Translation: Finance Minister's Explanation of China's Local Debt Swap Plan
Read the Chinese government's plan to reduce local hidden debt and the rationale behind it in its own words
Welcome to a special issue of NPC Observer Monthly, a (mostly) monthly newsletter about China’s national legislature: the National People’s Congress (NPC) and its Standing Committee (NPCSC).
On Friday, November 8, the NPCSC approved the State Council’s proposal to authorize local governments to borrow an additional RMB 6 trillion over the next three years to repay outstanding off-balance-sheet, or “hidden,” debt [隐性债务]. The NPCSC’s three-sentence resolution itself did not explain the debt swap plan. Instead, the specifics appeared in a written explanation that Minister of Finance Lan Fo’an delivered to lawmakers on Monday; he also disclosed additional details at a press conference held after the NPCSC session.
There has already been considerable reporting and commentary on Friday’s fiscal move. To add to it without duplicating existing coverage, I thought I might provide the primary sources for those interested. Below, I offer a lightly edited machine translation of Lan’s written explanation, along with selected quotes from his press conference. Some text is formatted to improve readability.
I’ll be back in your inbox soon to recap October. And I’ll cover this week’s NPCSC session once November is over.
If you’re enjoying the newsletter, I hope you’ll consider sharing it. —Changhao
Explanation of the Bill to Request Consideration of Increasing the Local Government Debt Limits to Replace Existing Hidden Debt
Standing Committee of the National People’s Congress:
On behalf of the State Council, I present the following explanation on the bill to increase local government debt limits to replace existing hidden debt:
I. The Need to Increase Local Government Debt Limits to Replace Existing Hidden Debt
The Party Central Committee attaches great importance to preventing and mitigating the risks associated with local governments’ hidden debt, requiring all localities to firmly curb new debt while steadily reducing existing hidden debt, with the goal of completing the task by the end of 2028. Since 2018, the various localities and departments have earnestly implemented the Party Central Committee’s decisions and plans, adhered to austerity requirements, and coordinated policy arrangements and various types of financial resources to steadily reduce hidden debt, leading to an overall alleviation of hidden debt risks. As of the end of 2023, the existing hidden debt of local governments nationwide stood at RMB 14.3 trillion. Based on the preliminary GDP estimate of RMB 126.06 trillion for 2023, the overall government debt ratio (debt balance/GDP), when considering both statutory and hidden debt, was 67.5%.
Since 2024, due to factors such as changes in the external environment and insufficient domestic demand, the gap between fiscal revenue and expenditure is pronounced, tax revenue growth has fallen short of expectations, and land sale income has significantly decreased, diverging from the localities’ prior expectations of debt-reduction resources and increasing the difficulty of addressing existing hidden debt. Local debt-reduction efforts are currently at a critical stage. To ensure the completion of the target and task of reducing local governments’ existing hidden debt, the State Council has proposed increasing local government debt limits to replace existing hidden debt. On September 25, the Politburo Standing Committee discussed and approved in principle the State Council Party Group’s report on work arrangements relating to increasing local government debt limits to replace existing hidden debt.
II. Scale of the Increase in Debt Limits and Policy Arrangements
Based on an overall consideration of the scale of existing hidden debt, policies in support of debt reduction, available local resources for debt reduction, and other such factors, we recommend increasing local government debt limits by RMB 6 trillion to replace existing hidden debt.
Increasing local government debt limits to replace existing hidden debt will, first, not increase the overall government debt burden or alter local repayment responsibilities; second, by accounting for the interest rate difference between hidden and statutory debt, we estimate that it could save approximately RMB 400 billion in interest payments; third, it will help address local “triangular debt” [三角债] issues [wherein multiple entities owe money to each other in a circular chain], boost confidence among business entities, and reduce bad debt losses for financial institutions; and fourth, it will support localities by relieving their financial burdens, thereby alleviating the dilemma of existing debt overstretching fiscal resources, freeing up funds to address “Three Guarantees” [i.e., guaranteeing basic living needs, salaries, and government functions] at the grassroots level and economic bottlenecks, optimizing government investment allocation, and promoting high-quality development.
To ensure the relevant efforts are standardized and orderly, and maximize policy effectiveness, the overall implementation plan includes three main aspects: First, a one-time approval for the total [increase in debt limits] with phased implementation over several years. The State Council will submit a one-time request to the NPCSC for an increase in local government debt limit of RMB 6 trillion, with implementation over three years [i.e., an annual increase of RMB 2 trillion]. Second, a one-time allocation to stabilize policy expectations. Local government debt limits will be allocated based on the scale of hidden debt according to a nationally uniform ratio, ensuring policy fairness and establishing stable expectations for debt reduction. Third, a special-purpose debt quota arrangement with specified fund use. To facilitate implementation and maximize the policy's effectiveness as soon as possible, the entire RMB 6 trillion will be set as a special-purpose debt quota, allowing localities to use it to replace various types of hidden debt under monitoring. According to this arrangement, the special-purpose local government debt limit at the end of 2024 will increase from RMB 29,518.508 billion to RMB 35,518.508 billion.
[Lan additional explained at the press conference: “For five consecutive years starting in 2024, RMB 800 billion will be allocated each year from newly issued local government special-purpose bonds to replenish government-managed funds [政府性基金], specifically for debt reduction. This will allow for the replacement of up to RMB 4 trillion of hidden debt. Together with the RMB 6 trillion debt quota approved by the NPCSC, this will directly increase local resources for debt reduction by RMB 10 trillion. We have also made clear that the hidden debt from redeveloping run-down urban areas [棚户区], due for repayment in or after 2029, totaling RMB 2 trillion, will still be repaid according to the original contracts. These three policies will work in tandem, and by 2028, the total hidden debt that local governments need to address will be significantly reduced from RMB 14.3 trillion to RMB 2.3 trillion. The average annual amount to be reduced will drop from RMB 2.86 trillion to RMB 460 billion, less than one-sixth of the original amount, greatly easing the pressure to reduce debt. Our estimate shows that local governments can achieve this on their own, and in some regions, it will even be relatively easy.“]
III. Relevant Work Considerations
Increasing local government debt limits to replace existing hidden debt is an important measure to implement the Party Central Committee’s major decisions and plans. The Ministry of Finance will collaborate with relevant departments to resolutely implement the Party Central Committee’s decisions and plans and thoroughly carry out efforts to reduce local governments’ existing hidden debt. First, the regional quotas will be issued as soon as possible. After the bill is approved by the NPCSC, the Ministry of Finance will, in accordance with procedures, seek the State Council’s approval to issue RMB 6 trillion in regional quotas in one batch to the localities, which will follow the legally prescribed procedures [to issue bonds]. Second, the bond issuance process will be accelerated. We will support localities in their issuance efforts, expediting the replacement process based on local conditions and priorities, reducing debt burdens, and realizing the benefits of the funds as soon as possible. Third, the localities’ primary responsibility [over the effort] will be reinforced. We will guide the localities to improve their specific measures and timeframes for reducing hidden debt and supervise their implementation. We will require all localities to strictly adhere to the austerity practices for Party and government organs, optimize fiscal spending structures, improve spending efficiency, activate funds and assets, and resolve hidden local government debt issues in the course of promoting high-quality development. Fourth, compliant use of funds will be ensured. We will implement big-data and digital monitoring, establishing detailed ledgers for each debt item. We will conduct regular special inspections and verifications, and closely track policy implementation. Fifth, oversight and accountability will be strengthened. We will improve the comprehensive monitoring and supervision system for local debt; and will strictly investigate, hold accountable, and mandate timely rectifications for issues such as incurring new debt without authorization or falsely resolving hidden debt.
Please consider the foregoing explanation.