November 3, 2023
BEIJING – Meeting calls for long-term mechanism to guard against, defuse leverage risks
China is set to pave the way for further moves to resolve local debt problems, experts said on Wednesday, adding that more efforts should be made to alleviate debt burdens of local governments and optimize the structure of fiscal spending and debt.
Their comments came after the Central Financial Work Conference, a two-day meeting that ended on Tuesday, said efforts should be made to establish a long-term mechanism to guard against and defuse local debt risks, set up a government debt management system that is compatible with China’s pursuit of high-quality development, and optimize central and local government debt structures.
Yang Haiping, a researcher at the Institute of Securities and Futures — part of the Central University of Finance and Economics — said the meeting assumes a higher-level perspective to coordinate development and security, which will help resolve local debt problems in the future.
Looking ahead, he said the country will likely take more steps to optimize bond issuances, utilization and repayment, and ensure the sustainability of debt through measures such as determining and controlling debt limits. And it will take more measures to ensure the implementation of debt control mechanisms and debt risk prevention mechanisms through corresponding accountability mechanisms.
Citing the steps mapped out by the Central Financial Work Conference, Luo Zhiheng, chief economist at Yuekai Securities, said optimizing the structure of central and local government debt is an important way to improve government debt structure and prevent and resolve debt risks tied to local authorities
In July, a meeting of the Political Bureau of the Communist Party of China Central Committee urged efforts to effectively guard against and defuse local debt risks, and formulate and implement a package of debt-clearance plans.
Yang said the country will gradually replace hidden liabilities of local governments with officially declared debts, and the issuance of “special refinancing bonds” will help ease debt burdens.
As of the end of October, more than 20 provincial-level regions issued over 1 trillion yuan ($137 billion) worth of such bonds during the month to swap their implicit debt, according to news reports.
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Special refinancing bonds are government bonds whose proceeds are typically used to repay hidden government debt — usually the liabilities of local government financing vehicles, or LGFVs — that are implicitly guaranteed by local governments. By doing so, implicit debt is replaced with official government debt.
Citing the steps mapped out by the Central Financial Work Conference, Luo Zhiheng, chief economist at Yuekai Securities, said optimizing the structure of central and local government debt is an important way to improve government debt structure and prevent and resolve debt risks tied to local authorities.
Due to the rapid growth of local government debt in China over the past few decades, and the impact of the COVID-19 pandemic over the past three years, local governments currently face significant financial burdens.
Although China’s government leverage level is not high by international standards, the debt level of local governments significantly surpasses that of other major economies.
Against such a backdrop, Luo said it is necessary to expand central government borrowing with the central government raising leverage levels, adding that China’s recent decision to issue an additional 1 trillion yuan in treasury bonds during the fourth quarter will help optimize debt structures.
Feng Jianlin, chief economist at Beijing FOST Economic Consulting Co, said the move suggests that the country is willing to expand central borrowing while preventing local governments from having new hidden debts.
According to the plan approved by the country’s top legislature last week, bond proceeds will all be allocated to local regions via the mechanism of transfer payments. And the move will expand China’s fiscal deficit to around 3.8 percent for the year, up from 3 percent.
Around 500 billion yuan is intended to be utilized within this year, while the remaining half-trillion yuan will be used next year.