What to know about China's 'strongest debt relief measures in recent years'

This photo taken on Sept. 2, 2024 shows the skyline of the central business district (CBD) at dusk in Beijing, capital of China. (Xinhua/Wang Jianhua)

An unusually strong statement from China's finance ministry, announcing the "strongest debt relief measures in recent years," has garnered significant attention both domestically and internationally.

At a press conference on Saturday, finance minister Lan Fo'an unveiled a plan to substantially raise the local government debt ceiling in one lump sum, paving the way for the replacement of existing hidden local debts through more government bond issuance.

The move is expected to help clarify and gradually alleviate implicit debt risks, analysts said.

Estimates suggest that the scale of this new round of debt replacement could exceed 2.2 trillion yuan (about 311 billion U.S. dollars).

The ministry set up a bond issuance quota of over 2.2 trillion yuan in 2023 to support localities, particularly high-risk areas, in addressing existing debt risks and clearing arrears owed to enterprises. An additional 1.2 trillion yuan of quota has been arranged this year.

High-cost, short-term hidden debts are being replaced by bonds with lower interest rates and longer repayment periods, said Luo Zhiheng, chief economist of Yuekai Securities. "In the process of the debt replacement, the risks will be reduced."

The outstanding implicit debts registered in the government platform nationwide dropped 50 percent compared to five years ago at the end of 2023, Lan said, noting that the risks are controllable.

Experts believe that the debt relief measures in the pipeline even go beyond risk management and are designed to enhance the spending capacity of local governments.

Local governments are responsible for about 86 percent of the country's public expenditures, while the central budget accounts for about 14 percent.

Given the critical role of local governments in China's economic development -- where they drive demand, attract investment and shape the local business environment -- strengthening local government finance is vital.

He Daixin, a senior researcher at the Chinese Academy of Social Sciences, said that replacing the hidden debts enables local governments to operate more efficiently, enhancing their ability to invest, stimulate consumption and ensure people's well-being.

Local governments will be empowered to take a more proactive role in economic development, thereby improving the business environment, boosting market confidence and further producing a multiplier effect, He said.