On November 8, 2024, the Standing Committee of the 14th National People’s Congress passed a resolution approving the State Council’s proposal to address hidden local government debt. The off-the-books debts, which are often incurred through special purpose financing platforms and go far beyond the legally binding debt ceiling for local governments, have long been a thorny issue that depresses economic growth and presents substantial risks to China’s overall financial stability.
As of the end of 2023, China’s hidden local government debt stood at a daunting 14.3 trillion yuan (US$2t), accounting for about 11.3 percent of GDP. Recent economic pressures, including slower-than-expected tax revenue growth and a steep drop in land sale income, have further strained local governments’ capacity to service this debt. These economic challenges have made the traditional paths of debt reduction insufficient, which now require a more robust, systematic response.
The new policy has three major components. First, there will be 6 trillion yuan (US$834b) increase in local government debt limits over three years from 2024 to 2026 to swap the existing local government debt. Second, 800 billion yuan (US$125b) from new local government special-purpose bonds will be allocated annually for five years to replace various types of hidden debt. In total, it will add another 4 trillion yuan (US$556b) in debt replacement. Third, the hidden debt derived from redeveloping run-down urban areas, due for repayment in or after 2029, totaling 2 trillion yuan (US$278b), will be repaid according to the original contracts.
In this way, by 2028, the total amount of hidden debt can be reduced to just 2.3 trillion yuan (US$320b), or about 16 percent of its current level. The overall approach means to replace hidden debt with legally recognized liabilities at more favorable interest rates. The resulting lower debt servicing costs are expected to save local governments approximately 600 billion yuan (US$83.4b) in interest over five years, which will alleviate local governments’ immediate fiscal strains and free up resources to promote development and improve public welfare. It will also help mitigate the risks of financial disruptions, as clearing hidden debts can improve the quality of financial assets and strengthen banks’ balance sheets.
These new measures mark a significant shift in China’s approach to debt management. It marks a transition from a reactive, crisis-driven approach to a proactive strategy aimed at holistic debt reduction, representing a change from case-by-case risk management to a comprehensive approach that addresses systemic financial vulnerabilities. It also suggests that the government is reforming its dual-track system with hidden and statutory debts in parallel to a unified and more transparent framework for all public debt.
The policy also strengthens oversight mechanisms to prevent the accumulation of new hidden debt. According to China’s Financial Minister Lan Fo’an, the central government will adopt a zero-tolerance policy to ensure rigorous monitoring and prompt response to new debt activity, through broadening the scope of debt monitoring, enforcing stringent budget management and holding violators accountable through enhanced regulatory practices.
The new policy has its risks, notably the potential for moral hazard if local governments perceive the measures as a soft bailout, the very reason why the central government had been reluctant to help them in past years. China will have to conduct deeper reforms, such as rebalancing the fiscal relationship between central and local governments and reinforcing budgetary discipline.
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