10 trillion yuan: China raises debt swap ceiling to ease local government pressure

Chinese lawmakers have approved a State Council bill to raise the local government debt ceiling by 6 trillion yuan (about $838 billion), providing local governments with a combined 10 trillion yuan of resources to swap their accumulated "hidden debts" over recent years, officials said during a press conference in Beijing on Friday.

The announcement is one of the most important stimulus measures the government has introduced in recent weeks to stabilize the economy against headwinds from both inside and outside the country, China's Minister of Finance Lan Fo'an said at the press conference.

Three-pronged measures to promote development, improve livelihoods

Under the new arrangement, the debt ceiling for special local government debt will rise from 29.52 trillion yuan to 35.52 trillion yuan by the end of 2024, said Xu Hongcai, deputy head of the financial and economic affairs committee of the National People's Congress (NPC).

Also starting this year, the country will set aside 800 billion yuan from each year's new special-purpose bonds for local governments for five consecutive years, thereby providing debt relief to replace 4 trillion yuan of hidden debts. Adding 6 trillion yuan will enable local governments to deal with 10 trillion yuan of debts, said Lan.

Besides the debt ceiling rise, another 2 trillion yuan of hidden debts resulting from housing improvement projects in run-down areas will become due only after 2029, Lan said, which will also help relieve debt pressure.

As a result, the amount of hidden debts that China's local governments need to deal with by 2028 is expected to drop from 14.3 trillion yuan to 2.3 trillion yuan, said the minister.

These measures will support local governments in replacing various types of hidden debts, freeing up resources to better develop the economy and safeguard people's livelihoods.

"These will help local governments streamline their financial chains and boost development momentum," Lan said.

By implementing the debt swap measures, resources originally allocated for debt repayment will be freed up to promote development and improve people's livelihoods, said Lan. It will also create more policy space which had been constrained by debt pressures, enabling greater support for investment, consumption and technological innovation, thus promoting stable economic growth and structural adjustment.

Meanwhile, time and effort previously spent on debt managing and risk mitigation will now be redirected to planning and driving high-quality development, he said, adding that the approaches will also improve the quality of financial assets, increase credit availability and benefit the real economy.

Implementing stronger policies, utilizing available deficit space

China's government debt level is significantly lower than that of major economies and emerging market countries, said Lan, citing data from the International Monetary Fund.

By the end of 2023, the average government debt-to-GDP ratio for G20 countries was 118.2 percent, among which Japan had the highest ratio at 249.7 percent, followed by Italy at 134.6 percent, the U.S. at 118.7 percent, France at 109.9 percent, Canada at 107.5 percent, the UK at 100 percent, Brazil at 84.7 percent, India at 83 percent and Germany at 62.7 percent. The average debt-to-GDP ratio for G7 countries was 123.4 percent.

In contrast, China's total government debt was 85 trillion yuan by the end of 2023, consisting of 30 trillion yuan in national debt, 40.7 trillion yuan in local government legal debt and 14.3 trillion yuan in hidden debt, giving a government debt ratio of 67.5 percent.

As for the use of debt, Lan explained most local government debt has been invested in capital expenditure, supporting the construction of a large number of infrastructure projects related to transportation, water resources and energy. Many of these assets are generating ongoing revenue, which not only provides strong support for high-quality economic development but also serves as an important source for debt repayment.

The minister noted that the central government still has substantial room for borrowing and increasing its deficit. It is actively planning its next fiscal policy steps and will intensify counter-cyclical adjustments.

For example, policies to support the healthy development of the real estate market have already been submitted for approval and will be released soon. At the same time, work is underway on the details of policies that will use special bonds to facilitate the recovery of idle land, increase land reserves and acquire existing residential properties for use as affordable indemnificatory housing.

More robust fiscal policies for 2024

In line with the economic and social development goals for next year, Lan said the government would implement even more robust fiscal policies.

These will include actively utilizing available deficit space, expanding the issuance of special bonds, and continuing to issue long-term special government bonds to enhance security capabilities for major national strategies and key areas. Efforts will also be made to accelerate large-scale equipment upgrades, expand the variety and scope of consumer goods trade-in programs, and increase central government transfer payments to local governments to strengthen investment in key areas such as technological innovation and public welfare.

The decision to raise the local government debt ceiling was announced during a press conference following the 12th session of the Standing Committee of the 14th NPC, which concluded in Beijing on Friday.

At the closing meeting, lawmakers voted to adopt a preschool education law, a revised Law on Protection of Cultural Relics, a revised Mineral Resources Law, an energy law and a revised Anti-Money Laundering Law.

They also adopted a decision on amending the Law on Supervision by the Standing Committees of the People's Congresses at all levels.

During the meeting, lawmakers ratified an amendment to the 1996 London Protocol on the prevention of marine pollution by the dumping of waste.

They also adopted several reports on the deliberations of proposals submitted by lawmakers, as well as a deputy qualification report and personnel-related bills.