China allocated 10 trillion yuan ($1.4 trillion) in new fiscal funding to replace local government hidden debt on Friday, the biggest move of its kind in recent years that analysts said will significantly mitigate financial risks while bolstering domestic demand amid external uncertainties.
As a prelude to further fiscal support, the debt swap program reflects that the unfolding raft of policy stimuli is aimed at promoting sustainable high-quality economic development, instead of only addressing short-term challenges, they added.
The Standing Committee of the National People's Congress approved on Friday an increase of 6 trillion yuan in the local government special bond ceiling to replace outstanding hidden debt — or liabilities of local governments that are not officially recorded.
The new quota will be allocated for three years through 2026, 2 trillion yuan annually, Minister of Finance Lan Fo'an said at a news conference on Friday following the closing of the latest session of the NPC Standing Committee.
Local governments will be eligible for local government special bonds worth another 4 trillion yuan over the coming five years starting this year to finance debt swaps, or 800 billion yuan each year, Lan said.
Stressing the debt swap program as the "centerpiece" of recent economic policies, Lan said it aims to address the issue that some local governments have large hidden debts and heavy interest burdens, which have not only posed financial risks but also exploited local financial resources.
The program will save local governments about 600 billion yuan in total over a five-year span and free up policy space to support investment, consumption and technological innovation, Lan said.
Luo Zhiheng, chief economist at Yuekai Securities, said: "The debt swap is significant in size, demonstrating policymakers' determination to address local government debt risks and boost economic growth. Issuing local government special bonds to swap implicit debts will make these debts explicit (on balance sheets), optimize the local debt structure and reduce interest payment pressure."
Luo said freeing up local fiscal resources to support regional economic development is also part of the plan.
Chang Haizhong, executive director of corporates at Fitch Bohua, said the size of Friday's move was significantly larger than similar attempts in recent years and can cover about 30 percent of the total short-term debt of local government financing vehicles over the next three years, greatly alleviating their liquidity pressure.
Under the swap plan, the amount of the country's local government hidden debt will drop to 2.3 trillion yuan by 2028, compared with 14.3 trillion yuan the ministry identified by the end of last year, official data indicated.
"Unlike the large-scale infrastructure investment initiated in 2008, Friday's stimulus places greater emphasis on debt management and risk prevention," said Cheng Shi, chief economist at ICBC International Holdings Ltd.
"It implies that future economic policies may focus more on sustainability and risk management, leaning more towards structural reforms and high-quality development," Cheng said.
At the news conference, Lan said that the ministry is accelerating the procedures to issue more government bonds to supplement commercial banks' capital and acquire idle land and property inventories, while tax policies supportive of the real estate market will be launched soon.
Looking ahead to 2025, the finance minister said that the country will implement "stronger fiscal policy" by proactively tapping into the scope for lifting fiscal deficit, increasing the issuance of special bonds and issuing ultra-long-term special treasury bonds.
The People's Bank of China, the country's central bank, also said in a report on Friday that it will adhere to a supportive monetary policy stance and increase the intensity of monetary policy adjustments.
Sources close to the central bank said that future monetary policy will continue to provide sufficient support to the real economy, countering lingering economic headwinds and rising external uncertainties.
Zhou Maohua, a researcher at China Everbright Bank, said the US Federal Reserve's continued rate cut cycle is beneficial for expanding China's policy space for further easing, adding that the Fed is expected to announce another 25-basis-point rate cut next month after a cut of the same size on Thursday.
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