring measures will be reviewed by the National People's Congress Standing Committee. According to the agenda of the meeting, it will conclude on the scheduled day, at which time more detailed information about the debt restructuring will be disclosed. Previously, some market participants speculated that the replacement of local government implicit debt would not involve issuing local government bonds but rather special treasury bonds, meaning that the central government would repay local implicit debt. However, this proposal explicitly states that the replacement of local government implicit debt will be achieved by increasing the local government debt limit, which is consistent with the previous method of implicit debt replacement.

The so-called implicit debt of local governments refers to the debt incurred by the government and its departments directly or by committing to repay with fiscal funds and providing guarantees, beyond the statutory limit of government debt. In order to prevent risks, the central government has, through intensified supervision, serious accountability measures, etc., initially curbed the growth momentum of implicit debt and gradually resolved existing implicit debt. The Ministry of Finance stated that by the end of the year, the implicit debt balance nationwide included in the government debt information platform had decreased by % compared to the number in the initial survey, and the debt risk is controllable.

In the efforts to mitigate implicit debt risks, China has allowed local governments to issue refinancing bonds to replace implicit debt since the beginning. The scale of this issuance has reached approximately trillions of yuan. Several fiscal and taxation experts told First Financial Daily that this measure can extend debt maturities, reduce repayment interest, and make implicit debt management more transparent, which is conducive to preventing implicit debt risks.

Minister of Finance Lan Fuan recently stated at a press conference held by the State Council Information Office that to alleviate the debt repayment pressure on local governments, in addition to continuing to allocate a certain amount of bonds each year from the new special bond quota specifically for supporting the resolution of existing government investment project debts, it is proposed to increase the debt limit in one go to replace local governments' existing hidden debts, further supporting local governments in resolving debt risks. Relevant policies will be fully explained to the public after completing statutory procedures. Lan Fuan emphasized that this soon-to-be-implemented policy is the most significant measure in recent years to support debt resolution, undoubtedly a timely policy rain that will greatly alleviate local debt repayment pressure, freeing up more resources for economic development, boosting the confidence of business entities, and consolidating the "three guarantees" at the grassroots level.

Luo Zhiheng, Chief Economist at Yuekai Securities, believes that under the dual background of significant debt pressure and economic development tasks faced by local governments, the new round of debt swap has important implications. For local governments, issuing local government bonds to replace implicit debt helps to make implicit debt explicit, optimize the local debt structure, and reduce interest payment pressure. More importantly, the fiscal space released through debt swaps allows local governments to more flexibly allocate resources to support the development of key areas and weak links, such as education, healthcare, and environmental protection, thereby enhancing the intrinsic dynamics of the local economy and social welfare; it helps local governments better implement tax cuts and fee reductions, and will significantly alleviate or even eliminate phenomena such as "arbitrary fines and charges" in some regions, contributing to an improved business environment.

"For urban investment companies, debt swap helps these companies shed historical debt burdens, enabling them to move forward with a lighter load, and providing a solid foundation for the transformation and development of urban investment companies," said Luo Zhiheng.