China's 'debt risk defusing' plan expected to support economic development

Editor's note: Liu Ming is an assistant research fellow from the department of economic forecasting of China's State Information Center. The article reflects the author's opinions and not necessarily the views of CGTN. 

The Standing Committee of the 14th National People's Congress (NPC) concluded its 12th session Friday in Beijing. The session passed a proposal by the State Council regarding the increase of local government debt limits to replace existing hidden debts. 

This is a formal confirmation of the statement made by Finance Minister Lan Fo'an at the press conference on October 12, where he indicated a plan to significantly increase debt limits to replace local governments' existing hidden debts. 

The proposal marks the official launch of a new round of the so-called "debt risk defusing" measures in the country.

Local governments are the key driving force behind China's economic development and reform. 

The proposal suggests increasing the local government debt limit by 6 trillion yuan ($822 billion). 

Under this arrangement, the special debt limit for local governments will rise from 29.52 trillion yuan to 35.52 trillion yuan by the end of 2024. 

The move will significantly enhance the vitality of local developments and is a crucial measure for achieving the next-phase targets of high-quality economic growth.

On the one end, this incremental fiscal proposal for "debt risk defusing" can effectively reduce local government debt risks. 

Some of the hidden debts accumulated by local governments during their development are now entering a concentrated repayment period. 

Declines in real estate investment have sharply reduced local land transfer revenues, leading to difficulties in the circulation of local funds and an increase of debt risks. 

The proposal for "debt risk defusing" will not only help by raising the debt limit to issue new bonds, optimizing the debt maturity structure and enhancing the sustainability of local government debt to prevent large-scale defaults that could trigger financial market fluctuations and disrupt social stability, but also facilitate the transformation of hidden debts into explicit ones. 

The move will increase debt transparency, strengthen supervision over the use of debt replacement funds and help prevent risks associated with hidden debts.

On the other end, this incremental fiscal proposal can enhance local financial capacity. 

In the context of declining interest rates, by replacing short-term debt with long-term debt and refinancing high-interest debt with low-interest debt, the proposal can effectively alleviate the debt pressure on local governments and save on interest expenses. 

This, to some extent, will increase the available fiscal funds for local governments, allowing them to allocate more financial resources and efforts into areas such as infrastructure development, industrial upgrading, and technological innovation in the real economy, thereby providing a solid foundation for economic growth.

Confidence is more important than gold. 

The fiscal proposal passed by the NPC is the most significant debt relief measure in recent years. 

It sends a clear signal to the market that the government is strengthening its counter-cyclical policy adjustments. 

This will strongly boost the confidence of market participants in both government policymaking and the capital markets.

With the gradual implementation of a series of incremental fiscal policies supporting high-quality economic development since September 24 of this year, coupled with the institutional clarification of this fiscal proposal for "debt risk defusing", the foundation for continued recovery and improvement of China's economy will be further solidified. 

As risk appetite continues to improve, investors will be more willing to engage in investments in local projects, and businesses will be more motivated to expand production and operation. 

At the same time, with the stable and healthy development of the capital markets and an increase in the wealth effect, residents will also feel more confident in their consumption.

(Cover via CFP)